Even before my previous entry, the credit crunch and the pumping of funds into the financial institutions by central banks were already in the midst.
Now it seems, that a variation of Possibility 6 happened.
Banks pay extreme caution in lending, and they are not even lending to their counterparts! As reported in Singapore's The Business Times on 15 September 2007, "Britain urges 'international action' after banking bailout", the Bank of England had to provide emergency funds to a major British mortgage lender called Northern Rock after other banks became wary of lending to it, squeezing the mortgage lender's financing.
As long as holders of CDOs related to the subprime crisis have no idea how material the financial impact will be, uncertainty will be formed in the market. As such, banks will take caution towards lending even if they are lending to others in their industry.
Let's all hope the subprime crisis will not be material to cause a banking meltdown.
Saturday, September 15, 2007
Monday, September 3, 2007
Possible Spillover of Sub-prime Mortgage Crisis
1) Subprime Crisis > Banks tighten lending > Credit Crunch > Investment funds pull out from markets > Currencies fall > Net Import Nations face crisis of higher priced goods (import inflation)
2) Subprime Crisis > Mortgage borrowers fail to pay up > CDOs worthless > Balance sheets of financial institutions get impacted (depending on impact, some may close, others face a huge profit write off) > Markets may get shocked > Investors seek liquidity > Pull of from markets > Markets fall, herd behaviour occurs > Market falls further > Investors lose confidence > Govts step in > Stability may occur slow or fast depending on the speed and actions taken by govts.
3) Subprime Crisis > Mortgage borrowers fail to pay up > Foreclosure of homes > Supply of home sales in market outstrip demand > Property prices fall > USA home owners feel less rich > Consumption decreases > USA demand for global goods decreases > Negative impact on export-oriented countries like China, Taiwan and Singapore > Economic slowdown possible on a global scale.
4) Subprime Crisis > Mortgage borrowers fail to pay up > Foreclosure of homes > Supply of home sales in market outstrip demand > Property prices fall > USA home owners feel less rich > Consumption decreases > FED lowers interest rate, get banks to lend out more > Banks change lending patterns from property to other forms > Consumption increases > Solve economic slowdown.
5) Subprime Crisis > Mortgage borrowers fail to pay up > Foreclosure of homes > Supply of home sales in market outstrip demand > Property prices fall > USA home owners feel less rich > Consumption decreases > FED lowers interest rate, get banks to lend out more > Banks change lending patterns from property to other forms > Consumption increases > Subprime Crisis gets worse, impacts entire economy > Possible stagflation.
6) Subprime Crisis > Banks tighten lending > Credit Crunch > Central Banks reduce interest rates > Banks pay extreme caution in lending > Not many borrowers > Interest rates remain low > Subprime Crisis gets bigger than expected > Economic fallout > Recession on a global scale > Possible depression like 10-year long Japan.
Many more other possibilities, as the future is uncertain.
2) Subprime Crisis > Mortgage borrowers fail to pay up > CDOs worthless > Balance sheets of financial institutions get impacted (depending on impact, some may close, others face a huge profit write off) > Markets may get shocked > Investors seek liquidity > Pull of from markets > Markets fall, herd behaviour occurs > Market falls further > Investors lose confidence > Govts step in > Stability may occur slow or fast depending on the speed and actions taken by govts.
3) Subprime Crisis > Mortgage borrowers fail to pay up > Foreclosure of homes > Supply of home sales in market outstrip demand > Property prices fall > USA home owners feel less rich > Consumption decreases > USA demand for global goods decreases > Negative impact on export-oriented countries like China, Taiwan and Singapore > Economic slowdown possible on a global scale.
4) Subprime Crisis > Mortgage borrowers fail to pay up > Foreclosure of homes > Supply of home sales in market outstrip demand > Property prices fall > USA home owners feel less rich > Consumption decreases > FED lowers interest rate, get banks to lend out more > Banks change lending patterns from property to other forms > Consumption increases > Solve economic slowdown.
5) Subprime Crisis > Mortgage borrowers fail to pay up > Foreclosure of homes > Supply of home sales in market outstrip demand > Property prices fall > USA home owners feel less rich > Consumption decreases > FED lowers interest rate, get banks to lend out more > Banks change lending patterns from property to other forms > Consumption increases > Subprime Crisis gets worse, impacts entire economy > Possible stagflation.
6) Subprime Crisis > Banks tighten lending > Credit Crunch > Central Banks reduce interest rates > Banks pay extreme caution in lending > Not many borrowers > Interest rates remain low > Subprime Crisis gets bigger than expected > Economic fallout > Recession on a global scale > Possible depression like 10-year long Japan.
Many more other possibilities, as the future is uncertain.
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