by Damozel | Apparently, only a global rescue plan can save us now---if anything can, that is. (NYT)
Government officials struggled to fashion a coordinated response to the ailing global banking system before going to Washington for annual meetings of the International Monetary Fund and World Bank.
With credit markets still frozen and stock markets around the world in a deep swoon, there is a growing consensus that the crisis is now so fast-moving and harmful to the global economy that it demands an unprecedented degree of worldwide coordination(NYT)
WSJ says that economists expect the crisis to spread. But I'm a glass half-full, kumbaya kind of a person. I don't see this as a crisis. It's an opportunity for cooperation! Look, David McCormick says so.
“As this thing has spread, the opportunities for cooperation have risen,” David H. McCormick, the under secretary of the Treasury for international affairs, said. “We need to promote and highlight these common areas.”
Others---others who have been right for far longer, I should say--- are less sanguine and more urgent. Permabear Nouriel Roubini, whose erstwhile doleful predictions are being vindicated by reality, bleakly sums up the situation and what needs to happen now, as in NOW.
The US and advanced economies’ financial system is now headed towards a near-term systemic financial meltdown as day after day stock markets are in free fall, money markets have shut down while their spreads are skyrocketing, and credit spreads are surging through the roof. There is now the beginning of a generalized run on the banking system of these economies; a collapse of the shadow banking system, i.e. those non-banks (broker dealers, non-bank mortgage lenders, SIV and conduits, hedge funds, money market funds, private equity firms) that, like banks, borrow short and liquid, are highly leveraged and lend and invest long and illiquid and are thus at risk of a run on their short-term liabilities; and now a roll-off of the short term liabilities of the corporate sectors that may lead to widespread bankruptcies of solvent but illiquid financial and non-financial firms.
So we have a severe recession, a severe financial crisis and a severe banking crisis in advanced economies.....
And in a world where there is a glut and excess capacity of goods while aggregate demand is falling soon enough we will start to worry about deflation, debt deflation, liquidity traps and what monetary policy makers should do to fight deflation when policy rates get dangerously close to zero.
At this point the risk of an imminent stock market crash – like the one-day collapse of 20% plus in US stock prices in 1987 – cannot be ruled out as the financial system is breaking down, panic and lack of confidence in any counterparty is sharply rising and the investors have totally lost faith in the ability of policy authorities to control this meltdown.....Nouriel Global Economics
Roubini lists the steps he thinks are required, adding:
At this point anything short of these radical and coordinated actions may lead to a market crash, a global systemic financial meltdown and to a global depression. (Nouriel Global Economics)
Will the US get it done, and in time? Iceland---a whole country--- is already more or less bankrupt. (IHT) Calculated Risk says:
Here is the proposal from Prime Minister Gordon Brown in The Times: We must lead the world to financial stability.
However according to the NY Times article, it sounds like the U.S. has only begun to consider these options
And Henry Paulson? What is our would-be economic czar doing about all this? At Naked Capitalism, Yves Smith says:
Dear God, Rome is burning, and the Treasury Department is hung up on niceties like executive comp and the standing of existing shareholders....The fact that this is coming up in discussions about how to keep the financial system from imploding is deeply troubling.
Has anyone ever been so disastrously wrong about everything, and so stubborn in refusing to accept stubborn facts as facts? Atrios:
It isn't 100% clear why Paulson and pals have insisted on misdiagnosing the problem, though I do have a theory. The "it's a liquidity problem" take is a way of saying that the system is awesome, but there's been a very brief and irrational crisis of confidence which has caused things to freeze. In this version, all of Paulson's pals aren't to blame, they're just victims of a silly moment.
What's going on here has led to liquidity problems, but not simply because people are a bit nervous. There are liquidity issues because the money is ALL GONE NOW.
Paul Krugman discusses the implications and application of Paulson's inaction up to now: events are reaching critical mass and are approaching the final stage of our ability to do anything to halt what's about to happen.
Last month, when the U.S. Treasury Department allowed Lehman Brothers to fail, I wrote that Henry Paulson, the Treasury secretary, was playing financial Russian roulette....
