Reggie Middleton's Boom Bust Blog

This was contributed by ChrisM regarding the recent banking meeting in Europe and my comments:

The meeting here in Basel has been very interesting, the main points are:

1) they don't expect the economy to slow much further in the second half.

In regards to the US and UK, I don't see much evidence to support this.


2) they are concentrating on fighting inflation first, before growth.

 This should have been number one priority from the beginning. Inflation is still woefully understated by government numbers. On the boat ride, I shared with the fellow boombustbloggers my observation that effective housing price inflation is still rampant. Nominal prices have dropped sharply across the country, but affordability is actually way down in many areas, due primarily to the tightening of credit. The largest barrier for home purchasers for the middle and working class is the down payment. This barrier has increased significantly after the mortgage markets came back to reality, thus even though prices may have drop by 20% or so, required down payments on those houses have increased as much as 100% to 400% (think from 5% down piggyback 2nd mortgages to 10% to 20% conventional mortgages with PMI).

In addition, interest rates have moved up sharply and maintenance costs have skyrocketed with the cost of commodity inflation. This does not take into account the cost of heating homes, which may have effectively doubled in the past year.

Fuel, housing and food are still stripped from the core rate reading, yet they are the most ubiquitous of consumer purchases and all have advanced nearly or more than 100% in the past year or so (sans food, which still went up a lot).

3) they have suggested that "parking" bad debts, by the central banks, to assist commercial/investment banks is a bad idea.

I agree wholeheartedly.

4) they have further suggested that the institutions should sell these instruments at market rates, to establish a true value, to hopefully achieve a bottom to valuations.

Without doing so, no serious investors will ever trust them. They must swallow the short term pain in order to gain long term clarity. Then again, foreign investors have agreed to pour good money after bad. I theorize that petrodollars and SE Asian manufacturing money are attempting to get monetized through the major financial systems of the US and the UK, but they are only willing to take but so big a loss in the "legitimate laundering" of their monies into these developed nations financial systems. After a while, they should grow weary. Remember, I stated that the introduction of foreign monies purchasing assets en masse tends to denote a sharp drop in asset value. Think back to US acquisition of foreign automobile companies, the Asian acquisition of overheated US real estate in 80's (Japan was supposed to take over the world back then), and the Japanese investment in consulting companies (ex. Deloitte and Touche). 

Obviously the FED does not have to heed these suggestions, but the warning by the Chinese today to stabilise the dollar, is a veiled threat that they may stop buying US debt.

Points 3 and 4 will see the banks tank (again), the next 3 months should be interesting.