US: Subprime crisis - the Fed's FUD

For Bernanke, the questions came thick and fast, helped only by the fact that several senators knew what they wanted to ask - but seemed unable to put their questions concisely, accurately or in some cases coherently. But some Senators put him to the test: why, one asked, if sub-prime mortgages are collected into a single investment vehicle, do ratings agencies give the composite fund a Triple A rating when none of the assets in that fund would qualify for such. Bernanke was relieved: the rating agencies are independent companies and not regulated by the Fed and we have no control over how they make their decisions, he was able to respond.

Another asked how, if savings are falling, earnings are stable and costs (including interest charges) are rising how Americans will bridge the gap when the savings are gone. Bernanke's answer was that cash savings are falling but that rising house values are creating an offset and that, if people wished, they could use an "equity release scheme." That raised eyebrows and Bernanke was asked if he really suggested that people go into more debt to pay off the debt caused by - amongst other things - inflation and interest rises designed but not being successful at countering inflation. His answer was that an equity release scheme is not really increasing debt - that it is converting an illiquid asset to a liquid asset. His questioner ran out of time before he was able to point out that the cost of that conversion would be an additional cash-flow drain, exacerbated by the payment of interest. He seemed oblivious to the irony that his answer implied that if mortgage arrears loomed, then the best course of action was to refinance the house - exactly the sort of lending that fuelled the sub-prime lending fiasco in the first place. And no one mentioned the dirty words "negative equity" - which could well become a contagion if people do borrow against the equity in their houses, and then prices fall, as they are already doing in several US districts.

BISfaculty is to host an Asia / Asia Pacific Regional Conference in Singapore on 24-25 September 2005 called "When American Sneezes...." about the impact of the Sub Prime Lending Crisis on markets, economies and companies in the Asia / Asia Pacific region. Details at http://www.bisfaculty.com