The Short View By John Authers- The Subprime Market
The Short View By John Authers- The Subprime Market
Copyright The Financial Times Limited 2007
Published: July 19 2007 03:00 | Last updated: July 19 2007 03:00
Ben Bernanke made his name writing textbooks on economics. Yesterday the chairman of the Federal Reserve deployed those skills, treating the US Congress to a textbook analysis of the factors affecting the US economy and monetary policy.
His bottom line was plain - he is positive about the US economy, but too worried about inflation to prompt anyone to bet on a cut in interest rates. No surprises there.
But he did not get a textbook response. Investors bought bonds, pushing the benchmark 10-year Treasury yield below 5 per cent for the first time in six weeks, and sold stocks - a textbook "flight to quality". The dollar sank. Traders seemed to be reacting to a different speech.
The disconnect lies in the subprime mortgages mess. Bear Stearns' announcement, after the market closed on Tuesday, that one of its hedge funds investing in subprime-linked securities had been wiped out, was worse than many on the market had assumed.
No one thinks Bear Stearns was uniquely unlucky. Many other funds, which have not yet had to adjust their values for current market prices, are presumably in the same state.
It was what Bernanke did not say about subprime that raised concerns. Two months ago, he said in as many words that he did not expect "significant spillovers from the subprime market to the financial system".
He did not repeat this yesterday. Rather, he said that conditions in the sector had "deteriorated significantly" thanks to "mounting delinquency rates on adjustable-rate loans". He also mentioned increased concerns among investors about other forms of credit risk. Compared with his previous comments, which he could easily have repeated, this looks bleak.
The biggest problem is that no one has yet written the textbook on the subprime market. With a short history, it remains a great unknown. So it may be good that other markets are at last taking notice.
Copyright The Financial Times Limited 2007
Published: July 19 2007 03:00 | Last updated: July 19 2007 03:00
Ben Bernanke made his name writing textbooks on economics. Yesterday the chairman of the Federal Reserve deployed those skills, treating the US Congress to a textbook analysis of the factors affecting the US economy and monetary policy.
His bottom line was plain - he is positive about the US economy, but too worried about inflation to prompt anyone to bet on a cut in interest rates. No surprises there.
But he did not get a textbook response. Investors bought bonds, pushing the benchmark 10-year Treasury yield below 5 per cent for the first time in six weeks, and sold stocks - a textbook "flight to quality". The dollar sank. Traders seemed to be reacting to a different speech.
The disconnect lies in the subprime mortgages mess. Bear Stearns' announcement, after the market closed on Tuesday, that one of its hedge funds investing in subprime-linked securities had been wiped out, was worse than many on the market had assumed.
No one thinks Bear Stearns was uniquely unlucky. Many other funds, which have not yet had to adjust their values for current market prices, are presumably in the same state.
It was what Bernanke did not say about subprime that raised concerns. Two months ago, he said in as many words that he did not expect "significant spillovers from the subprime market to the financial system".
He did not repeat this yesterday. Rather, he said that conditions in the sector had "deteriorated significantly" thanks to "mounting delinquency rates on adjustable-rate loans". He also mentioned increased concerns among investors about other forms of credit risk. Compared with his previous comments, which he could easily have repeated, this looks bleak.
The biggest problem is that no one has yet written the textbook on the subprime market. With a short history, it remains a great unknown. So it may be good that other markets are at last taking notice.
posted by Carlos T Mock at 8:55 AM
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