Credit markets are all a-jitter again. No one knows how many assets will be nonperforming, which ones they will be, how much total value is at stake. We also know that there has a been a sudden stop, a complete cessation of net long-term private capital inflows to the US; nearly all of the financing burden of the US current account deficit has to be shouldered by central banks and sovereign wealth funds. These two events are related.
It is US debt, mortgage items but perhaps not only, whose quality is in doubt. This is why there is little appetite for such goodies among private investors. But if enough liquidity is pumped in to dissuade investors from wholesale dumping, and if the CB’s continue to do what it takes to keep the dollar afloat, we may continue to muddle through.
The risk is that the two dangers will interact. The Fed and its partners can support asset values by buying into these markets, as they have indicated they will. But if for any reason this effort falls short, it is possible that default risk and currency risk could spiral upward in tandem. Fear of default could push private capital flows into the red; this would ramp up the pressure on the dollar, increasing currency risk, and so on. It is not beyond the realm of the possible that this nasty synergy could erupt within the time frame of a few hours or even minutes. It would be sudden and unexpected: one morning you could go online to scan the headlines and find out we were already in the thick of it.
I’m not saying that a crisis is inevitable, but I’m not saying it can’t happen either.
5 comments:
Alan Greenspan has an oped on the financial market meltdown (Greg Mankiw provides a link). Bottom line - don't blame Alan's tenure at the FED. (I report, you decide).
Well, as near as I can tell, the major Fed players have not been sleeping well since at least September, 2006 when New York Fed prez, Timothy Geithner, gave his "we do not know what the hell is going on in the derivatives markets" speech in Hong Kong, although it was couched in all sorts of layered over and buttered rhetoric that made it easy for those not paying close attention to think that everything was fine and hunky dory. They don't know what is going on or what to do about it, but have known that they do not know for some time, which would be enough to cause me to lose sleep if I were one of them. Heck, even a super monetarist hawk like William Poole has gone all pudgy-softy. Serious loss of sleep...
Barkley
This is really interesting. I think I will keep my money in a sock for a while.
I didn't mean to dis anyone's beard. As far as I can remember, Marx never had a real day job, so could grow the beard he wanted to; and it was the 19th century, a period of remarkable hairiness in Europe and America.
This century looks to be hairy in the other sense of the word.
Seems, has seemed, evident that decades of financial deregulation and, particulary through the last ~15 years, associated rise in scope and weight of the non-bank banking sector would result in a progressively more uncontrollable hybrid.
Beneath the consciousness of most, a new system of financial intermediation rose out of the neoliberal project. Without being dramatic, I think it safe to say that system is evidently in process of failing and a failing beyond the capacity of national states, central banks and present supranational institutions. Which might be otherwise were this merely a 'liquidity' problem and not one of homogenized, artificially differentiated, globalized, incorrectly rated, counterparties' insured risk and unadmittable insolvencies.
As Barkley very correctly said, 'serious loss of sleep', and likely moreso as the latest concerted action has so far failed to bring interbank rates down but added more volatility.
More than a serious loss of sleep perhaps.
John Kenneth Galbraith said (way back in the olden days) that "banking may be a career from which no man really recovers."
Get that? 'No man'...
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