Monday 28 January 2008

The real value of the interest rate cut is....

.....lower interest rates!

Last week, I predicted it would be an interesting week for the markets. And so it was. Today, Monday, Asian markets opened lower, and so far today European markets are all down. While this may be part of the classic Monday gloom, there are indications that we are not near the end of the bad news:

Over the next month, some major banks and financial institutions will be announcing full-year and fourth-quarter earnings results. Expect losses.

My prediction last Tuesday on hedge fund losses were partially borne out by SocGen’s EUR 4.9 million fraud. As Bloomberg reports today:

The bank handed investigators information about Kerviel on the evening of Jan. 25 as part of the probe into the losses, the biggest in banking history, that occurred when Kerviel set up positions in futures linked to European stock indexes and then hedged them with fictitious trades.

Expect future losses. SocGen isn’t the only one affected by the downturn in the last 35 trading days. I expect further trading positions to unwind in the next 10-15 business days, possibly leading to some grim headlines.

The Fed has, in my opinion, acted correctly with the 75 basis point interest rate cut, but for reasons the headlines are overlooking. I don’t consider this cut will affect consumer spending at all: as I posted earlier, consumer spending has been driven in recent years by re-mortgaging and housing values.

However, the interest rate cut should make it easier for all those families with sub-prime mortgages to pay their monthly instalments. This may cushion the impact of foreclosures related to the sub-prime and the potential ALT-A crisis, together with the FHA Secure Plan. In this respect, there is an economic benefit to the interest rate cut. A further 50 basis-point cut would accellerate the short-term benefit, despite the longer-term inflationary and macroeconomic impact this might have.

I’d be very interested in seeing some projections of how many sub-prime and ALT-A borrowers will be affected by an interest rate cut. Any data, anyone?


The BBC published some interesting stats on the sub-prime loan volume last November: it would be great if they could update this:

Mike Larson published some stats on market size in his December 9th column on Market Oracle:

Clive Crook discussed the principles behind the Paulson Plan in on December 9th:

The Federal Housing Administration details the FHA Secure plan on,717234&_dad=portal&_schema=PORTAL

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