Recently, there has been a burst of the housing bubble over at the United States. A hedge fund got bankrupt and many suffer losses. Based on reports, there are a total of about 1.5 trillion dollars of mortgage in US backed by 20 trillion in real estate worth.
Liquidity has dried up, resulting on high borrowing costs for companies.
The Feds and all the world banks everywhere has injected a large amount of money to boost of liquidity.  Based on latest news, it seems that the funds injection is working so well that it lowered the interbank lending rate to 0.75 percent beneath the targeted 5.25 percent.
Honestly, I do not think it will cause a recession. Initially I thought there was a high chance as I remembered most of the financial crisis is triggered by a burst of the housing bubble. In Japan’s case, properties crashed by over 80% resulting in a lot of banks being saddled with monstrous bad loans. This lead to a credit crunch in the country resulting in the recession that lasted over a decade and a half (think the housing was depressed for 17 years if I am not mistaken).
However, this US sub-prime thing feels different. It is different in a few ways…
Use of sophisticated financial instruments to protect the banking sectorÂ
The US financial system seems to be pretty developed and much of the financial risks has been taken off banks and sold off as Asset Backed Securities/Collaterised Debt Obligation. In the case of a default, the risks and liabilities are spread far and wide….. a heavy load over many shoulders is definitely a lot more bearable than in the case of Japan. I mean.. even Singapore banks like OCBC and UOB helps takes up part of the CDO risks, i.e. 600 million and 500 million… and they have set aside about 30 million as losses because of the CDOs…
That is good actually… so when the Central Banks put in the money… there should be effect. The banks might still be unwilling to lend initially, but their unwillingness cannot be compared to the Japanese counterpart who has to bear the brunt of the bad loans. I mean… if some guy offers me money at 5% and i see a lot opportunity of lending it out at 6% to companies… I dun see why not…
Prices are not as exhorbitant as Japan
I just did a check on the house pricing index on US properties and am pretty surprised. It seems that since 1980 till before the crash, properties have only appreciated about 400%. 400% over 27 years… if u compound it… I believe should be only around 10%? Surely there is no way for prices to drop over 80% in the case of Japan… as if that was so, the houses would even be cheaper than before the information revolution in the US….
Anyway, maybe it is time to pick up some shares in our local banks… who have been hit by the subprimes…. 