Whoever came up with the idea that the United Stateâ€™s economy can â€œdecoupleâ€ from the global economy had their brains decoupled from reality. For all the â€œwe are one worldâ€ jargon they spew, they seem to forget that the biggest and most powerful linking agent among us all is global trade and the economy.
Yesterday, another side of the subprime mess reared its ugly head, UBS wrote down more than $10 Billion francs in bad loans. This was not the first time as it comes on the heels of another write down earlier this year.
The write-down follows a 4.2 billion Swiss franc ($3.7 billion) hit that UBS suffered at the end of October which was also related to U.S. subprime mortgages -- loans made to high-risk home buyers who face rising interest rates and are now defaulting on payments. [via Reuters]
Who wouldâ€™ve thought that borrowers with bad credit or no credit would possibly default on their payments? It looks like the â€œownership societyâ€ is turning into the nightmare society for banks, but help is on the way from Reserve banks and investors.
What caught my eye from this article was the injection of capital from entities in Singapore and the Middle East. The intent was to stabilize UBS and is eerily reminiscent of Abu Dhabi Investment Authority injection of capital into Citigroup last month. This, coupled with the fact that the Federal Reserve and other banks are ready to lower rates at the first whiff of 10% market decline, is confirmation of a lurking and dangerous global financial riptide.
Large banks will undoubtedly continue to be bailed out by investment authorities and Reserve banks as the subprime mess unwinds. The Bank of England lowered rates last week and Canada followed suit too, who's next? We know that our Federal Reserve has lowered rates recently and is poised to do so again today. Lower rates do indeed stall for time as everyone hopes it will be enough to unwind these crazy SIV's and other subprime loans.
But these bailouts and lower rates come at a price, more inflation. You simply can't solve one bubble's problem (Dot com) with another bubble (Real Estate), and keep it going into perpetuity! Sooner or later the bill must be paid and then the carefully orchestrated house of cards will come crashing to the ground. Real Estate was the first causality of this financial riptide, the world could be next.
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