Top Swiss banker agog at U.S. lending standards

Credit bubble looks more and more globalized

Roth says story is just beginning:

“We’re certainly not at the end of the story. There are question marks surrounding the development of the American economy,” Jean-Pierre Roth, president of the Swiss National Bank, said. “Something unbelievable happened. People who had neither income nor capital got credit with very attractive conditions. Now reality is striking back,” he said.

Meanwhile, an American financial analyst says not all of the collateralized debt obligations have been priced to market, so we still don’t know exactly how serious things are.

Stockmarket historian David Schwartz warned investors not be fooled by signs of recovery. “The truth is no-one knows how serious the financial problem in the US is, nor how it will unfold. We do know central banks are scared out of their minds,” he said.

The credit bubble Roth says became global because foreign banks either followed the Fed’s lead or inflated their countries’ credit for their own reasons, as with Japan.

In parallel, the Bank of Japan held interest rates at zero for six years until July 2006 to stave off deflation. Even now, rates are still just 0.5pc. It also injected some $12bn liquidity every month by printing money to buy bonds. The net effect has been a massive leakage of money into the global economy. …

Faced with an asset shock coming from Asia, the Federal Reserve and the European Central Bank could have taken counter-action. They did not do so. Nor did they tighten much to offset liquidity being "created" by the new-fangled credit instruments. The Fed held rates at 1pc until June 2004, when the economy was growing at 5pc. The ECB kept rates at 2pc until December 2005. It takes 18 months - or so - for monetary policy to exert its full effects. The bubble peaked in early 2007.

The central banks have said their task is to fight inflation, not to police asset prices. Critics retort that the US asset bubble in the 1920s and Japan's bubble in the 1980s both occurred at a time of low inflation. Belatedly the Bank of Japan, the ECB, the Swiss, the Scandies and the Bank of England are questioning the wisdom of ignoring asset prices, deeming it wise to "lean into the wind" to slow excesses. But it is very late in the day. The credit bubble is already with us.

And, that’s why this thing isn’t going to go away overnight.

Also, related to that, if Bernanke seriously cuts the Fed funds rate, other countries’ central banks will look to their own houses. Just like warring tariff hikes exacerbated the Depression, warring rate manipulation may do the same for the credit bubble.