in layman's terms, and perhaps a bit technical terms, can someone explain what's the deal with liquidity crunch? I understand the root cause is subprime mortgages and the fact that stream of payments from mortgages is in jeopardy especially since the ARM's resetting.

But why does it matter so much? I mean it does to some extent, but how does it affect country wides, or washington mutuals of the world? And what brought down Bear stern hedge funds or why did Goldman sachs have to get a haircut? I didn't even know large investment banks can have a haircut too. :)

This issue has been extensively discussed on the Macro Economic Trends and Risks Board.
http://boards.fool.com/Messages.asp?mid=25835101&bid=114903

Wendy

Look at this article in tomorrow's Chrisian Science Monitor

http://www.csmonitor.com/2007/0827/p01s01-usec.html

Basically the liquidity problem is short term loans. I seriously doubt there will be much spillover to the real economy, and if there is it will trim a small amount out of growth.

What's more important, I believe, for the real economy (i.e., not Wall Street game players and big banks, about whom I give not a whit) is the drop in housing prices. Much of the growth in cosumer spending over the last few years, with median incomes stagnant against inflation (or worse) was home equity loans or refinancing and paying less for mortgages. That's like so over. So, unless some new way of boosting consumer spending comes along, obviously nothing so radical as giving people who work for a living a greater share of the nation's wealth, consumer spending has to slow. As far as I'm concerned, the harder it is to borrow for people, the better in the long run.

Lack of cheap money for buyouts lowers price for Home Depot unit:

http://www.nytimes.com/2007/08/27/business/27depot.html?hp

(And may even hurt big investment banks counting on running up big money from takeovers.)

I become increasingly unconcerned. I don;t believe if every big bank and every hedge fund in this country went bankrupt, it would matter to the average shmo.

I don;t believe if every big bank and every hedge fund in this country went bankrupt, it would matter to the average shmo.

If the shipping companies lost their credit lines, the average shmo would notice. If the trucking industries lost their credit lines, the average shmo would notice. If his credit cards stopped working, he would notice. If the farmer that supplies his foot can't get credit to buy a new combine, he would notice. If the major banks went bankrupt, it would be such a world changing event that the economies of most nations would collapse. Credit is one of the necessary lubricants for our economy. Without credit, we go back to the 30s or 40s. Of course, when we run out of oil, that's where we're headed, anyway.

Hedge

It's all about bank profits.

http://www.nytimes.com/2007/08/27/business/27bank.html?_r=1&oref=slogin

"“If the financial system stays in trouble, the economy is going to roll over,” said Richard X. Bove, a financial services analyst at Punk, Ziegel & Company."

Methinks financial services analysts look at the world from the point of view of financial services, and most of the economy is people going about their daily lives.

IMHO as long as folks think this way...I understand the root cause is subprime mortgages and the fact that stream of payments from mortgages is in jeopardy especially since the ARM's resetting. the more I realize how far we've got to go to "get it" (no offense intended toward poster). This is a deck of cards reflected by the following data:


In May the guys at Dominion Bond Rating Service (DBRS) provided a world-wide calculation on different positions and they go as follows:

1% Cash

10% Securities such as stocks, bonds and money market

11% Structured asset-backed product

78% Derivatives

Rusty

I am not sure what you mean. Can you elaborate please?

IMV the ripple effects that are beginning are merely the tip of the iceberg. However, I expect that this board isn't the best place to expound on my bearish view since it's likely held by a small minority. I will only add this link and suggest others research a bit deeper into what Buffet called "instruments of mass destruction"...derivatives...ABS, CDO, CLO, LBO...etc.

http://www.marketwatch.com/news/story/normally-safe-commercial-paper-market/story.aspx?guid=%7B75C0DAD1-831E-4CDA-9932-32F7158AC7F6%7D&dist=hplatest

A trip over to PrudentBear.com may be informative...

http://www.prudentbear.com/index.php?option=com_content&view=article&id=4724&Itemid=55

Rusty

Hi Rusty, you're preaching to the choir!!

rk (tin-foil hat strapped on)

Hi Rusty, you're preaching to the choir!!

Not convinced. I'm convinced the big players and the big banks have been creaming up money in the lending racket with bad loans and derivatives of bad loans, but I am unconvinced this will really have a devastating affect on ordinary people. When Pen Fed offers me 8% on a CD, that means there is a liquidity crisis.

When Pen Fed offers me 8% on a CD, that means there is a liquidity crisis.

Why? Was there a liquidity crisis last time CDs were at 8%?

Why? Was there a liquidity crisis last time CDs were at 8%?

Probably not. I'm just pointing out that if there is a liquidity crisis, making it hard for banks and credit unions to lend money to customers with good credit needing to borrow for the usual reasons (prime mortgages, car loans, home improvement loans, credit cards), the banks and credit unions will have to offer savers much higher than current rates.

I am expressing doubts that the liquidity crisis that is of such concern to the big game players on Wall Street will trickle down, any more than the enormous amounts of money the big game players made setting the liquidity crisis in motion has trickled down. I think they are crying "please save us or the little folks will get hurt, too" as an excuse for pressuring the Fed to stop worrying about inflation and pump more cheap money out.

Well Bernanke isn't quite as blunt as I am, but I think he agrees with my basic point that bankers and investors should pay the price for making bad loans and investments.

http://www.washingtonpost.com/wp-dyn/content/article/2007/08/31/AR2007083100448.html?hpid=topnews

The problem with the liquidity crisis, primarily caused by irresponsible sub-prime mortgage lending, is that even people with excellent credit are facing tightened lending terms.

Kahuna,CFA

The problem with the liquidity crisis, primarily caused by irresponsible sub-prime mortgage lending, is that even people with excellent credit are facing tightened lending terms.

That's another way of saying that interest rates vary based on various events (domestically and around the world). In this case, the event affecting interest rates is the fear of the aftereffects of irresponsible subprime lending.

But there always have been and always will be events that affect interest rates (sometimes negatively and sometimes positively). And people of all credit ratings are always affected by those changes in interest rates. So, it may be characterized as less of a "problem" and more of "reality".