Tuesday, March 18, 2008

Bank Run!!!!!

Not a high street bank this time, but essentially the same thing. Right now, the Fed and big players such as JP Morgan are doing their best to stop the US financial system from going off the edge. They're struggling. If they fail, as best as I can tell, we're looking at a mess of a scale not seen since the 1920s. I don't own shares, I don't own a house, I'm still worried.


Matt Nolan said...

Its all about banks willingness to lend to each other. Once the losses on subprime loans have been declared (which may take a while yet - 6 months possibly?) risk premiums will fall.

Note: A liquidity trap in the US is not the end of the world for NZ - after all Japan has been stuck in one for the past 15 years and it didn't do too much to us. We would be in trouble if Asia imploded at the same time - however given that most Asian countries are running current account surpluses, it looks like we are just in for a bit of a slowdown.

Terence said...

Thanks Matt.

But what happens if the losses turn out to be very big? Mightn't that generate further 'bank runs' and further dampen investors 'animal spirits'? Or what if in the intervening 6 months the crisis becomes to large for the Fed et al to cope with? Mightn't this lead to large scale panic? What also if larger problems with derivatives markets compound the crisis?

Did I ever tell you that I'm a worrier? :)

As for the impacts here in NZ: while recession or depression in the US may not be too bad for us, I'm inclined to think that the short term credit crunch may well do more than enough to turn a deflation of the housing bubble into a pop (the caveat here being that house prices ought to be sticky so ought not collapse). Given average NZer indebtedness, above and beyond housing I think the crunch could be a broader issue too.

I'm also not so sure what to make of talk of decoupling. Sure, if China keeps driving the commodities boom we may be ok. But I don't think China can do this if the US ceases to consume it's goods to the extent that it has.

I'm definitely a worrier :)

Of course the fed may manage to keep things under control. The crunch may turn out to be a minor fender bender and NZer's may keep making their mortgage repayments.

And if I repeat these lines enough at night I may start sleeping again...