Some of these quotes just seemed too good to ignore…
`I don't see any impact as yet on the real economy or on the inflation rate. Obviously, there could be an impact, but we have to rely on some real evidence.' There is ‘a sort of credit crunch', in place affecting housing and some types of corporate paper’, but only a ‘calamity’ would justify an interest-rate cut now. William Poole, President, St Louis Fed, 16 August.
‘Financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward…. the Federal Open Market Committee judges that the downside risks to growth have increased appreciably’. Federal Reserve statement accompanying a 0.5% cut in the discount rate at which it lends to banks, 17 August.
'Until recently, there was a lot of denial, but this is a big deal. Now the big question is: Will this spill over into the broader economy?' Byron R. Wien, former US strategist at Morgan Stanley, now with Pequot.
‘If an economy is robust but unsoundly financed, it will not stay robust for long, as the Asian crisis of 1997-1998 showed’. John Plender, Financial Times commentator.
‘All of the old-timers knew that subprime mortgages were what we called neutron loans — they killed the people and left the houses. The deals made in 2005 and 2006 were going to run into trouble because the credit pendulum at the time was stuck at easy.' Louis S. Barnes, 58, partner at Boulder West, a mortgage banking firm in Colorado.
'Buyers (of the securitised subprime loans) didn’t fully understand what they were getting. They were sold, not bought. The actual buyers were often not mortgage specialists, but generalists who looked at these bonds as a way of earning higher yields.' Rajiv Sobti, portfolio manager, Proxima Alfa Investments, a New York hedge fund.
‘The fact is the rating agencies didn’t do a very good job. They had no way of knowing whether some of the loans were imprudently granted.’ Rep Barney Frank, chairman of the House Financial Services Committee, who will hold hearings on the issue next month.
Clearly the Fed’s move on Friday will help to improve liquidity in the financial markets, so that companies can borrow to pay their bills, and employees can get their wages on time. But will it encourage lenders to relax lending standards again? This will probably depend on whether there are any more skeletons to emerge from the subprime cupboard.