Happy Birthday Credit Crunch
Posted on April 7, 2008
Filed Under Investing |
Difficult to believe but it is now over a year since we had the first signs of the sub prime and credit crunch turmoil. My own post of 11th May - A Measure of Fear and Greed warned that the VIX had reached historic highs and that there was trouble ahead.
During the past year it is fair to say that the “professional money men” (and it is mostly men) have managed to take the entire financial system to the brink of a financial meltdown while simultaneously profiting from the whole sorry mess. It has been a breathtaking tour de force.
First create a bubble - any bubble will do. This time round it’s been cheap money and ludicrously low interest rates which positively encouraged banks to lend to anyone with a pulse! The chief beneficiaries were the private equity markets and home owners, in particular those at the bottom end of the credit scale. Even as these loans were being repackaged and sold on as grade A investments into the wider financial community the consequences of this credit binge were beginning to worry central banks as inflation started to enter the system. At this point the “professional money” began shorting the very same products they were cheerfully selling to everyone and anyone.
The rest, they say, is history. However, there is a further twist which differentiates this particular market panic with previous market storms and it is the extent to which central banks and governments (aka you and me) have been forced to intervene directly to prevent financial armageddon. In the UK Northern Rock is now under public ownership and in the States J P Morgan’s buyout of Bear Stearns was underwritten by the Federal Reserve. Never mind moral hazard we are now all hostages to fortune.
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