Friday, 6 July 2007

Credit crunch will 'shred investment portfolios to ribbons'

Check out this article by Ambrose Evans-Pritchard in the Daily Telegraph and Robert Peston's latest blog 'Are markets hurricane-proof' on the BBC.

With the near-collapse of the two Bear Sterns hedge funds recently and the major downturn in the sub-prime lending market the spotlight is on the increasingly esoteric instruments being used by banks to 'gamble'. The two articles make some interesting points:

  • The underlying debt assets may be mis-priced as the quality of the loans made by the banks may not be all it's cracked up to be - as they are bundling them up and selling the risk on and not holding it themselves.
  • If the market starts to topple, there may be no buyers for these instruments and prices would collapse leading to a credit crunch.
  • Investors portfolios would "be shredded".
  • "This is a 100pc-proof government-created monster. Bureaucrats (yes, Alan Greenspan) have distorted market signals, leading to the warped behaviour we see all around us."
  • The Bank of International Settlements notes that the Fed's strategy leads to serial bubbles, creates an addiction to easy money, and transfers wealth from savers to debtors, "sowing the seeds for more serious problems further ahead".
We already know what the Fed's response to any impending collapse will be. The Fed chairman 'Helicopter' Ben Bernanke has already said he would drop cash from helicopters if necessary. When the head of the world's most important central bank says that, you know you're in trouble.

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