Ben Bernanke Tells US Congress That Subprime Crisis Will Get Worse

Yesterday we mentioned the possibility of synchronous recessions/crashes in China and the US. It’s worth mentioning again. It’s the biggest objection to buying into the resource bull at these prices.

On that score, US Fed Chairman Ben Bernanke fronted the US Congress yesterday and told them that the subprime problem would get worse. But traders are learning to quickly discount what the Fed chief says. “Bernanke’s comment that the subprime mess could be in the US$150 billion ballpark exacerbated the sell-off. Why should we believe him? He didn’t see any of it coming,” said Elliot Spar of Stifel, Nicolaus & Co.

The Fed is spinning the story anyway. What’s going on in the credit markets is no longer just a subprime story. It’s a corporate debt story too. It’s a bank asset quality story. And it’s a story about the health and viability of the balance sheets of some of America’s largest financial firms.

Markets generally muddle through even the worst of situations. But as the Austrian theory of the credit cycle suggests, massive misallocations of capital have to be liquidated before the next bullish phase can begin. Right now, investors seem to be in full denial that liquidation is necessary and healthy. Acceptance will come eventually, after anger and grief.

There’s no doubt Australia has exposure to a slow-down in China. But at least the Aussie boom is correlated to a production boom. Real wealth comes from production, not consumption based on debt. You see evidence of both in Australia.

The resource boom is a production boom producing higher wages for Aussie workers, higher profits for Aussie firms, and higher share prices for Aussie investors. Let’s hope that’s not all squandered away by people choosing to live beyond their means.

But then again, who are we to tell people how to live? You can’t control the financial habits of an era. These things go in cycles too. We live in a time of widespread financial illiteracy. The resource boom has cushioned Australia from the consequences of massive debt. At least for now.

Dan Denning
Markets and Money

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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3 Comments on "Ben Bernanke Tells US Congress That Subprime Crisis Will Get Worse"

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Earl Mardle

However, I did see the other day that Aussie has the dubious distinction of having its consumer debt at something like 150% of income, the worst in the world.

And good luck with the gold. By all means hold it while the rest of the economy goes to hell, but there’s a point where even gold doesn’t work, ask Croesus.

Me, I’m investing in my land, my tools and my education. Learning to live with less.


there are two things they don’t teach you about in school, one is women and the other is money.
both have to be learned about the hard way. women don’t have to be taught about men cos women are hardwired straight from the factory to understand men completely, men are such simple critters anyway.

Pier Johnson
It’s quaint, yet not correct to say — “Real wealth comes from production, not consumption based on debt.” Wealth comes from growth of being able to make things wanted — having the right kind of factories for future wanted goods, the right kinds of transport system for future wanted travel, the right kind of health care for future living citizens. In-production machinery wears out toward obsolescence. The trick is gearing income growth of those working with offered credit and future-wanted goods. Why there is such a mess comes back to false Price Signals brought to us by Fiat banknote funny… Read more »
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