"Carry trades are not easily unwindable. It cannot go on forever either. The U.S. economy might slow down further, or Japan, where inflation is near zero, might see interest rate changes. In these cases carry might be unwound," he said.
Boy.. talk about a pregnant statement!! Kuroda dances around the issue of who is going to borrow all that excess depositor money in Japan unless it's foreigners?
The way to eventually unwind the carry trade is for Japan to grow its INTERNAL economic assumption of debt so that the cost/benefit analysis to foreign borrowers is less attactive. Bottom line.. Japanese companies and borrowers must replace foreign borrowers in order to insure Japan's monetary base does not contract and launch a recession/depression and deflationary spiral.
And everytime the Japanese raise interest rates, that cost/benefit analysis becomes more risky to the foreign borrower of yen. They have to find other investments that pay even higher rates of return.
And it ignores the obvious fact that until Japanese depositors are no longer willing to be satisfied with 1/4 percent returns on their money, that carry trade will HAVE TO CONTINE..
But changing to the matter of the sub-prime loan markets, I have a question. If I'm not mistaken, those loans represent the down payments that are normally paid cash by the home buyer. So, it begs the question.. considering that most of these homes were purchased by lower middle class (and maybe middle class) individuals, the only value on those homes that currently is at risk are the 10-20% of the home value those loans covered. Is is fair to say that 80% of the home that is covered by the primary mortgage will be covered by Mortgage insurance typically associated with such loans?
Secondly, if those sub-prime loans are now practically worthless, is it not incumbent upon those primary mortgage lenders to re-purchase those obligations and renegotiate the terms with the mortgage borrower?
Finally, those sub-prime loans were securitized and resold to the public markets. If those loans were not as sound as they were presented to be to those re-purchasers, do we not have a situation where fraud can be alledged against the mortgage lenders, both sub and prime?
Still trying to get a grasp, like most of us, on the actual, or potential ramifications of these sub-prime lenders going belly up. I know that people didn't buy these securitized sub-prime loans without some kind of hedge or insurance. And certainly the mortage lenders demanded insurance in the form of PMI. It's usually directly included in the overall mortage payment.
businessweek.com
realtytimes.com
Hawk |