The consequences of Lehman’s fall were apparent within days, yet key policy players have largely wasted the past four weeks. Now they’ve reached a moment of truth: They’d better do something soon — in fact, they’d better announce a coordinated rescue plan this weekend — or the world economy may well experience its worst slump since the Great Depression....
The response to this downward spiral on the part of the world’s two great monetary powers — the United States, on one side, and the 15 nations that use the euro, on the other — has been woefully inadequate.
Europe, lacking a common government, has literally been unable to get its act together; each country has been making up its own policy, with little coordination, and proposals for a unified response have gone nowhere.
Krugman gets to say "I told you so" as well. And he has earned that right. He did.
The United States should have been in a much stronger position. And when Mr. Paulson announced his plan for a huge bailout, there was a temporary surge of optimism. But it soon became clear that the plan suffered from a fatal lack of intellectual clarity. Mr. Paulson proposed buying $700 billion worth of “troubled assets” — toxic mortgage-related securities — from banks, but he was never able to explain why this would resolve the crisis.
What he should have proposed instead, many economists agree, was direct injection of capital into financial firms: The U.S. government would provide financial institutions with the capital they need to do business, thereby halting the downward spiral, in return for partial ownership. When Congress modified the Paulson plan, it introduced provisions that made such a capital injection possible, but not mandatory. And until two days ago, Mr. Paulson remained resolutely opposed to doing the right thing.
Is it too late already? Krugman suggests that there are still procedures that might stanch the hemorrhage, as it were. But it's going to need more than a local pressure and a bandage at this point. What we apparently need is a worldwide tourniquet.
[R]ecapitalizing the banks and jump-starting their lending are at the top of the list of remedies that many economists are now suggesting. By acting in concert, countries can maximize the punch of their actions, these experts said, while avoiding distortions that occur when countries go different ways....(Krugman)
Other economists concur by the way.
The U.S. economy has sunk into a recession and government action is critical to stem the damage, according to economists in the latest Wall Street Journal forecasting survey.
"We're in the middle of a very dark tunnel," said Brian Fabbri of BNP Paribas, referring to the worsening credit crunch. "Each day we see another crack in the system." (WSJ)
Meanwhile, other nations that adopted or aspired to our brand of capitalism are apparently feeling a certain resentment. The days of our being a role model might be coming to an end.
Other than a few fringe heads of state and quixotic headlines, no one is talking about the death of capitalism. The embrace of free-market theories, particularly in Asia, has helped lift hundreds of millions out of poverty in recent decades. But resentment is growing over America's brand of capitalism, which in contrast to, say, Germany's, spurns regulations and venerates risk...
With the U.S. government's current push toward intervention and the soul-searching over the role of deregulation in the crisis, the stage appears to be at least temporarily set for a more restrained model of free enterprise, particularly in financial markets.
"If you look around the world, China is doing pretty good right now, and the U.S. isn't," said C. Fred Bergsten, director of the Peterson Institute for International Economics. "You may see a push back from globalization in the financial markets." (WaPo)
Comic relief, anyone?
The need for concerted action is clear, but nobody seems to know how to make that happen. Congressional leaders Reid and Pelosi---and French president Nicolas Sarkozy---are calling for a meeting of the Group of 8..(Krugman) In the meantime---this ought to make everyone feel better---Bush is planning to make a speech to calm everyone down.(Krugman) I hope he says, "Wall Street got drunk" again.
Meanwhile, Bill Anderson at libertarian Lew Rockwell still thinks the invisible hand of the market should be allowed to stanch its own wounds. Or something---I'm not sure I am correctly understanding him. As I read his piece, he seems to be saying that the financial crash and global meltdown was caused by Krugman and others who "lied" about Herbert Hoover. I am going to assume that I am NOT reading him correctly.
Memeorandum has more on the meltdown here.
RECENT POSTINGS
A Bold New Plan to Rescue the Economy: Nationalizing the Banks
Risky Business: Junketing with AIG on Taxpayer Dollars
Economist DeLong Says, "McCain Mortgage Plan Worse than I Imagined"
AIG Execs Re-Distributed Shareholder Wealth to Themselves
Comments