> From: "James Heartfield" <Heartfield at blueyonder.co.uk>
[...]
>> Will the current subprime collapse lead to a generalised market failure?
>> We
>> will see, but it does not seem likely.
>
> That may be (I'd agree - there's lots more financial slack in the system),
> but the word 'crisis' is useful because it suggests that the correction
> ahead will entail either serious displacement efforts (Fed bailouts along
> the lines of 9/98) or moving the cost to those least able to pay (the
> low/medium-income homeowners - especially African-Americans - who are
> going
> to be on the streets very soon).
>
> The more serious problem, it seems, is the durable US current account
> deficit, a geographical and temporal displacement that may be untenable.
======================================
It seems the Fed and other central banks are for now prepared to let the big
financial institutions take a hit to break the speculative frenzy in the
more complex and illiquid derivatives, while ensuring that there are
adequate reserves in the system to maintain the wider flow of credit to the
real economy. It's only if and when it appears that panic is spreading and
credit tightening among consumers and producers that you're likely to get
more urgent measures.
However, some federal relief for defaulting homeowners might become unavoidable, including a loosening of buying constraints on Fannie Mae, after higher rates start kicking in on adjustable rate mortgages later this fall. It's also an election year, and Hillary has already started campaigning around the issue.
Also, isn't the current account deficit only a serious problem if there is a depression? Short of that, might not rate cuts even have the effect of encouraging foreign buying of rebounding US stocks and corporate bonds?
Of course, I'm conscious that the resiliency of the system tends to encourage complacency, and will do so until we're deep into a crisis.