'Interest rates across the world were slashed yesterday as central banks took unprecedented emergency action in an effort to contain the worst economic threat since the Great Depression.....
....The extraordinary level of coordination was designed to demonstrate resolve in the face of financial panic but failed to restore confidence in the stock market. Share prices rallied briefly in London but the FTSE 100 index closed down 239 points at 4,367, its lowest point for four years.
In its bleakest forecast for years, the International Monetary Fund said that the world was entering a major downturn in the face of “the most dangerous shock . . . since the 1930s”. The US and Europe were either on the brink of or already in recession'.The IMF's Global Financial Stability Report on the crisis is here. The executive summary of the report is here. The 'Fund is mainly arguing the case for a much more regulated international financial system and offering its services.
I have been so busy the last few days that I have been unable to focus on the extent of the current disaster, the loss of personal wealth and so on. The prospects for a prolongued, severe global recession are real. How things change so quickly!
Amidst the gloom I came across this refreshingly vulgar musical piece at FXH's Lan Downunder by The Saw Doctors. I've been playing it between meetings and teaching today. Rob Waschik provided me with this delightful insight into the source of the affection displayed by the Saw Doctors towards the Bangles displayed in the FXH clip. I thought they were pretty good too.
What does this have to do with the possible collapse of capitalism? Nothing at all. Nothing. That's why I link to it.
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It seems that we have at present is a crisis of distrust between the banks, who are afraid to lend to each other One permanent feature of the post subprime era could be an agency empowered to verify, or at least audit, the assertions made by banks about their credit worthiness. That would require access to full information lodged with the agency by the banks and held under absolute security. There would have to be disincentives for non-compliance, and given the global nature of banking, some international brokering mechanism to avoid nationalist isolationism.
My biggest fear when Henry Paulson met with congress urging in a histrionic way the initial "bailout" was that it wouldn't work and confidence in the US government will also go down.
It seems that we could be well on our way to a new tipping
point where confidence in US treasury bills, the monetary-policy instruments of the Fed., and the executive powers of the White House, falls.
Should that happen, nationalization and privatization become almost indistinguishable.
It is paramount at this point to shore up confidence in the ability of government to affect the market and confidence in the instruments that it traditionally uses to exert a measure of control on the market.
A hands-off approach--let it "go to pot"--is perhaps a better option than the Paulson's comical "cunning plans". Of course, isolating the healthy part of the banking sector and letting the rest "go to pot" might be the way to go.
PS. It's probably urgent to put some adults in charge of the Commonwealth Bank here. This is no time for cow boys shifting once again risk towards low probability catastrophic events.
This may not be the end of capitalism. But it is the end of capitalism as we have known it.
The US, UK and German banking systems are either nationalised or soon will be. (Pissant countries like Iceland don't matter.)
This is with the full support of the entire political class, the entire financial and investor community and everybody orthodox commentator, such as Alan Wood in today's Oz.
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