> What I was unconvinced about was the apparent certainty among bears
> that the subprime financial crisis that broke out over the summer
> would spread into a generalized financial crisis. It's had some
> contractionary effect but hasn't yet turned into that sort of broader
> crisis - yet.
Part of the reason, I believe, is that -- for obvious reasons -- large financial firms have been deliberately slow at disclosing their exposures and losses. With accounting manipulations, you can do this up to a point. This has given a chance for the central bankers to inject large amounts of liquidity and keep things somewhat checked. But this seems even more ominous. I think of those movies where a huge beast is badly pummeled but refuses to fall. Then, after a prudent delay of a second or two designed to enhance the effect, it finally falls raising a big cloud of dust.
> It still could. But it looks like the liquidity
> problems of the summer and fall are receding; interest rate spreads
> are falling back to more normal ranges.
It seems to me that spreads are all over the place. And, as we know, they are pretty whimsical. Here's a couple of charts with a few yields:
http://www.economagic.com/mgif/M710125021802481007077239583134.gif http://www.economagic.com/mgif/M710125021802481008494439290165.gif
Does that look like spreads falling back to more normal ranges?
> But the solvency problem -
> whether people can service their mortgage debt in the coming years -
> has not yet worked itself out. That's going to take time.
It's commonplace to say that the credit markets have become extremely intertwined and complex. With so much uncertainty, wealth evaporating here and there, you have a recipe for all sorts of nasty reverberations. Here's Wolfgang Münchau on the chance of a credit default swaps mess. This market, says Münchau, has an overall exposure of USD 45 trillion.
> What I'm still allergic to is the
> tendency to scream "Crisis! Crisis!" at the first sign of financial
> difficulties or a business cycle downturn. Recessions are pretty
> ordinary things. We've had 10 or 11 of them since the end of WW2.
> There are plenty of reasons to suspect this one could be pretty
> severe, following two relatively mild ones in 1991 and 2001. But
> sovereign wealth funds are shoring up our banks, and the USG could
> soon be applying $100 billion in fiscal stimulus.
I see your point. Let's see how things play out.
