Stock markets world wide dropped sharply yesterday in spite of the announced bail out plans by both American and European governments. Today the DOW Jones opened 7% lower than yesterday, causing European markets to also drop sharply. This means that the Dow Jones has lost nearly 25% of its value in the last eight day. European markets are reacting in a similar panicky fashion. All the markets, American and European, then recovered some as the Dow Jones led the way for the European markets. The Japanese Nikkei index has also lost a lost nearly a quarter of its value this week.
It's a rather stunning display by the markets of two things. First, the banks world wide are extremely interdependent. Second, that they think the bail out plan by the American government and the plan announced yesterday by the British government to buy stakes in British banks as well as the the coordinated interest rate cuts announced by European governments yesterday are simply too little too late.
Perhaps more significant than the falling stock markets is the continued very high rate of interest that banks are charging other banks for interbank loans. In spite of the coordinated interest rate cuts by governments, the London Interbank Interest Rate (LIBOR) increased slightly to 4.82 percent. This is two percent age points higher than it was last month. The coordinated interest rate reduction by the governments should have lowered the LIBOR, but failed to do so. The banks which might have money to lend simply don't know which other banks are likely to default on the loans, and they don't think the government actions are likely to work any time soon.
In other words, the interbank credit crisis continues apace with no end in sight.
Into this financial mess steps George W. Bush. At 10:25 A.M. EDT this morning Bush stepped up to the microphones in the Rose Garden and announced to the world "We are aware that there is an economic problem and we are working on it." His short talk contained no new news and has had the reaction appropriate to his lame duck status and record low disapproval ratings.
As to the economic problems - bankers and government financial authorities around the world will be working long hours again this weekend, and no one really knows what will come out of the effort.
Economies around the world are headed into recession now primarily because of mismanagement of the financial sector by Wall Street bankers, by the Federal Reserve under Alan Greenspan, and by excessive deregulation from the Washington D.C. politicians they bought. How long the recession will last remains up in the air. Bush's total irrelevance is a bit of a surprise.
- Yesterday Nouriel Roubini reported The world is at severe risk of a global systemic financial meltdown and a severe global depression.
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.
On the real economic side all the advanced economies representing 55% of global GDP (US, Eurozone, UK, other smaller European countries, Canada, Japan, Australia, New Zealand, Japan) entered a recession even before the massive financial shocks that started in the late summer made the liquidity and credit crunch even more virulent and will thus cause an even more severe recession than the one that started in the spring. So we have a severe recession, a severe financial crisis and a severe banking crisis in advanced economies. - Today in the Wall Street Journal the last great Federal Reserve Chief, Paul Volker reports We Have the Tools to Manage the Crisis
Now we need the leadership to use them. Here is a sample from his article:Today, the financial crisis has reached a critical point. The sharp decline in the stock market and its volatility dramatically make the point. More important if less visible, the flow of credit through the banking system and the financial markets is seriously impaired -- even in part frozen.
Go read the article to see what the tools are.
For months, the real economy, apart from housing, had not been much affected by the developing crisis. Now, a full-scale recession appears unavoidable. Important state and local governments face deficits they may be unable to finance. Recessionary forces are apparent in other important countries and exchange rates are unstable.
Those are facts. [Snip]
Fortunately, there is also good reason to believe that the means are now available to turn the tide. Financial authorities, in the United States and elsewhere, are now in a position to take needed and convincing action to stabilize markets and to restore trust. - Calculated Risk (CR)This morning eports CNBC: Treasury Preparing Term Sheet for Recapitalization.
- Earlier today CR also reported Financial Crisis: A Global Response?, a short summary of four different reports on the reactions to the international credit crisis.
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