Central banks are not stopping credit crisis

Central banks are not stopping credit crisis



Now that we are exactly one week into the liquidity crisis world financial sell off, the question arises, when will it stop?


If this was merely a stock decline due to some normal economic retraction, or news, one might expect at least a pause in the carnage is all world stock markets. However, that is most definitely not the case – as of Thursday 2:00 AM. Asian markets are way down 2 to 3%. European markets are way down too 2% or so. This is a growing world liquidity crisis. The central banks have not been able to stop it.


What is a happening is more and more revelations of credit losses – due at first to home mortgage derivatives (2 to 5 $trillion worth), then, revelations now that the corporate paper (bond) market is freezing, (KKR seeks to delay short term commercial paper) then, LBO’s are now frozen, now the largest US mortgage lender, Countrywide, may become insolvent – as they cannot sell mortgages and are being forced to hold them. Bloomberg puts out an article that ‘credit markets are frozen.’ What was first a mortgage related credit crisis is now spreading across many other major credit markets. The central banks will not have the horsepower to shore up all of these at once. The continuing stock sell off world wide is showing that. This is a crisis of greater magnitude than LTCM and 1998 – Roubini.


Then we find that new losses are emerging in Europe, related to the US mortgage derivative market that is now totally illiquid. The ECB asks for calm, and infuses tens of billions - Monday. Then we find that Asians are not marking down US mortgage derivatives, perhaps denying the problem, but in the US regulators are looking at the books of banks and brokerages to see if there are hidden losses. But the other major credit markets are also freezing.


The US Fed, ECB, BOJ and other have been still infusing temporary liquidity. The Fed another $7 billion yesterday, and $36 billion Friday buying illiquid MBS (mortgage backed securities). In total we are well over $500 billion in central bank emergency infusions to markets and banks in the last week alone.


But, with all this money, the financial markets are still tanking. The credit problems are not being managed, and I put out an alert two days ago that I did not believe the present central bank efforts at merely adding liquidity will work, because the unfolding credit crisis is very widespread, and world wide.


So far, $500 billion of central bank infusions have not stopped either markets from selling off, nor stopped potential financial collapses, by for example Countrywide, which will be in serious trouble very soon if they cannot get some liquidity from the mortgage bond market. That news led to Wednesday’s Dow sell off, followed by more Asian and European selling.


Gold is selling off again for liquidity reasons to cover margins and redemptions, and also because the general commodity complex will suffer if there is a serious economic slowdown. There is competition between flight to safety into gold and liquidity driven selling out of gold.


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Christopher Laird

Editor in Chief



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