ECB release half a Trillion just in case…

The ECB released a further 500 billion, Bank of England 10 billion and the Fed 20 billion This was done as a follow on the the USA’s liquid injection rather than rate cut, the idea is to lower interbank rates, increase liquidity and at the same time not promote inflation.

Thankfully and historically we are seeing a trend here. The Fed, ECB, Canadian Central Bank, Bank of England and the Swiss Central Bank all acted in unison, traditionally this was not the case and its great to see that internationally we can start acting in a global way in a global world. Prior to this we acted in a national way in a global world, central banks didn’t refer to eachother before making a move.

All the banks with the qualifying collateral could buy from the ECB at 4.21% which is what the old Euribor was, this will mean that the people selling from euribor rates will only be able to sell to institutions which don’t qualify for this money, it may also mean that the people who are most at risk therefore still have to buy expensive cash and that may raise its own concerns.

The Libor thankfully dropped from its 7 year high. That alone is a sign that perhaps this line of attack is working.

Banks are fearful of needing cash in order to cover possible issues concerned with exposure to sub-prime loans in the USA, the property market in America is meanwhile in freefall. One could argue that with the ability to purchase property cheaply there, and the strong euro that the USA would be an opportunity for a property investor, personally though, I wouldn’t touch with a barge-pole. Many analysts feel that we have not seen the true extent of the mortgage market meltdown.

In the past banks used to lend out money that they held on deposit, and then things changed, not only in the market but in the way money was being lent, for a start there were a lot of derivative options. Basically in the past a bank would sell loans, make sure they were good, then after a while they would sell these performing loans to investors, this is normally described as securitization or ‘selling your book’.

However with the subprime loans this changed because people were buying money from the bond market, selling it to middle company they in turn distributed the loans via brokers and in the end much of the due dilligence was lost and they basically entered into the area of asset based rather than credit based lending. The practice of giving low initial repayments that could almost double after two years instigated a string of repossessions. In cities like Cleveland, Ohio one in ten properties has been repossessed, the largest property owner in the city is Deutsche Bank because they have taken back literally hundreds of properties.

Florida and California had about 55% of the sub-prime loans countrywide. Why? Because many of these loans catered for recent immigrants (as they do in Ireland as well) and these two states have massive immigrant populations, for them to get on the property ladder these loans – also described as ‘non-confirming’ or ‘non-standard’ – were the only way to buy a home. In the USA however, unlike Ireland, there were baloon payments the same as there are on some types of car finance. This was coupled with a cheap initial rate that would then go to a very high rate, one that would make up for the initial discounts.

US house prices

The reason some people feel it is far from over is that many of the loans that will be going to the higher rate have as of yet to come to fruition. US house prices have faced their first nationwide decline since the 1930’s. Those were grim times, my dad lived through them, my aunt was born in a tent in a local park, everybody was poor, dirt poor, I genuinely hope the world doesn’t ever have to face times like that again.

The issue there is that people would then refinance again to get away from the high rate but there were fees and costs so even if you only wanted to do a direct swap your debt would increase, again and again. One of the main things that people don’t tend to focus on in this whole area is that of ‘Debt Responsibility’ and it is certainly my belief that for many Americans credit is not respected, it’s considered as something that is warranted for everybody irrespective of their circumstances, I would be interested to see what the immigrant populations attitude or respect towards credit was as well although there is no information on this.

This also shows the shortcomings of the educational system in the USA and also Europe for that matter, we don’t teach our kids about money, they learn about theorems and things that they will likely never actually use in life, they learn about science and many other things – important things I must say- but not about money which is something that will affect their day to day lives for as long as they live. Writing to your minister asking for classes teaching kids about money won’t even get you a reply, I know because I have tried.

The knock on effects are huge, California and Florida real estate markets are going to flop (as they had most of these loans), jobs connected to that will be shed. Building activity will (it is estimated) be reduced by half there will be a wave of job losses there, and in particular immigrants will be hit as many of them would be non-union workers and operating in the lesser skilled areas.

Bond holders, the people who paid money to own these sub-prime mortgages are the ones feeling the most hurt, they have lost almost half of their value and the banks have to come to terms with them as well.

It will not be easy times and the effects will definitely be felt world wide. We can just hope that international governments and businesses act in unison to try and avert a possible depression.

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