14 August 2007

Bailing water out of a sinking boat?

Central banks pump in cash to stave off credit crunch

For the second day in a row, central banks around the world pumped billions of dollars into financial markets Friday: Japan and Australia joined Europe, the US and Canada in repeatedly injecting liquidity into cash-thirsty markets. It's the largest intervention the world has seen since central banks sprang into action after the terrorist attacks of Sept. 11, 2001. Sept. 11 was truly a crisis. This time, it remains unclear. "I think it's a crisis, but it's a financial crisis," said Sherry Cooper, chief economist at BMO Nesbitt Burns. "The entire financial system is in crisis because people, banks are afraid to lend money." The turmoil that started with the souring of the subprime mortgage markets in the US has flowed over to capital markets around the world, snagging currencies and stocks that have no direct relationship to US mortgages. But the spillover into the so-called real economy -
growth, unemployment, inflation and business investment - has been minimal. So far. "It's not a Main Street crisis because we still see growth, we still see [low] unemployment, and in my view we're going to continue to see it," Cooper said. "But it does increase risk." But the sudden attention from central banks and the scale of their interventions should be enough to make people sit up and take notice, economists say. "I think everybody has a vested interest in what's going on, because at some point, it will spill over into the real economy," said Rob Palombi,
director of fixed income research at Standard & Poor's in Toronto.
(Globe and Mail, National Post 070811, Globe and Mail 070813)

Is this the end of the Ponzi scheme? Have people's expectations finally come down to reality? I've read quite a bit indicating that things are only going to get much worse this fall, when a majority of those subprime mortgages go in for re-adjustments, while many of the ones that have already been adjusted go into their second reset later in the year. More than two million subprime adjustable rate mortgages (ARMs) are poised to reset at much higher rates in coming months, worsening an already suffering housing market. Borrowers who took out hybrid ARMs in 2004 and 2005 to secure low "teaser" rates for the first two or three years of the loan may see their monthly mortgage payments climb by 35 percent or more.

Consumer groups and politicians worry that hundreds of thousands of subprime ARM borrowers will be unable to keep up with their mortgage payments and will lose their homes.

"In October alone more than $50 billion in ARMs will reset," according to Mark Zandi, chief economist and co-founder of Moody's Economy.com.

Who knows what things will look like at the end of 2007?

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