My forecast is that there will be fallout from the subprime fiasco but that it will not be appalling, at least outside the USA, and not necessarily what people think.
Some years ago when working in the City someone sent me a hand-written letter seeking funds to start up, if I remember rightly, a crocodile farm in Kent. Perhaps not wanting to appear blusteringly over-confident he wrote 'As to whether I can repay the money, time alone will tell'. He didn't get his loan - at least not from me - but I thought of him when all this started. The old banker's maxim is 'Never lend money to people who aren't going to repay it' and this, of all things, appears to have been forgotten.
Years ago the banks subcontracted their risk assessment to ratings agencies who regarded the mortgage business as a percentage game: each package of debt contained hundreds, thousands of debtors and most people, most of the time, pay their debts. What they didn't seek to establish is why these people were getting mortgages in the first place: it was the result of the Fed keeping interest rates too low, too long, an unnatural credit binge which was bound to go at least slightly wrong, but they didn't spot it.
So the first casualties should be the ratings agencies which classified this rubbish as AAA. No-one is going to have much confidence in them for a bit, and regulators all over the world are going to look closely about how competent they are and how seriously they are taken. And there are skeletons in this closet. More fallout soon.
This is my first post and as I write $/£ is 2.04; $/€ 1.37 and Brent crude around $75. Expect the dollar to weaken even further in the run-up to Christmas on the back of further bad news and the ECB's inability to lower rates, but losing more against the € than the £. My guess is oil will come off $3 - $5.
More about currencies soon.
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