OldVet on Black Swans and Rate Cuts

Reader OldVet sends me an e-mail message:

[note from cactus – apologies for the delay in posting this which makes the timing off, I’ve been traveling]


For some time aficionados of financial markets have been jabbering about “Black Swans” and “triggering events” and things like that in order to try and predict what’s going to be the ultimate result of the sub-prime mortgage crisis in the US . Risky US mortgages were packaged and sold around the world as “mortgage backed securities.” A major German bank has had to be rescued after buying this crap, and 157 US mortgage lending intuitions have failed as home buyers failed to pay their debts on time. In the course of investigating different sources of information and opinion, we note this morning that the Bank of England is declaring some very broad and very public guarantees to depositors of Northern Rock savings and loan society in England, where they’ve had crowds lining up to pull out their deposits. We also note this morning that the Russian stock market has fallen 10% in the last month or so, largely on foreign investors withdrawing their money.

Likewise we’ve been thinking that a crisis in one mortgage and real estate market like the US may not be isolated, because the housing “bubble” in prices is universal and not local to the US . Ireland, Spain, China, and India for example, have all seen pure price inflation of housing much greater than in the US . Does that mean they have pockets of rot in their lending institutions? Are their mortgage markets and credit practices prudent? Are they also, like the US , vulnerable to major corrections in housing prices with real economic effects to follow? Based on the UK experience, outlined in gory detail below, we know there are pockets of rot. Maybe not in every single market, but in enough to have follow-on consequences in world stock and currency markets.

In this light, and with a major US Federal Reserve Board meeting likely to cut US interest rates a bit this afternoon, we wonder just how much good a rate cut or two will do at this stage of the game? Are such cuts trivial in a global sense? After all, it’s not “liquidity” in the banking sectors of the world that are the problem, but risky loans made to poor credit risk home buyers and businesses. If you can’t pay a million bucks for a house, it won’t matter what the interest rate is or is not, will it?


This one was by OldVet.