Wednesday, October 08, 2008

today : sailing on the sea of red

I don't have a degree in economics. I'm not even that good at sums. But I do know when things don't smell right.

Here's my question. Where did the money go? I'm not talking about the money that dried up in the credit markets that apprently started this whole shebang. I'm talking about the money that has been poured into the world banking system over the past month or so by pretty much every central bank in the world. 10 billion here, 30 billion there, it's a daily occurence that central banks are pumping 'liquidity' into the markets. But it seems that the central bankers have driven their Chevys to the Levees to find that the Levees are dry. And filled with sponges. And with a leak in the other side.

Because it seems that however much cash is pumped in, it achieves nothing. The credit market doesn't suddenly unjam. It seems that none of this endless new cash is actually liquid.

Imagine this: 9% of American mortgage-holders are in default. That means that another swathe are on the edge - leveraged to the hilt against the value of the house, working two jobs, paying the mortgage one month and the credit card the next, and a further swathe of homeowners are one illness, new baby or job-loss away from joining those strugglers. Let's be conservative (deliberate small c) in our estiimate. Let's say that 20 percent of US mortgage holders are in one of these three groups. An annual 16 percent fall in house values means that more and more are sliding into negative equity.

I read the other day that property in the US in total is worth about 7 trillion dollars. Okay, so roughly 9% of that is the 700 billion bailout. I get that bit. But what about the rest? No wonder banks are squirreling away the free cash. They know that the black hole is way bigger than the headline figures. And as the economy continues to tank and house values plummet the bottom gets further away.

Good job the bankers all have luxury yachts to live on.

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