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June 26, 2007
Spilt!
Despite growing weakness in the U.S. housing market and building defaults in sub-prime mortgages, policy makers have been quick to contend that the damage in the housing market was, and would remain, contained.
“The credit quality in the prime market still seems to be good. We have not yet seen any spillover.”
Bernanke ~ March 5, 2007
Fed's Stern says no spillover from subprime woes
March 9, 2007 ~ Reuters
“we see no serious broader spillover to banks or thrift institutions from the problems in the subprime market…We believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.”
Bernanke ~ May 17, 2007
Paulson said the housing market correction is "largely contained" and that the market's correction was mostly “behind us.''
Henry Paulson ~ May 22, 2007.
“we have not seen major spillovers from housing onto other sectors of the economy.”
Bernanke ~ June 5, 2007
Fed's Pianalto: No Spillover From US House Slowdown Yet
June 11, 2007 ~ Dow Jones
But just as the phrase ‘no spillover’ threatened to take on a Greenspan-like aura (i.e. Alan gave added meaning to ‘irrational exuberance’, ‘conundrum’, and ‘measured’, to name three), it has become obvious that ‘spillover’ was taking place all the while…we just couldn’t see it.
Bear Stearns Stumble Sends Shockwaves ~ Dow Jones
Fed Watching, Waiting
With credit spreads rapidly widening, sub-prime related assets being marked down, and rating agencies wanting to avoid looking corrupt again by not downgrading something (remember investment-grade rated Enron), the conditions are ripe for financial crisis to occur. The problem for the Fed, which under Greenspan relished saving the day, is knowing when to enter the fray. To be sure, if the Fed immerses itself in the sub-prime bailout minutiae too soon it risks fracturing its credibility if/when more potentially larger defaults arrive, but arrive too late and investor confidence may not easily be repaired.
“Had the failure of LTCM triggered the seizing up of markets, substantial damage could have been inflicted on many market participants, including some not directly involved with the firm, and could have potentially impaired the economies of many nations, including our own.” Alan Greenspan, October, 1998.
In short, US policy makers have been quick to assimilate the ‘no spillover’ mantra because they believed that losses would remain dispersed and/or hidden. They were wrong. Given that the meltdown in sub-prime is about to intensify rather than and abate and CDO pricing/liquidity and investor confidence has already been shaken, spillover has entered the building.
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