Land and property Develeopment Diary of the 'credit crunch' Essay

Land and property Develeopment Diary of the 'credit crunch' - Essay Example Thus the diminishing supply of capital is further depleted as it becomes available for immediate government consumption. There can be a credit crunch because of panic disintermediation. Panic disintermediation is the dumping (rapid sale) of securities, commodities, and other assets in a scramble over possession of the limited supply of money (cash). Portfolio managers were telling investors, and each other, that being out on the long end of the yield curve was the best hedge against a downturn in the world economy. It took only 48 hours in the real-world classroom for them to learn differently. There can be a credit crunch because of a run on the currency. This source is actually the same as that of the only difference being that there is panic liquidation of financial assets in one currency, in exchange for cash in another currency. This happened in October 1998 as the yen rose in value from Yen 131/dollar to Yen 111/dollar in less than two days (Oct. 7-8). The dollar had become less attractive relative to the yen: the Fed cut the discount rate, hedge funds unwound short yen positions, and Japanese banks and other financial institutions dumped dollar securities because they needed the capital at home (especially after the Nikkei 225 dipped below 13,000). Borrowing in yen at extremely low inte... Borrowing in yen at extremely low interest rates was considered a free lunch. Then one day the free lunch disappeared. Tiger Management, a hedge fund which had been borrowing in yen to buy dollar assets, suffered a loss of almost $2 billion on Oct. 7 due to the surge in the Japanese yen against the U.S. dollar. That was about 9 percent of the fund's value. Credit crunches used to be banking phenomena almost exclusively. No more. During the 1980s and 1990s formerly illiquid assets became more marketable or tradable. They no longer just sit on the asset side of some bank's balance sheet. "Securitization" is the process by which a collection of receivables is put together in a package, and then bonds are issued against the package. The package may be a collection (or portfolio) of credit card receivables, or automobile lease payments, or commercial mortgages, or some similar type of asset which provides "backing". Payments made to the owner of the packaged assets are then passed along, in part, as interest and principal to the bondholders. The bonds (which may have various strange and wonderful names, such as "CMOs"--collateralized mortgage obligations) trade in a secondary market, so the whole process has turned fairly illiquid items (the original credit card payments, or whatever) into tradable securities. The term "disintermediation" is also used, meaning that banks (or other financial intermediaries) are no longer the direct lenders, but rather bond purchasers become the direct lenders. Repayment to the bond investors depends on the good credit of those making payments into the asset pool (of commercial mortgages, or whatever), so that the interest payments on the bonds reflect a "credit spread" over some