It was nearly one month ago when Northern Rock Bank (If you English Premier League lover, you must be familiar with that bank because it is the main sponsor of the Newcastle United), the fifth largest mortgage bank in
A day after BoE’s decision to, finally, guarantee all of the Northern Rock depositors. Another important event happened in US, something that Wall Street had been expecting. This was the Fed's move to cut its rate, not only 25 basis points but 50! The market reacted very cheerful. Surging Dow Jones Industrial Average by 2.51 %, the highest one-day-jump since April 2003. Suddenly, brokers, bankers, and investors in the Street were gleeful like children who got their dreaming Christmas-gift before the date. The main reason to cut the rate because the Fed thought that the current financial turbulence caused by sub prime mortgage crisis started to drag down the
Yes. The main cause of current financial turbulence simply because greedy and cupidity of sub prime mortgage players. Started from the sub prime mortgage lender and bank which financing risky sub prime mortgage loan with money market fund, simply for the sake of higher interest rate differential than financing through long-term fund. Don't forget also the role of the investor (mainly hedge funds) who takes the risk with buying those money-market securities but purely did not understand the things that had already been bought, because of their complexity. And last but not least, the role of rating agency which used faulty model to rate the securities, but without realizing and still issuing AAA-rating. It’s the same with the faulty role of auditor during the dot-com burst in this earlier decade. The greedy lender, combining with blind-risk taker investor and faulty rating agency, has finally produced a cupidity economic bubble. What a perfect combination right? And now, after the bubble burst, all of the economies have to pay their cost. This such of things did not only happen once. We have already experienced these things several times in our economic history, although in different patterns and appearances. The capital-market crush in 1987; the Asian Crisis in 1997; the Long Term Capital Management bailed out because Russian default in 1998; the dot-com bubble burst in 2001; and sub prime mortgage crisis. Why such things always repeat? Because all of those evils know that their greedy action will be bailed out by central bank, monetary authority, tax payers and the whole economy. Too big to fail. A Moral Hazard.