Storm Cloud at the Global Bazaar?
Global finance is mysterious, exciting and sometimes reckless. A specter now haunts it -- the specter of excess "liquidity." Will this prove a passing anxiety or, as in 1997 and 1998 with the Asian financial crisis, will it threaten the stability of the entire global economy? Good question.</br></br>"Liquidity" is a common, but confusing, economic metaphor. Financial markets (say, stock and bond markets) are said to be "liquid" when it's easy to buy and sell. Transactions flow smoothly. By contrast, either buyers or sellers are scarce in an "illiquid" market. Prices move sharply, up or down. Markets can also have too much liquidity: Investors may take increasingly large risks to put their abundant funds to use. "Bubbles" can form. Losses may follow.</br></br>Just recently, HSBC -- a major bank holding company -- announced more than $10 billion in losses on so-called "subprime" home mortgages. Representing about 20 percent of new mortgages in 2006, subprime loans go to weaker borrowers with shakier credit histories. When borrowers are less creditworthy, their loans carry higher interest rates. Hence, the appeal to lenders. Now, losses are emerging.</br></br>What's unclear is whether the subprime losses are an isolated event or a harbinger of wider investment blunders.</br></br>In the past quarter-century, points out economist Richard Berner of Morgan Stanley, the financial system -- the way that savings are channeled into investments -- has changed in three fundamental ways.