Jeff S. Hong, Ph.D.
Dept. of Business Management
212-220-8388
The stock market chill over the last couple of weeks that started on 07/26/’07 is triggered mainly by the ailing housing market and the structural issues within the financial market, not by the economic fundamentals. This is especially evident in a time when the corporate profits are at record high due to production at its all-time high and lower-than-ever production cost thanks to many cost-saving practices that have now become stylized standards such as global outsourcing.
The finance and banking sectors are closely-knit fabric of cross-lending & borrowing, and inter-investing all in the effort to diversify the risk. Most of the banking center lenders issue and sell mortgage-backed securities - i.e. bonds, which are basically loans backed by the collaterals that can be repossessed in case the property owners default. In other words, these banking centers make loans to the property buyers, which are then secured by the property itself as collateral. Then, they sell bonds - i.e. borrow against these mortgage-backed lending, and invest the proceeds in the stock market.
The recent weakening of the housing market, however, signaled the increase in the risk, as more property owners default in their payment, which leads to the repossession and liquidation of these properties. The sudden increase in the supply of real estate out for sale would obviously lower the prices of the properties, especially when the housing market is in doldrums. Hence, as the value of these properties drops, so does the size of the funds these lenders can recover to retire their mortgage-backed securities as these instruments reach maturities, which, in turn, lowers the demand for the stocks of these lenders, making it more difficult to sell, and subsequently lowering the price of their stocks.
This increase in the default-risk of these financial and banking giants sends the signal and sets ripple effects in motion across the entire finance and banking sector, as a number of banks and lenders are in the practice of repackaging these debts and reselling them back in the market as a means to reduce their risk-exposure. This chain of events eventually causes the credit crunch across the finance and banking sector, which consequently shrinks the size of funds available in the economy - i.e. the money supply - increasing the overall default risk, which affects the market clearly in a negative way.
In addition, the weaker Japanese Yen against other major currencies also prompted the sale of US dollar-denominated assets worldwide by the Japanese institutional speculators in a spree for profit-taking amid imminent credit crunch to take quick windfall gains from exchange rate differentials, which then further dropped the prices of U.S. stocks.
Copyright reserved by Dr. Jeff S. Hong
This article in Korea Monitor vol 4 issue 32 08/10/2007
'Issues' 카테고리의 다른 글
| 최근 아프간 피랍사태에 대한 단상 (0) | 2007.09.02 |
|---|---|
| 미래학자 피터 슈워츠가 제시하는 인류의 미래 시나리오(펌) (0) | 2007.09.01 |
| 내가 돈줄테니깐 니가 내일해라? (0) | 2005.07.22 |
| 영원님 의견에 대한 답변 (0) | 2005.07.22 |
| 존경하는 기장님, 뭐가 어쨌다고요?” (0) | 2005.07.21 |