Friday, August 10, 2007

Credit Crunch Not Going Away / Minyanville

Mr. Practical from Minyanville has it right. The party is over...

I aslo recommend the Five Things You Need to Know: Oh, THAT Excess Liquidity; Oh, THAT Liquidity Crisis; Oh, THAT Credit Crunch; Oh, THAT Excessive Risk-Taking; Oh, THAT Consumer Slowdown that gives a good summary what happened on the day that had almost historic proportions....

Denke das Mr. Practical von Minyanville es hier treffend beschreibt. Die Party ist vorbei....

Zudem ist der folgende Link Five Things You Need to Know: Oh, THAT Excess Liquidity; Oh, THAT Liquidity Crisis; Oh, THAT Credit Crunch; Oh, THAT Excessive Risk-Taking; Oh, THAT Consumer Slowdown lesenswert. Hier wird noch einmal der gestrige (historische) Tag zusammengefasst.

Last night the European Central Bank issued a statement promising plenty of liquidity to banks. The Fed arranged a very large $24 bln in repos this morning, trying to get fresh credit in the hands of banks to deal with their current commitments. Even the Bank of Canada issued the same statement.

> In the meantime Bank of Japan & RBA have joined the party. No surprise that the ECB provides further EUR61B to boost liquidity is acting with a follow up . Looks like $130 billion wasn´t enough to calm down the market..... That was already roughly 50 percent more than after 9/11! All Central Banks have now provided close to $ 250 billion liquidity....

> In der Zwischenzeit müssen immer mehr Notenbanken zur Hilfe eilen. Keine Überraschung das die EZB 61 Mrd € nachlegen muß (95 Mrd € waren wohl nicht genug.....das waren immerhin fast 50% mehr als nach dem 11. September) . Addiert man alle Zentralbankinjektionen zusammen kommt man auf ca. 175 Mrd. €......

But all this misses the problem. The theory is flawed. Central banks promising new credit to strapped banks only helps them with their current problems. It will not get new credit into a system that can't take anymore. Banks, given their situation, are reducing drastically their new commitments, as they should. Borrowers can't afford to borrow more.

Sooner or later the market will realize that this is a credit crunch. We have not seen a real credit crunch since 1973. Go back to your history books to witness what a credit crunch does to asset prices. Pure and simple, when the borrowing dries up, there is no "money" to buy assets.


This is a process that is likely to take years to correct. It will not be a pretty process as debt gets destroyed (foreclosures) until enough of these excesses get wiped away to start anew. It was all caused by too-easy credit for too long by a Central bank not willing to let the market itself handle the allocation of capital. It insisted on providing credit cheaply when the market didn't deserve it.

So U.S. consumers have lived beyond their means for too long. They have wasted away their savings and are now in too much debt. Pure and simple

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13 Comments:

Blogger Edgar said...

Hi jmf, you sed:

So U.S. consumers have lived beyond their means for too long. They have wasted away their savings and are now in too much debt. Pure and simple.

I couldn't agree more. This country (the U.S.) has had it far too easy for far too long. Easy money has run amok, from mortgage fraud to executive, sports, and entertainment compensation. People waste fuel like there's no tomorrow while half the world lives in poverty. We need a hard recession, ten to twenty years worth. I fear these people are beyond help. They are stupid and lazy and selfish. I hate waste, and we've had a lot, now we need some want, in the upper classes especially.

1:38 AM  
Blogger jmf said...

Moin Edgar,

AMEN!

Looks like the UK wants to play catch up with the US on this issue.

In hindsight i´m glad that we have had our "recession" in Germany for almost 4-5 years and no houisng bubble to mask/hide the recession like in the US.....

1:56 AM  
Anonymous Anonymous said...

Back to the trigger for ops.

The euro overnight rate EONIA? Euribor? The Paribas funds are called EONIA the other EURIBOR the other Parvest are designed to "to enhance the performance of cash reserves" relative to these benchmarks.

While there may be a broader issue in market regarding value of assets did the trigger of a spike in overnight rates really justify the action if you consider the what the possible reasons for the spike were?

2:33 AM  
Blogger jmf said...

Moin Anon,

the BNP labels are sounding harmless. Nice marketing....

It is too bad that we don't see similar actions when the excess is so obvious :-(

4:15 AM  
Blogger jmf said...

Deutsche Bank's DWS ABS Fund Assets Drop 30% Since End of July

Aug. 10 (Bloomberg) -- The assets of Deutsche Bank AG's DWS ABS Fund fell by a third to 2.1 billion euros ($2.9 billion) from 3 billion euros at the end of July, as the fund's investments lost value and clients withdrew money.

The fund doesn't have any investments in U.S. subprime related debt, spokeswoman Anke Hallmann said today. DWS, based in Frankfurt, currently has no plans to limit redemptions from the fund, though that may change if markets were to ``fall drastically,'' Hallmann said.

4:26 AM  
Blogger jmf said...


Overnight Dollar Libor Gains to Highest Since 2001

4:28 AM  
Anonymous Anonymous said...

How unusual are these volatilities?

I read in money managment fund prospectus EONIA range is <20%, Euribor 25%.

4:54 AM  
Anonymous SPECTRE of Deflation said...

This is far from a US problem. Much of the shit that was rated AAA was sold to Europe and Asia. Those regions were also growing M3 at double digit levels and allowing asset bubbles in their own countries. This is a GLOBAL crisis. No one is immune!

We are about to relearn the lesson that liquidity/debt ain't money. Money is what you need to square things, and there is no money.

6:02 AM  
Anonymous Anonymous said...

hi! can someone please explain whence central banks have the liquidity? where does the money come from the ECB injects into the system? Thanks! Great blogg!

7:55 AM  
Blogger Ben Bittrolff said...

" hi! can someone please explain whence central banks have the liquidity? where does the money come from the ECB injects into the system? Thanks! Great blogg! "

From repos.

http://en.wikipedia.org/wiki/Repurchase_agreement

The Financial Ninja

9:16 AM  
Anonymous Anonymous said...

where does the money come from the ECB injects into the system?

They create it out of nothing. Essentially. For example: in the US, the Fed would 'buy' something (securities) from a member bank, and then just credit the member bank's reserve account, thereby increasing its liquidity. This sort of transaction is designed to be more of a loan -- the member bank is supposed to use the extra liquidity to meet any short-term demand, and then repay the loan (re-purchase the securities) a few days later.

Not sure how it exactly works with the ECB, but with any fractional reserve system it is bound to be similar.

eh

1:12 AM  
Anonymous Anonymous said...

Thanks for the informations about injecting money! If I understand the mechanism of repos correctly then the FED "prints money" in return for financial assets. However since this is just a loan it expects that those assets are bought back by the banks. I read on Bloomberg that the New York Fed is "buying assets including mortgage-backed securities". Hence they might be buying so-called toxic waste. Will the banks really buy this stuff back? Joen

10:06 AM  
Blogger jmf said...

Moin,

thanks to all.

"Hence they might be buying so-called toxic waste. Will the banks really buy this stuff back?"

BINGO! That´s the right question you won´t hear anybody ask on CNBC etc.... :-)

11:22 AM  

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