Casper Economic and Political blog

I placed an order for a LCD (i.e TFT) monitor yesterdat with a “Whenever they are free to pack it” delivery option (as I am not in a hurry) and the item was packed and sent to courier this morning at 10am (Order placed 10pm yesterday, assuming they start working at 8, that is still pretty quick).

There are two explanation - either they are super efficient or that there isn’t much order to process AT ALL.

This financial mess is now spreading everywhere.

I was in Singapore in July and had an opportunity to visit several condo developments.  At teach of the development, there is a mortgage advisor from a bank linked to the developer.

Upon enquiry, there were willing to lend to me up to 100% of my monthly income (no kidding), provided that 30% deposit is put down.  From the sound of it, also no doc (or no full verification of income was (Banks are required).  (This only apply at 70% or less, 90%+ loans are quite strict).

However, during the last recession, Singapore condo crash by more than 50%. And if this crisis continues (which looks like it will be), we will have a nice drama of subprime @ Singapore.

http://4.bp.blogspot.com/_YlvEjlIelzk/SQCC1xZyh_I/AAAAAAAAUUg/grVZ2H8TaZw/s1600-h/1.jpg

(Oct 6 - OCt 12 transaction price)

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http://1.bp.blogspot.com/_YlvEjlIelzk/SLbZMyG1sGI/AAAAAAAANoE/qLT3slrm7Gs/s1600-h/1.jpg

(Aug 11 Weekly Transaction price)
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http://propertyhighlights.blogspot.com/2008/10/high-loan-exposure-becomes-dampener.html
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and a warning from Moody

http://propertyhighlights.blogspot.com/2008/10/high-loan-exposure-becomes-dampener.html

Now US is talking about fiscal stimulus and UK is talking about bringing ahead project spending (which will act as fiscal stimulus).

If the stimulus is spent on truely useful infrastructure (e.g. rail), then it is an investment that our children will benefit from.  If it is spend on rubbish stuffs ( as Brown government often does such as hiring consultants who cost millions to figure out how to spend the money), then it would become a debt that we and our children have to pay.

There is also a possibility of giving the money back to the citizens via tax cut / tax rebate but there is a risk that the money is saved rather than spend (and hence defeat the purpose).

I have a proposal - let’s send the rebate in prepay Visa/Mastercard issued by the government (or contract it to say the like of Newcastle Building Society) and makes the credit expire after 3 months.  In this case, they would have no choice but to spend the money (albeit on Groccery if they must).

Things are getting really bad. The latest implosion in the Letter of Credit market now risked the entire world economic system to fall.   There was a report on the

http://www.clusterstock.com/2008/10/credit-freeze-slams-global-trade

Basically, international importers (say issued by BNP Paribas) will send the exporter a letter of credit where the importer’s bank (say Citi) will pay the importer on presentation of evidence of delivery of goods/services.  The importer’s bank Citi then reclaim the sum from the exporter’s bank. In this case, the exporters’ bank becomes a counterparty of the  importer’s bank.  If it (i.e. Citi), cannot be sure that it will get paid from BNP (importer’s bank), then it refuses the letter of credit.   Without being able to be sure that the company will get paid, goods get stucked at the ports.

Of course, this can be mitigated by using prepayment/escrowed but then this is very expensive.  Also, under such enviroment, global banks like HSBC will do well as HSBC USA will of course accept HSBC Hong Kong’s LC.

The same credit crisis also prevent investors from lending to banks and corporation (via the Commercial paper) market and worse still, banks are not lending to each other either.  (except HSBC noted that it lent about £2bn to UK banks via HSBC UK).

Now, what we need is a Global Credit re-Insurance fund backed by government, but with its initial capital raised from various mega insurers around the world.  The fund would be staffed by legendary insurer such as Warren Buffet who know the odds.  This is to put to rest the counter party risk and so that corporation and banks that are not a credit risk can start borrowing again.  This will also eliminate the uncertainty in the CDS market once and for all (rather than moving it to an exchange - we can do that later) as now all credit insurance contract are now centrally reinsured/cleared.  Those that are no longer credit worthy would not be sold an insurance at a acceptable price and would need to be allowed to go down.

The insurance fund should also be transparent and make all the reinsured contracts transparent.

To simplicy things, the fund can probably forced all contract to be written in USD or RMB (whcih will allow RMB to replace USD as the global currency for all)