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Bond Outlook December 19th

The central banks are doing all they can to resolve the liquidity crisis, but they can do so little about underlying solvency problems. Only time can solve them.

Bond Outlook [by bridport & cie, December 19th 2007]

In this last Weekly of 2007, may we leave you a question to ponder on over the break? Can a massive loosening of liquidity solve a solvency problem? Obviously the question itself implies a view, viz., that the immediate underlying cause of the current prices is the fall in US (and UK) housing prices and the terrible performance of mortgage-backed securities. This immediate cause is a manifestation of the USA’s living beyond its (considerable) means.

It is worth recalling that the housing crisis is the underlying cause, as a return to healthy financial markets can only be achieved when the US housing market stabilises. Until then, insolvency will be hitting house owners and the holders of mortgages and mortgage-backed securities. Every attempt to bail out the victims of falling house and assets prices puts off the evil day when the mess must be cleared up, but will not prevent it. Our view is that the powers that be should let the write-offs and bankruptcies happen so that the deck can be swept clean and the extent of the damage seen, following which a fresh start can be made.

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