Collapsing banks and markets: what now?

It’s hard to get a handle on exactly what the collapse of Lehman Bros along with the takeover of Merrill & Lynch means to the world economy, along with the rescue package for Fannie Mae and Freddy Mac. Obviously to a lot of ordinary people with investment accounts, it means the loss of what they had hoped would be financial security for the long haul. To the stock market, it means the biggest daily drop in value since 9/11. The USA is obviously going to feel a lot of financial pain over the next few years as a result. But does it mean a global recession (or worse, a depression) is looming, as in the saying “when America sneezes, the world catches a cold”?

Lots of politicians here in Australia, along with stock market advisors, are telling us not to panic (without fully acknowledging their own vested interest in keeping the market as stable as possible). The story is that unlike the last global depression triggered by collapsing American banks, today the world economy has moved on from the hegemony of American markets, and that the growing dominance of the BRIC economies (Brazil, Russia, India and China) will buffer the rest of the world from the collapse in US financial confidence. It’s a nice story, and one that I want to be true for the sake of me and mine, but how reliable is it?

I’ll link to articles/posts covering the financial crisis as I find them. Anyone else who has a better finger on the economic pulse, please share your insights in comments. About the only positive I can see from this is that an actual economic crisis will give the corporate media something to obsess about other than Sarah Palin (and that the Bushenomic contribution to the current crisis should stick to McCain like glue, getting the election discussion back to the basic issues again).

Categories: economics


10 replies

  1. I’m not saying I have a better finger on the global economy, but while the world has moved away from US being the sole driving force, that doesn’t mean it is any more stable. Knock one leg out of a 4 legged table and you’ve got a ramp. And broken dishes.
    But then again, I’m just a pessimist.

  2. I heard one reporter begging people to not stuff money between their mattress. It is scary times when people are thinking of that. A friend of mine has started being gem stones. It is his belief that they have a more permanent value and will be more readily trade able.

  3. A few news articles mentioning the growing concern over AIG (due to exposure to the derivatives markets following the collapse of Lehman Bros):
    The Guardian: Global share rout continues
    Forbes: Derivatives and Dangerous Times
    The Age: Shares tumble after Lehman’s demise
    Bloomberg: Americans certain Lehman’s bad, just not sure it’s bad for them

  4. Another positive light is that a less stable economy is in a better position to make radical changes to support a better valuation of environmental currency. Now is the time to be looking for new pillars of the economy, rather than financial institutions, whose only real product is inflation.
    I’m not an expert, just a service provider to the banking industry. Of course, that does mean that its immanent collapse is not good news for me financially….

  5. Bad luck, Ariane. I hope you have some cushion available. 😦
    More links:
    Bernice posted about the meltdown yesterday: Upstaging the players
    Can the independent non-bank financial intermediaries survive in USA?
    from Club Troppo by Fred Argy
    Wall Street’s Troubles Are Yours, Too…
    from ECHIDNE OF THE SNAKES by echidne

  6. I dont think this will focus attention on the failures of the Republican government. McCain’s come out blaming the speculators on Wall Street, so he’s distanced his party from the whole thing.
    While many are saying this a failure of the regulatory regime, I’m not so convinced.
    Subprime mortgages are a new invention that was hailed as revolutionary, enabling many who would never have dreamt to of buying their own home and the like. The cost was higher risk.
    If you invest in high-risk products, there is a chance it will bit you. It’s not a moral right or wrong, just a fact of life.
    What perplexes me about this whole debate is politicans discussing what has happened as if its a matter of lax principles. It’s more a matter of poor judgement. Firms should be free to take risks, should they so choose. Next time, they will likely be more careful. Such destructive learning is, unfortunately, the way of the market. It sure beats the alternatives however.

  7. the Bushenomic contribution to the current crisis should stick to McCain like glue
    Ha. Nothing seems to stick to McCain. I’m so dispirited about this election; I think we’ve already lost. For some reason, people are LOVING Sarah Palin. I can’t believe some of the things I’m hearing. I hear women planning to vote for her (not McCain, they’re not thinking about that) because she’s got a cute little Down syndrome baby and a pregnant daughter; she’s so nice!
    When McCain chose her, I laughed. “How stupid does he think American women are?” I jeered. And now I am gobsmacked to find out how stupid we really are. There are a huge number of American women for whom Palin is the deciding factor. I could puke.

  8. This subprime mess wasn’t really caused by companies choosing to take more risks. It was caused by good old fashioned greed combined with the most insane incentive schemes you can imagine. Essentially the problem with these mortgages is that many of them were made in full knowledge that they could never be repaid.
    The strategy was to sell a loan to someone with low initial repayments. Come back in two years when they can no longer afford the repayments and sell them a new loan on the basis of the capital growth of the house in the mean time. The sales guy gets full commission each time, and is living in the Bahamas by the time the bubble bursts.
    So I don’t really blame the sales guys. An incentive scheme that completely ignores the long term outcome of the loan is bound for disaster. As the sales guy I was talking to yesterday reminded me, sales guys are coin operated.
    And the reason people are calling it a failure in regulation is because the market itself has failed to regulate. The market did not identify the insanity of this strategy, and downgrade the value of the banks that indulged. In general, there seems to be an unwritten law that if the market can’t regulate it, government should. I think this is somewhat flawed, in general we only know that the market has failed after the fact. On the other hand, banks represent what amounts to an essential service – it’s not like you have a choice about whether or not to use them. They should have some social responsibility as a result.
    This is my understanding of the situation at least.

  9. ”This subprime mess wasn’t really caused by companies choosing to take more risks. It was caused by good old fashioned greed combined with the most insane incentive schemes you can imagine. Essentially the problem with these mortgages is that many of them were made in full knowledge that they could never be repaid.
    Yes, but the good news to come out of that is that the regulations in our industry prevent it happening here.
    ”This is my understanding of the situation at least.”
    Bang on, Ariane.
    Keris last blog post..Follwing up

  10. I’m more of an insurance person than a banking person, so I’ve been following AIG particularly. I can’t quite understand how they became so bound up in the credit swap market – doesn’t really seem like an insurance market to me.
    I do think there is lax regulation involved there – insurance regulation in the US is state based, which means that insurance companies do tend to try and find the state with the easiest regulations, and do business there.
    Bank’s here in Australia are genuinely in pretty good shape, I think – as a colleague of mine said, they make so much money they didn’t have to go down some of the more risky avenues that their overseas counterparts did to make money – perhaps blame our cosy oligopoly for lower risk business?

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