From: M Holmes 
Newsgroups: uk.finance
Subject: Re: SIGNS OF A TURNING HOUSING MARKET
Date: Tue, 6 Jul 2004 16:16:14 +0000 (UTC)

curiosity  wrote:

> What kind of vulnerabilities are there do you think amongst the
> saving/lending institutions in the event of a burst credit-bubble?


I'd go along with Noland's hypothesis that Freddie and Fannie may well
be smack in the middle of a full blown financial crisis if the US
housing market turns and their mortgage-back portfolios aren't quite as
stress-tested as they think. They're playing in trillion Dollar
derivatives markes with asset backing of 3%, so they don't have to get
it very wrong for the roof to fall in. Whether there'd be a taxpayer
bailout remains to be seen, as the US federal deficit is already in
"borrowing the interest" territory.

Greenspan also hasn't left himself with many more bullets to reliquidate
yet another burst bubble, should it happen before he gets rates back to
neutral.  If the mortgage traders were hung out to dry, the US housing
markets, and to some extent other markets, would see at least a huge
credit crunch. That's one way to get to the Japanese scenario.

That said, it could come almost from anywhere in the global derivatives
markets. Everyone thinks they're insured through swaps and matching
their liabilities. However someone has to have the other end of every  
contract and the whole system cannot possibly insure itself.   
Unfortunately transparency is so low that we'll find out who's holding
the parcels only after the music has stopped.


What's interesting is the variation amongst the central banks on what's 
happening.  All economic creeds are represented.  Reading between the  
lines of what's been said lately we have:

Japan   : We're still in deflation from a burst credit bubble. Still
          reflating after all these years - Keynesians.

America : Bubble? We still don't see no bubbles. Just keep bailing
          credit and smile - Fisherites.

Britain : It's a housing bubble, and we'll kill it if it upsets our
          inflation forecasts - Monetarists.

Europe  : It's a credit bubble, but we're too deep in the shit to raise
          rates - Neo-Keynesians.

China   : It's a speculative bubble. Rather than raise rates, we'll  
          order the speculators to stop speculating and the banks
          to stop lending - Marxists.

BIS     : It's a credit bubble. For Christ's sake kill it before it
kills
          us - Austrians.


Needless to say, this surfeit of analysis, and the lack of agreement,
should not be reassuring to anyone.

> concerns me somewhat that the FSA oversees protection to savers for
> it's listed organisations but only up to a max of about L30k. 

If you believe there's even a chance of a burst credit bubble, you
should obviously have less than 30K in each bank, though what makes you
so confident about the assurances of the FSA escapes me. 

If it's a credit bubble, then those banks which have lent most in the
primary assets of the speculation will clearly be at most risk of
problems.  Suppose it is property? Who's most exposed amongst the high
street banks and mutuals? Which ones were recently lambasted in
documentaries about overaggressive lending and ignoring standard
benchmarks of loan to income? That's precisely the behaviour that always
causes trouble in the aftermath of credit bubbles. 

FoFP