A little too exciting
As the Dow plunged 500 points and Jim Cramer warned that the stock market could fall another 20%, the ever excitable Ambrose Evans-Pritchard said: “Unless there is immediate intervention on every front by all the major powers acting in concert, we risk a disintegration of global finance within days.” Telegraph:
We are fast approaching the point of no return. The only way out of this calamitous descent is “shock and awe” on a global scale, and even that may not be enough. Drastic rate cuts would be a good start. Central bankers still paralysed by a misplaced fear of inflation – whether in Europe, Britain, or the US – have become a public menace and should be held to severe account by our democracies. The imminent and massive danger is now self-feeding debt deflation.
The lesson of the 1930s is that any country trying to reflate in isolation will be punished. The crisis will ricochet from one economy to another until every one is crippled. We are seeing it play again in this drama as our leaders fail to rise above their narrow, parochial agendas. The European Central Bank – which raised rates into the teeth of the crisis in July – has played a shockingly destructive role in this enveloping slump. Its growth predictions this year have been, and still are, delusional. Neglecting its global role, it has vastly complicated the fire-fighting efforts of Washington.
It could have offered “cover” to the US Federal Reserve this spring when Ben Bernanke was forced by events to slash rates to 2pc. It could at least have signalled an end to monetary tightening. That is how an ally ought to behave. Instead, it stuck maniacally to its Gothic script, with equally unhappy consequences for both sides of the Atlantic, as well as for China, Japan, and India. The euro rocketed yet further, which it turn set off an oil shock as crude metamorphosed into an anti-dollar with leverage. The ECB policy was self-defeating, even on its own terms. It merely drove headline inflation even higher, while deeper forces of underlying debt deflation pulled the real economies of Germany, Italy, France, and Spain into a recessionary vortex.
Far from offering reassurance, the weekend mini-summit of EU leaders served only to highlight that nobody is in charge of this runaway train. There is still no lender of last resort in euroland. The £12bn stimulus package is risible. Angela Merkel has revealed her deep limitations. It was she who vetoed French efforts to launch a pan-EU rescue package, suspecting that any lifeboat fund would prove to be Trojan Horse – a way of co-opting German taxpayers into colossal transfers of wealth to Latin Europe.
In that she is right, but it is too late now for dysfunctional EU political games. By demanding that those who caused the damage should pay for it, she crossed the line into caricature, or worse. Her comments echo word for word the “we’re alright Jack” attitudes of Euro-pols during the first US banking crises in 1930-1931, until the storm hit Europe and the entire cast was swept away by furious electorates, or simply shot.
We have said that this situation is considerably more serious than many believe, that the US’s $700 billion bailout was only the beginning, and that more expensive and intrusive emergency measures such as direct purchases of commercial paper and interest rate cuts lay ahead. So far that does indeed seem to be the scenario.
On the other hand, a Real Money columnist has a slightly different view: “What we are seeing today is a very rare thing. This is what capitulation looks like. This is what happens when folks give up on the market and are so afraid that they want out at any price. You don’t see action like this other than at truly historic times, and that what this is. That doesn’t mean you rush in and buy into the teeth of this decline, but the good news is that if you have cash, you are going to have some fantastic bargains to pick from. The bad news is that there is no way to know how long this will continue before we find a low.” We’ll just have to see what happens.
October 6th, 2008 at 9:53 pm
I agree with the capitulation thesis.
How does $700 Billion equate (on a GNP basis) with some of the historical stesses that society has dealt with? Look at the re-establishment of global (or national) economies after these events.
The sun will shine again.
October 6th, 2008 at 10:45 pm
For a long time people wanted political hustlers to run their education, their health care, their retirement, their entire economy. The lower classes wanted it because they are lazy, and could be bought with short-term gifts . The elites wanted it because they didn’t have to go through the ugly masses, they didn’t have to get retail, they could go right to the capital and influence to their advantage at the wholesale level. The poorer were selling their liberties for candy, and the elite were buying and paying with financial chains being forged for future generations that had no say, but will reap. The only problem was that the distant tomorrow after all us Keynesians are dead, is looking like next week. How irritating.
And now the Nuzio’s of the financial world are not showing up with their payment and the whole racketeering enterprise is getting a little testy and the Capo’s are having trouble convincing their soldiers that they still rule the streets, that they are sharp, hard and fast. Soldiers and Captains everywhere aren’t showing up, aren’t kicking up tax receipts and are talking all sorts of crazy talk and when the Bosses call for a little show of respect in their economic perp walk, they’re all alone save their lawyer, Paulson. No one is even showing up at the social club, no one picks up their cell phone. What the heck is going on here?
The unfairness of it all. Who’da thunk it? And the Bosses? They all think they are victims of some unseen hand. That Smith guy, somebody’s got to get to him.
October 7th, 2008 at 12:40 am
This is becoming a white-knuckle ride for sure. What was it Kipling said about keeping your head when all those around you are losing theirs?