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It's spreading
Aug. 10th, 2007 07:38 amHas anyone else noticed the similarities between the outbreak of Foot and Mouth disease in the UK and the global fall-out from the US subprime loan meltdown?
Just as the government relaxes movement restrictions of cattle, up pops the disease in Dorking, 10 miles outside the original exclusion zone. Just as Bernanke says that the subprime loans problem is contained, BNP Paribas says that it won't buy some funds because at the moment it can't sell them. Yes, it's the famed liquidity crunch. The ECB panics and pumps as much into the economy as it did in the immediate aftermath of 9/11 (an indication of how seriously the pwers-that-be are taking things) — €95bn. The markets see what the ECB has done and promptly assume that things must be much worse than they had previously thought.
Ah well, try to look on the bright side. A problem with the booming UK housing market has been the limitless supply of easy credit. The government tries to stem consumer demand by raising interest rates. But now, the problem solves itself, because the supply has been cut off. That doesn't mean interest rates will fall, because there is the other side of the equation. If people won't lend, and there are still people who want to borrow (albeit, fewer of them), then the "price" of borrowing goes up. It's all very well the BoE setting base rates at 5.75%, but there's a real market of lenders and borrowers out there. Compare it to the Zimbabwe situation, where they tried to curb inflation by not printing notes. Net result? Inflation continued and liquidity dried up because there wasn't enough cash to "oil" the economy.
The same thing can happen with interest rates. Set them too low in a credit-crunch market and all that happens is that trade dries up. So you have to inject more cash into the markets (passim, the ECB and Fed yesterday, the JCB today). All of that makes things quite exciting for the macroeconomist, but a first-impression interpretation from Birks Towers would be that you can forget any easy loans for the next 18 months. That pushes through to the "real" economy, bringing down house inflation in the UK and general inflation elsewhere. That eases upward pressure on interest rates for the "curb inflation and borrowing" reason. But it doesn't ease the upward pressure from the very unusual "encourage supply" reason. You (the Central Bank) can get round this by supplying it yourself, in the short term, but eventually the markets have to get back into gear. If they don't, you have a very hard landing indeed.
FTSE down another 140 today? I wouldn't be surprised.
PJ
Just as the government relaxes movement restrictions of cattle, up pops the disease in Dorking, 10 miles outside the original exclusion zone. Just as Bernanke says that the subprime loans problem is contained, BNP Paribas says that it won't buy some funds because at the moment it can't sell them. Yes, it's the famed liquidity crunch. The ECB panics and pumps as much into the economy as it did in the immediate aftermath of 9/11 (an indication of how seriously the pwers-that-be are taking things) — €95bn. The markets see what the ECB has done and promptly assume that things must be much worse than they had previously thought.
Ah well, try to look on the bright side. A problem with the booming UK housing market has been the limitless supply of easy credit. The government tries to stem consumer demand by raising interest rates. But now, the problem solves itself, because the supply has been cut off. That doesn't mean interest rates will fall, because there is the other side of the equation. If people won't lend, and there are still people who want to borrow (albeit, fewer of them), then the "price" of borrowing goes up. It's all very well the BoE setting base rates at 5.75%, but there's a real market of lenders and borrowers out there. Compare it to the Zimbabwe situation, where they tried to curb inflation by not printing notes. Net result? Inflation continued and liquidity dried up because there wasn't enough cash to "oil" the economy.
The same thing can happen with interest rates. Set them too low in a credit-crunch market and all that happens is that trade dries up. So you have to inject more cash into the markets (passim, the ECB and Fed yesterday, the JCB today). All of that makes things quite exciting for the macroeconomist, but a first-impression interpretation from Birks Towers would be that you can forget any easy loans for the next 18 months. That pushes through to the "real" economy, bringing down house inflation in the UK and general inflation elsewhere. That eases upward pressure on interest rates for the "curb inflation and borrowing" reason. But it doesn't ease the upward pressure from the very unusual "encourage supply" reason. You (the Central Bank) can get round this by supplying it yourself, in the short term, but eventually the markets have to get back into gear. If they don't, you have a very hard landing indeed.
FTSE down another 140 today? I wouldn't be surprised.
PJ
