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Sunday, March 23, 2008

SNB - Economy: Central Bank action Switzerland - March 2008

© Thomas Ramseyer
March 2008
Central Banks to pump in billions of USD
Lead by the FED major central banks pour liquidity into monetary system.
FED: USD 200 bio. SNB USD 6 bio. (see tender of USD 4 bio.) Major names to swallow the lure. FED may buy USD abroad to flood foreign economies with liquidity.
SNB already has partly neutralized this effect by raising USD 4 bio by having investors tender.

FED will pump USD into the US at cheap level.
This is meant the monetary system as well as the economy to pick up the pace again. As it is known right now banks are afraid to lend money to other banks. So they will use the funds available to the benefit of their own balance sheets. Also we know that in credit markets spreads are only possible if high quality banks give money to lower quality market participants and so on.That cascade has been working for years and will go on working in the future.

The first time I got acquainted with such passages in
Switzerland was 1978. E.g. Institutional investors give to cantonal bank which gives to smaller big bank passing the money to some foreign bank located in switzerland and so on only for the money to finally arrive somewhere in Turkey. Along this passage normally set up by some moneybroker earning 1/16% per year upfront from each of the chain’s members the interest rate become gradually higher to reach the highest level in Turkey.

It can be reckoned where the money then flew. Thus in fact only the more or less skilled and regulated banks of the chain established gave comfort to the initial investors. The proverb „ a chain is as strong as its weekest chain link „ is highly accurate. One link breaking may impact
even the safest institution. E.g. UBS and all the other sort of experts.

Deterioration staggers up the ladder to even reach the initial investors such as funds, pension plan funds, individuals as well as investment bankers having been too slow to get rid of the risks

Presently the money flooding the market will apparently not flow to the weakest participant of the actual chain
. It will depend on the recovery of the United States’ real estate market. As a lot of the houses for sale being the reason of the actual crisis are familiy houses meant for individuals – the latter being executed because of mortgage, credit card debt, car loans – a recovery of the real estate market will depend on the condition of the economy’s labour market. In first place the economic growth rate is going to slow down. Already now the market is talking about an upcoming recession. The ugliest outcome could be stagnation or stagflation. Recession – most recent newspaper are reading some 25'000 workers to be sacked in the banking business as a start – normally leads to heavy layoffs. The consequences thereof being lower consumption with all the consequences. 

Once the market will have recovered a new generation of sales people as well as fund managers are going to trade the former junk again. As time goes by everybody will have forgotten.

All the three-letter vehicles (TLVs) are going to be declared first class by holders supported by the rating agencies which want to realise profit thus transferring former writeoffs into realised gains.

It will be wise to remind oneself of the history of such TLVs letting shake and even tumble the world financial system in the early 2000s

copyright Thomas Ramseyer