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Goodbye Subprime, Hello Prime

By Matthew YeomansPosted Monday, Aug. 4, 2008, at 6:35 AM ET

Anyone looking for a bold move by U.S. and European central banks this coming week is likely to be disappointed. Amid slowing global growth and continued high inflation, "the outlook confronting policymakers remains grim," writes the Financial Times.

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While most private banks have likely taken all the write-downs necessary to account for their subprime folly (HSBC today reported a whopping 28 percent fall in profits for the first half of 2008, and RBS looks set to declare the biggest loss in U.K. banking history later this week), the sucker punch of a global economic slowdown combined with high inflation suggests neither the Federal Reserve nor Europe's equivalents have the appetite to juggle interest rates. That, says CNN Money, is an admission by the Fed that it is "pretty powerless to do much about either problem right now." With the Fed criticized in some quarters for fueling inflation through successive rate cuts and yet fearful of stifling growth by raising rates from the current 2 percent, its options are limited. "The Fed is not really part of the equation any more because of the corner they've painted themselves into," one analyst tells CNN Money.

There is one silver lining for the U.S. economy, notes the Wall Street Journal, and that is productivity, currently growing at 2.5 percent. While Fed chairman Ben Bernanke takes encouragement from this, saying it demonstrates how strong the U.S. economy is, others point out that the desperately weak dollar is to be thanked; it has fueled the export market.

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Now that the subprime tsunami has passed, get ready for a prime disaster. That's the warning from the New York Times this morning in a story that suggests that growing numbers of "homeowners with good credit are falling behind on their payments [and] defaults are likely to accelerate because many homeowners' monthly payments are rising rapidly." Prime loans account for the majority of the $12 trillion U.S. mortgage market, so it's sobering to hear the chief exec of JPMorgan Chase describe the prime loan outlook as "terrible" and suggest losses on prime loans at his bank could triple in the coming months.

Has Time Warner finally found a way to get rid of AOL? The WSJ reports the company on Wednesday will announce the formal split of AOL's dial-up and advertising and content businesses, leading to a probable sale of both concerns. The dial-up market, the source of AOL's meteoric 1990s growth, has long been a drag on the company. By isolating it, Time Warner can explore sale options for the more promising content and advertising division … and that could see either Microsoft or (more likely) Yahoo enter the equation. "[Prior] Yahoo discussions have valued AOL at around $10 billion, excluding the dial-up business," notes the WSJ.

Continued fear over high oil prices is putting the brakes on globalization. As crude futures once more rise on concerns about Iran's nuclear program, the NYT considers how global supply chains—"Brazilian iron ore turned into Chinese steel used to make washing machines shipped to Long Beach, Calif., and then trucked to appliance stores in Chicago"—may no longer make economic sense. High oil prices combined with rising costs associated with maturing labor forces and tougher trade and environmental regulations around the world could yet mean manufacturing jobs returning to the United States. Now that's an energy concept almost a bizarre as T. Boone Pickens, Al Gore, and Ted Turner seeing eye-to-eye.

Finally to the Amazon, and news from the BBC that Brazil has launched a landmark international fund to protect its rainforest from illegal logging and agricultural development. This so-called avoided deforestation fund—the latest in a series of tropical forest initiatives recommended by the U.N. as a frontline measure to fight climate change, since 20 percent of global carbon emissions come from deforestation—seeks to raise $21 billion by 2021 through foreign investment. Norway is the fund's first donor, with a pledge of $100 million, but Brazil's government has warned donors that signing a check doesn't mean they have a say in the country's internal affairs. "We are not going to trade sovereignty for money," one minister said.