I never thought to hear you speak again.—Thy wish was father, Harry, to that thought.
[1597-8 Shakespeare Henry IV, Pt. 2 iv. v. 93]
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| European Central Bank President Jean-Claude-Trichet heading into the Bank's headquarters in Frankfurt. |
Independent Newspapers Group Business Editor Brendan Keenan writes, under a headline: Home loan rise let-off on the cards as markets dive, in today's Irish Independent that global financial markets face the worst crisis in perhaps 30 years, analysts warned yesterday.
Just six months ago, global bank HSBC had stunned markets when it disclosed that it was was increasing bad debt provisions in the US by almost $2 billion because of losses in the high-credit risk subprime home lending sector.
Subprime mortgage lending in the US had surged over the past several years, and these days, subprime mortgages comprise about 12% of the roughly $8.4 trillion U.S. mortgage market, up from 7.5% of the market in late 2001.
CNBC business television interviews a raft of analysts, traders and managers from both the Wall Street world and beyond on a daily basis and the line of a clear majority from February was that there would be no "contagion" from this relatively small sector of the home lending market. Everything would be hunky-dory.
Are any of these optimists now embarrassed that they were talking about the implications of an intricate system stretching across the globe that many of them did not understand?
Absolutely not! Just move on and make new prognostications. Nobody is keeping a scorecard!
Also in the first half of the year, the consensus view was that the Fed would cut rates from the early summer. This of course was seen as an imperative during the swoon in late February when markets were jolted by a plunge in Shanghai.
The wish is simply father to the thought and on both sides of the Atlantic, a rate cut or end to tightening is now seen as a panacea.
William Poole, President of the St Louis Federal Reserve Bank, said in an interview on Thursday that only a “calamity” would justify a Federal Reserve interest rate cut before the meeting. He played down the impact of market turmoil on economic growth, telling Bloomberg News that “no one has called up and said the sky is falling”.
However, in a feed for eager bulls, a spokesperson for the Fed said Poole’s views did not necessarily represent those of the Fed’s interest rate setting committee as a whole.
European Central Bank President Jean-Claude Trichet called for "strong vigilance" on inflation, signalling a rise in the ECB's key interest rate to 4.25%, when the Governing Council will meet on September 6th.
Trichet always stresses that the Bank does not pre-commit and its focus is on the medium to long term not the current year.
People should also understand that Trichet will not bend to politicians' wishes and he has said that the market tumult ``can be interpreted as a normalization of the pricing of risk.''
He does not view the role of a central bank as a support for share prices.
The eurozone economy is still growing but a little slower than in the first quarter and the current market volatility will have to be a threat to the real economy, for the planned rate hike to be put on hold.
Today, we have even a claim from an economist that the ECB could begin cutting rates in early 2008!
This is where optimism transcends to pessimism because such a scenario is only credible in the context of an impending recession.
Economists on Interest Rates
The Irish Times reports today that Dermot O'Brien, economist, NCB Stockbrokers said that there are now tentative expectations in the market that the European Central Bank's (ECB) base interest rate will peak at its current rate of 4 per cent and that an interest rate cut could happen in early 2008, O'Brien said.
This would require the ECB's Governing Council to backtrack on a strongly signalled rate hike pencilled in for September 6th.
O'Brien said that it would be more damaging to the ECB's credibility not to adapt its policy in light of credit difficulties in the market.
O'Brien is quoted in the Irish Independent as saying that the ECB will reverse the decision it signalled to raise interest rates when it meets on September 6th.
The tight market conditions remove justification from the European Central Bank (ECB) for increasing interest rates, O'Brien's colleague Eunan King said a week ago.
"The ECB and the Bank of England may have to find a way to back-track on their signalled rate hikes, unless the current turmoil in financial markets calms," Mr King said.
Ulster Bank economist Pat McArdle is reported to have said that the situation would have to get worse before interest rate rises would be postponed.
"I think it would have to get worse before the ECB would change its mind, but any more of this and [the rate increase in] September would look doubtful," he said.
Bloomberg News publishes additional forecasts from economists:
``There is a big financial storm brewing,'' said Andrew Bosomworth, a fund manager at Pacific Investment Management Co. in Munich. If companies ``can't finance themselves, we may see bankruptcies. A forward-looking central bank should go on hold.''
``People in the market are now reducing the chance the ECB will raise interest rates in September to just 40 percent,'' said Christoph Rieger, fixed-income strategist at Dresdner Kleinwort in Frankfurt. ``Two weeks ago, it was 90 percent.''
Delaying an increase ``would be the responsible course of action in the face of significant market turmoil,'' said Charles Diebel, head of European rate strategy at Nomura International Plc in London.
``The ECB should recognize that the process of risk normalization is threatening to become disorderly,'' said Lena Komileva, an economist at Tullett Prebon in London. ``It's becoming a textbook financial meltdown now.''
Investors are simply ``getting out of risky assets,'' said Guillaume Menuet, an economist at Merrill Lynch in London. ``It doesn't mean markets are fundamentally re-pricing the ECB outlook.''
``This is a case of reality hitting the fan -- softening economic fundamentals coupled with the dire state of financial markets,'' said David Brown, chief European economist at Bear Stearns in London. ``It's sayonara to the ECB's rate-tightening cycle.''
As to hitting the fan, Brown's metaphor could also be used in regard to the recent hedge fund bonfire at his own company's headquarters in New York!
On his certainty regarding ECB's monetary policy, it just goes to show that economists, traders, analysts and so can be clever people. However, the wish more often than not becomes father to the thought.
In an article titled Belief persists in real economy, in Thursday's FT, Chris Giles and Gillian Tett wrote:
Many of the financiers at the heart of the current storm argue – perhaps unsurprisingly – that the events are highly significant. For what is essentially occurring now is widespread “deleveraging” – the market term for when investors and financial institutions are forced to cut their debt in a hurry by selling assets...most economists remain sanguine. After all, fundamental world growth prospects are strong, they say, and lower prices for risky assets could even make the economy more robust. Moreover, much of the market turmoil has erupted in financial spheres such as derivatives – which often appear to have a limited connection to the world of goods and services.
David Miles, chief UK economist of Morgan Stanley, for example, likens the complex financial products that are central to the current malaise to bets on a horse race. These bets can add up to an impressive figure – but they do not affect the outcome or the strength of the horse.
Similarly, he argues, in the real world it is the revenue-generating process of the economy in households and companies that matters, not the complex bets on this made between investors in sophisticated markets. Or, as Julian Jessop of Capital Economics puts it rather more directly: “People in financial markets always think they are more important than the real world.”
