The Fed may need to get ready to put another $300 billion into the banking system, trading cash for paper that is clearly not worth a hundred cents on the dollar.
According to a report from Morgan Stanley (NYSE: MS) "A systemic credit crunch is underway, driven primarily by bank writedowns for subprime mortgages," according to the report co-authored by analyst Christopher Flanagan. "We would characterize this situation as a systemic margin call," according to Reuters.
The report is based on subprime-related home prices falling a total of 30%.
The private markets do not have the capital to solve a problem of this magnitude. Even sovereign funds are not likely to be able to pul ltogether the level of funds which the report indicates might be necessary. Nor is there any reason to believe that they would want to take that kind of risk.
That would leave the problems at the feet of the Fed, which has already opened a credit facility of $100 billion to ease a tightening market. It looks more likely with each passing day that the problems with write-downs may still be in their early stages.
Douglsa A. McIntyre
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