Re: [OPE-L] Lapavitsas on the financial crisis

From: Costas Lapavitsas (Cl5@SOAS.AC.UK)
Date: Sun Jan 20 2008 - 18:34:37 EST

The reason why money markets have picked up again - allowing the FT some smugness laced with fear - is that the main central banks have announced enormous injections of liquidity. The ECB alone has made available sums in the region of 500bn dollars. How much of this will actually materialise remains to be seen, but it appears to have restored some confidence among banks. There is no rocket science and no exchange rate mystery behind it. Moreover, it was announced after I had given the interview.


-----Original Message-----
From: Jurriaan Bendien <adsl675281@TISCALI.NL>
Date: Sun, 20 Jan 2008 17:44:19 +0100
Subject: [OPE-L] Lapavitsas on the financial crisis

Costas Lapavitsas argues:

"Since August the money market has gone from a complete freeze to just about chugging along. The reason is obviously that banks do not trust each other, since all of them carry assets that are contaminated by subprime loans."

In reality, there is no real empirical evidence for this freeze, or a chugging along. In reality, the episode of panicking means more liquidity and more volatility, which in turn boosts the currency trade. The BIS survey estimates that, longterm, traditional fx trading volumes surged from 1.9 trillion USD per day in 2004 to 3.2 trillion USD per day in April 2007. The trade in idle funds is only increasing longterm, not decreasing. Currently Australasia is one favourite, because of relatively high interest rates available there (roughly 8-10%) with low inflation (roughly 2-3.5%). The Yen has also strenghtened as a result of the falling dollar.

"Three-month Libor, overnight index swaps and interbank liquidity: they are all so 2007. As 2008 begins, banks are again lending to each other at almost normal rates, and pressure on the money markets is much reduced"

The more pertinent thing to observe is, the overall more conservative policy of lenders, implying a credit squeeze:

""The ECB survey reported a "sharp tightening" of standards applied to lending to business, largely because of the changing economic outlook. The net percentage of banks reporting that they had tightened credit conditions in the final quarter of 2007 on loans to business rose to 41 per cent, up from 31 per cent in October's survey - which was already the highest since the survey began in early 2003. A net balance of just 2 per cent of banks reported an increase in demand in corporate loans in the fourth quarter - the weakest since July 2005 - with the deterioration at the end of last year largely due to the decline in financing needed for mergers and acquisitions and corporate restructuring. At the same time, banks reported that "securitisation activity was severely hampered" at the end of last year. Banks also reported a further significant tightening of credit standards for people borrowing to buy houses and a sharp drop in demand for such loans to the weakest level since the survey began in early 2003. This probably reflects a gradual slowdown in the eurozone housing market that was under way before the global credit squeeze took hold last August." (FT, january 18, 2008 Ralph Atkins "Credit Squeeze hits Eurozone borrowing").

In general, this results in an era of greater financial conservatism in the West.


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