It barely made the headlines. The first signs of a subprime crisis showed themselves in February. HSBC kicked the game off, when it announced it had to dramatically increase its provisions for bad debts in its US market. Then, still in that month, New Century Financial, which specialises in subprime loans, said it was being forced to re-state 2006 results, to take into account defaults on loans. Then there were the failures of two funds at Bear Stearns.
It went quiet. We held our breath and waited. The markets tumbled in February, but then rose back up again. Alan Greenspan warned of a possible US recession, but his words were soon forgotten. In the UK, markets soared; in the US new all-time highs were set on the Dow with such regularity we lost count.
We were puzzled. Recently, we likened the markets to a Lewis Carroll creation because it sometimes feels as if the smile on Uncle Sam’s face is all there is. Like the Cheshire Cat, which “vanished quite slowly, beginning with the tail, and ending with the grin, which remained some time after the rest of it had gone.”
So when the big August crisis occurred, and markets tumbled, there were really only two surprises. The first was that anyone was surprised, and the second, because of the events in question: not so much over what things had happened, but rather the way things happened.
All of a sudden, Collaterised Debt Obligations, or CDOs, became a name that was in common usage. Comedians joked about the money markets. Rory Bremmner recently sang, “the bank loan is connected to the subprime loan, the subprime loan is connected to the interbank loan.”
And yet the markets didn’t do so bad. This morning the Dow Jones stood at 13,245, 700 points up on the start-of-year position, and 900 points down from the year-high. Markets in Germany soared, and of course in China, shares soared like nothing we have seen since the bubbles of yesteryear: the South Sea and Tulip bubbles, for example. But in London, things were not so good. Right now , the FTSE 100 is just 120 points above the start-of-year score.
Now it is all about whether central banks can save the day. Can they flood enough liquidity into the pot to make it all well again, or is the problem deeper than that? Total write-downs from the banks this year now come in at $70 billion. That sounds awful, but remember the IMF predicted total losses of $300 billion; even then, they reckoned the global economy would expand by 4.8 per cent next year. The key might lie with the extent to which bank losses mount. Yes they will rise, but will they rise above the level predicted by the IMF?
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