Publication date: 5 July 2008 | Covering: April – June 2008
Quarterly Briefing
- Bear Stearns aftermath: March 14–16 rescue backstory still dominating; Fed-facilitated sale to JPMorgan at US$10/share; systemic rescue precedent set
- Oil surges: Crude oil rises from US$90 in January to above US$130 by June; record highs driving global inflation; food prices spike
- Fed cutting hard: Rates reduced from 4.25% in January to 2.0% by April; five cuts in rapid succession; housing and credit crisis driving response
- IndyMac stress: IndyMac Bank under severe pressure; depositor concerns; will fail in July; WaMu also stressed
- Write-downs continue: Major banks — Citigroup, Merrill Lynch, UBS — announce further massive mortgage-related write-downs; cumulative losses exceed US$400bn
- Zimbabwe hyperinflation: Annual rate exceeds 100,000%; currency collapse; economic catastrophe; regional refugee crisis
- US housing: Prices falling 15–20% nationally; foreclosures at record; first-time buyer support debated in Congress
- Jamaica: Oil import cost surging; BOJ raising rates; inflation rising; tourism holding but pressure building
Bear Stearns; Fed Cuts Aggressively; Banks Write Down
The second quarter of 2008 was shaped by the aftermath of the Bear Stearns rescue in mid-March and an accelerating collapse in US housing and credit markets. Bear Stearns, the fifth-largest US investment bank, had been brought to the brink of failure by a run on its funding — triggered by concerns about its mortgage-related exposures — and was rescued by a Federal Reserve-facilitated emergency sale to JPMorgan Chase at an initial price of US$2 per share, subsequently raised to US$10, with the Fed providing a US$29 billion guarantee against Bear’s most toxic assets. The rescue established a critical precedent: the Fed would use its emergency lending authority to backstop non-bank financial institutions deemed systemically important, a significant extension of its role as lender of last resort. Through the quarter, the Federal Reserve continued to cut the federal funds rate aggressively, bringing it from 4.25% at the start of the year to 2.0% by April, the most rapid rate reduction since the early 1980s. Despite this easing, credit conditions remained severely impaired: major financial institutions continued to announce further write-downs on mortgage-related assets, with cumulative losses across the global banking system exceeding US$400 billion by mid-2008. Citigroup, Merrill Lynch, UBS, and others all booked multi-billion-dollar charges.
Oil at Record Highs; Food Crisis
Compounding the financial sector stress was an extraordinary surge in commodity prices. Crude oil rose from approximately US$90 per barrel at the start of the year to above US$130 by June, driven by strong demand from emerging markets (particularly China and India), constrained supply growth, dollar weakness, and significant financial flows into commodities as an alternative asset class. Food prices followed a similar trajectory, driven by rising agricultural input costs, biofuel mandates diverting grain to fuel production, and adverse weather in key growing regions. The combination of high energy and food prices drove global consumer price inflation to levels not seen in decades, creating a stagflationary dilemma for central banks: the financial crisis called for lower rates and easing; the inflation surge called for tightening. Most central banks prioritised financial stability, accepting higher near-term inflation.
Jamaica: Oil Import Costs; Mortgage Conditions
The oil price surge to above US$130 per barrel significantly worsened Jamaica’s current account deficit, as the island imports virtually all of its petroleum requirements. Fuel costs for electricity generation, transportation, and industry all rose sharply, driving domestic inflation higher and squeezing household disposable incomes. The Bank of Jamaica responded by raising interest rates to contain inflationary pressure, maintaining the tight monetary conditions that kept commercial mortgage rates elevated. For the housing market, the NHT’s subsidised rate structure remained critical: its 0%, 2%, and 4% tiers on loans up to J$6.5 million individually or J$13 million jointly were insulated from the commercial rate environment. Tourism arrivals held reasonably well through the first half of 2008, but the US recession and financial crisis were beginning to erode the tourist spending that Jamaica’s economy depended upon.
Looking Ahead to Q3 2008
Oil at above US$130 and still rising, US housing still falling, major bank balance sheets under severe stress — the outlook as we enter the third quarter is deeply uncertain. Whether the Bear Stearns rescue has contained the systemic risk or merely delayed a larger reckoning is the question that will define the second half of 2008. For Jamaica, the oil price trajectory will be the most important external variable for the balance of the year.
Mortgage & Housing Finance Disclaimer: This publication is for general information only and does not constitute mortgage, financial, legal or investment advice. Mortgage products, lending criteria, interest rates and borrowing costs vary between lenders and may change without notice. Readers should obtain independent advice from a qualified mortgage adviser, financial adviser or legal professional before making financial or property decisions.
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