Monday, October 13, 2008

Rates Update

Up to now, the saving measures have a very limited effects:

Risk Premium:
1 month LIBOR: 309 pts
3 month LIBOR: 332 pts
5-yr AAA: 475 pts
10-yr AAA: 600pts (!)

30-yr Fixed Mortgage: 466 pts
15-yr Fixed Mortgage: 440 pts
5/1-yr ARM: 443 pts
1-yr ARM: 582 pts
30-yr Fixed JUMBO: 596 pts
15-year Fixed JUMBO: 533 pts
5/1-yr ARM JUMBO: 467 pts


Will the BOE measures work?
The dilemma is :
if not save, the bank that does not use it can still subject to further pressures from the market. Only the biggest bank with good fame can take this burden. Even so, the risk of insolvency is high. The good side is: incompetent bank will no longer be in the market and further poison it. The risk is: panic, and despair.

if save, it means that the beneficary bank is really in trouble. For the moment a sharp drop may be ceased by the government action. Yet, its future is even more uncertain. Once the government invests, it locks in. Tales about inefficiency and political interference of SOEs are no news to the public. The handling of these acquired banks, after the turmoil, is another headache.

Maybe a combination of direct injection, nationalization, endorsement, acquistion, and exchange of problematic asset by government bonds may help out the current situation. However, it also means the huge accumulation of government debt as well as an influx of "money" into the black-holes. Governments use their own credits, at the risk that eventually even the government will bankrupt and its currency will greatly depreciate, meanwhile deflation is still happening inside that country (which is completely against conventional economic concept but can happen as its asset also loses price).

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