The Livable Blog

This may be bad news if you just bought a house or condo. But it may be very good news for stopping Gateway. If the private developers have difficulty borrowing money, P3 freeways become more difficult to finance without government loan guarantees. MacQuarie Bank is one of the biggest P3 financiers and has been hard hit.

Of course, if this develops into a recession it will negate the case for expanding ports too.

Just another nail in Gateway's coffin.

http://www.reportonbusiness.com/servlet/story/RTGAM.20070812.wliquidity0812/BNStory/Business/?cid=al_gam_nletter_newsUp

How the liquidity tide turned

HEATHER SCOFFIELD

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Globe and Mail Update

August 12, 2007 at 10:22 PM EDT

OTTAWA — It was just a few weeks ago when all the talk was about the global liquidity glut — too much investment capital chasing too few assets, driving down yields even on high-risk debt.

Anyone could borrow money, even American home buyers with lousy credit ratings.

But all of a sudden the global liquidity glut is no more.

It has unwound so quickly that in the space of a few weeks central banks around the world have gone from warning markets about the excesses of low yields and too much cash, to injecting hundreds of billions of dollars of cash into those very markets.

In the olden days of just a month ago, Bank of Canada Governor David Dodge was expressing some concern about high-risk yields being too low, but mainly, he was playing down the extent of the U.S. subprime mortgage fiasco, and stressing the strength of the Canadian economy and corporate balance sheets.

A couple of weeks earlier, the central bank's deputy governor Tiff Macklem partly credited the global liquidity glut for the consumer prosperity and strong housing market that has helped fuel Canada's economy recently.

And the federal government created a high-profile competition-policy panel to review, among other things, how Canada should take more control over the foreign buyers snapping up Canadian companies.

The liquidity glut has served as the backdrop for monetary and economic policy, and for investment decisions implicating economies around the world.

Now, amid the turbulence of the markets and the overwhelming concerted action by central banks, analysts are reviewing how this ample liquidity could evaporate so quickly, in the hopes of determining the long-run repercussions of the reversal of fortune.

Goldman Sachs has broken it down into five stages:

• Stage One: Money was too cheap for too long.

  Fuelled by low interest rates, liquidity and leverage have been getting ever cheaper since 2001.

• Stage Two: In search of higher returns, investors took on riskier assets, driving down the yields of those assets. At the same time, financial innovations helped spread the risk around. High-risk investments were made to look safer than they actually were.
• Stage Three: Enter the subprime monster. The U.S. housing market turned. Holders of subprime mortgages found all of their intricately connected but widespread holdings contaminated. Markets started to worry.

• Stage Four: That brings us to now. Investors and markets have second thoughts about the true value of many assets. Without knowing the “true” price of credit, leverage is no longer acceptable. Lending seizes up. Positions dependent on leverage try to unwind.

  “They've reached a point now where they don't know how to price things,” adds Craig Alexander, deputy chief economist at Toronto-Dominion Bank. “So if you don't know the value of things, the value is zero.”

• Stage Five: The future. It can be summed up with a big question mark. Either markets reprice risk quickly and settle down when summer holidays end, or they don't, and the volatility drags on, spilling over into the broader economy.

Goldman Sachs prefers the first option. “The main difference to previous episodes is probably that globalization and a strong world economy has substantially improved the fundamentals of many asset classes, in particular emerging markets,” its analysts write. “Clearly, U.S. housing is the exception here.”

Economists who feel comfortable predicting how the credit crunch will play out are few and far between. The liquidity glut dried up quickly mainly because of a rapid change in market psychology, and psychology doesn't fit well into forecasting models. “We can't underestimate the power of the shift in investor sentiment,” says Rob Palombi at Standard & Poor's in Toronto.

The coming days will no doubt bring forth a bloody trail of hedge funds, banks, brokerages, insurance companies and pension funds that have to confess to their clients that they have too much exposure to credit instruments that can no longer be accurately priced, economists say.

But they also add that there is a floor, somewhere, to the damage.

Corporations are in an era of record-high profits. Many of them are sitting on large piles of money, not connected to the derivatives and credit instruments that are churning financial markets.

This internal liquidity can't finance a merger-and-acquisition frenzy like the one we've witnessed recently, but it can finance business investment and the normal expansions and operations that many companies want to undertake.

The question is, given the shaky environment caused by the credit crunch, will companies be bold enough to act as though it's business as usual?