Taoyuan Nights

I’ve been too busy watching the markets lately, to find the time to write much about it.

Suffice to say it’s been the most interesting two weeks in finance, of my whole life.

We’ve lost the world’s biggest insurer, and basically all the world’s biggest investment banks are dead or eaten by competitors. Most of this happened in just 10 days.

In the UK, we had about 8 big banks of varying sizes, so far 2 are dead (NRK/BB), 2 have been forced into takeovers (AL, HBOS). That just leaves LLOY, BARC, RBS, and HSBC. It’s exciting stuff.

Meanwhile in the USA, idiot citizens are phoning in to their representatives, trying to stop politicians passing a $700bn financial stability package. This is tremendously short-sighted. What do you think will happen if the banks become paralysed or bankrupt? Hundreds of thousands of businesses will be screwed. Hundreds of millions of individuals will potentially be screwed as the housing market begins a new and steeper nosedive, as their pension funds collapse, and as jobs disappear. John Mauldin has it right – pinch your nose and do the deal, because it’s the least bad of many bad options right now.

Meanwhile, Taiwan has tried to keep it’s housing market and stockmarket afloat by making money cheaper to borrow again, i.e. dropping interest rates. But this is foolish – the banks are paralysed by not knowing what losses they’ve taken and what losses their counterparties are taking. So, it doesn’t matter how low you put interest rates, the banks simply won’t lend. This is a liquidity crunch now, far more than an affordability crunch (though the housing market here is pretty bad in that regard too!)

Check out the Taipei Times. Wow, the media is catching up to the fact that houses are absurdly expensive in Taiwan, particularly Taipei, and it only took them two years to realise that.

““Taiwan’s housing prices are still overpriced,” Chiang Li-wen, manager of Taiwan Cooperative Bank’s (合作金庫銀行) personal banking unit, said by telephone.”

“Taiwan’s top five banks, including Taiwan Cooperative Bank, issued a total of NT$31.97 billion (US$1 billion) in new mortgage loans last month, the lowest since NT$21.19 billion in loans made in February, the central bank said in a statement this week.”

Here is what happened in Japan 18 years ago when the banks realised they had huge losses on their books (just like Taiwan), at a time of ridiculously high house prices (just like Taiwan), and couldn’t lend any more (just like Taiwan). Notice the interest rate graph – dropping interest rates doesn’t save you in a liquidity crunch.

House price declines in Japan, last 18 years. From this article.

Interest rates in Japan, last 18 years. From this article.