All the same, there are some smouldering situations at present that have the potential to cause major problems if not to unravel the global economy completely.
First we have the US housing crisis. The latest twist is that the major banks that bought sub-prime mortgage loans from the direct lenders are now forcing their repurchase. This is putting huge strain on the small mortgage companies and one, ResMae, has filed for bankruptcy protection saying that the repurchases had crippled its operations.
Merrill Lynch, for one, had forced ResMae to buy back in December, 2006, $308m of defaulted loans out of an original sub-prime portfolio of $3.5bn. Under mortgage contracts, originators are often obliged to buy back loans that default early or where technical underwriting mistakes have been made.
The buck, as they say, does not stop there. The mortgage originators get some of their funding from the major banks so their problems could spread further across the US banking sector. Then there is the yen carry trade (borrowing in low yielding yen and investing the money in higher yielding assets) which has been a worry for many years and gained the attention of the G7 meeting in February. The trade keeps pushing the yen lower against the logic of economic fundamentals. But the failure by leaders to talk tough only caused the yen to weaken further.
Those taking a benign view of the risks involved point to the tendency of hedge funds playing the trade to hedge against a sudden strengthening of the yen. They forget to analyse who is carrying that risk and the impact on them if the currency suddenly shot upwards.
The International Monetary Fund, searching for a role now developing countries have mostly paid back their loans, should be looking at this one.
