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Will 2008 Be Looked Back On As Worse, Or Much, Much Worse Than 1929? Part I

By Andy Shaw | January 23, 2010

Originally Posted 25th March 2008

There has been so much going on recently in the Credit Crunch that I think I could spend 200% of my time writing about it and still not explore all of the probabilities, let alone the possibilities. I also considered not saying anything about it as sometimes the truth can be really scary! So I knew before I told you all what I’m about to that I had to be able to present this info in a way that you could actually see the opportunities presented rather than getting depressed about it.

So the trouble is deciding what parts are most relevant to you as the property investor?

I watch the media and a lot of what is going at the moment on is being talked about, but as the financial guru’s are all speaking in their jargon, unless you are fluent in it, then you could actually think that there isn’t that much going on at all. It’s just the financial world having a few problems that doesn’t really affect me. Well, it does affect you!

And in actual fact there is so much going on that everytime I think, ‘I’ll write about that’, another chess piece either moves or falls which changes the importance of what I was going to discuss here. And they make moves that I didn’t know even existed in the game. It’s fair to say that the media actually seems to be keeping up with a lot of this stuff, but as the editors either don’t know or don’t understand the levels of importance then it is difficult for them to explore what is really happening.

Like last week, for instance, with the Fed cutting rates by 0.75%; it’s like trying to push the QE2 with a piece of string. But what else can they do, at least they are attempting to do something, unlike our central bank which has its hands tied by a mandate of watching inflation. Still, it does look like Mr King has had his ties loosened just a little as he has been hinting that he will let inflation rates rise slightly. I think I’ve mentioned before that if inflation is bad, recession is a 100 times worse, but what I haven’t mentioned is depression, and that’s 10,000 times worse and if the central banks don’t act in the right ways that’s where we could end up. If that happens then ‘All Bets Are Off!’.

So, the question is how much longer is Gordon Brown going to fiddle whilst our economy burns? If he had actually understood what was going on then there is a damn good chance that the very worst part of this credit crunch could have been averted. If, for example, he hadn’t sat on his hands when the Northern Rock crisis landed on his desk and instead he had just helped the ‘Lloyds buy out’, then this whole thing could probably have been contained by the central banks. Instead, because he didn’t understand the ramifications of his actions and because he didn’t understand that it would cost him more to go down the road he actually went down (in other words, he can’t add up very well), he opted for what looked like the path of least resistance and therefore we had a run on a British bank (unthinkable, even as I type now!).

But there is a glimmer of hope at the moment seen last week when Bear Stearns fell the Fed and JP Morgan moved to buy this fantastic business (with a cashflow problem caused by a lack of market confidence) for a few cents on the dollar. What kind hearted individuals ;-|. When I saw this happen my natural sceptic came through as this sort of thing is exactly the way I’d plan business takeovers, that’s if I was playing a board game and it wasn’t real life. The trouble is this is real life and I think they are still playing as if it’s a game. Which, of course, at their level, for them at least, it is; I was always too nice to be in real business :-)

Anyway, that said about JP Morgan (the first real blood letter in this crunch), they and the Fed stepped in and sorted this out because if they hadn’t then Bear Stearns could have been the domino that toppled them all. In my opinion at the moment the dominos are running off in so many directions that I think that there is every likelihood that they may not be able to contain all of the possible fall outs. The question in my mind is will they stop it, or rather can they let it carry on until all of the big players have had their next to free company like Morgan/Stearns.

Interlude – Before I could hit send on this article, I saw that JP Morgan have had to increase their bid from $2 to $8 or $10 (didn’t catch the exact amount) because the shareholders have worked out that if Bear Stearns were allowed to go bankrupt then because of the favourable rules for bankruptcy they would get considerably more than a sale to JP Morgan. Will these pieces ever stop changing direction?

But that’s the sceptic in me. If the Fed and JP Morgan hadn’t stepped in when they did, then as one commentator I read said this would have been an ‘Extinction level event’. I am not sure if it would have been or not, but in all likelihood he may have been right, as Bear was a major counterpart to virtually every important financial player in the world. So its insolvency would effectively freeze the assets of many hedge funds and other liquidity providers which, of course, could and probably would cause the financial system to seize-up. Then the American economy would have turned from a recession to a depression. The real difference is that one is caused by economic forces and the other through economic mis-management. Now I am a strong believer that our housing in this country is independent from what happens in the American market to a degree, unlike most pundits you’ll see on the media, but at their level we are not! So if you think Bear Stearns had nothing to do with you then you’d be right, but if the Fed hadn’t stepped in you’d be wrong, really wrong.

But the real change came about last Sunday. I believe this happened when the Fed changed their rules on security for borrowing. Now this is the biggest thing I’ve seen for a while. What happened was that they usually just let the big boys come up to them with their Treasury bonds as security and borrow against them – you’ll have seen in the media that the Fed are releasing another £200 billion and it didn’t seem to make any difference as the market confidence didn’t return after each new release of funds.

Well, after last week, they can now bring their Mortgage Backed Securities as security for Fed loans. Don’t underestimate the importance of this one as this on its own could return confidence to the banking market. Now all the main players can take their MBS’s to the Fed and borrow against them at exceptionally good rates.

Now if the Fed had done this the week before then Bear Stearns may not have folded. There’s a big outcry against the Fed making this move in the money markets as mortgages have never really been liked by the money men. It was only in the late 80’s when they found a way of packaging several into MBS that mortgages left the domain of small banks in America.

Now the Fed haven’t lowered their guard all the way to let just anybody with MBS turn up at their door. At the moment they are restricting it to the likes of Lehman Brothers or Goldman Sacks etc., but this lowering of criteria is an enormous step.

What worries me is that they haven’t moved quickly enough and there are several others about to fall. Don’t get me wrong, that could well be part of a plan. I just hope the Central Banks email and phones stay working if they are making such a risky play.

So what does all this mean for us on the other end of the scale borrowing money?

Well, I haven’t got time to finish this today, so I’ll write it up tomorrow :-)

Best wishes

Andy

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