Back to Friday
Never mind the 10% fall in stock markets in the US, to be followed by a similar crash in Asia overnight. The really, really bad news yesterday was the reversal in the money markets. Money market had modestly improved after the bank rescue packages were announced, but this is now reversing again. In the the US, the TED Spread, the best measure of money market stress got back again to 4.38%, and in Europe, the improvedments in money market interest rates petered out. If the goal of the rescue operations was to relieve the money market, this operation must now be judged as having failed.
The EU summit yesterday announced that world leaders will meet in a G8 summit soon. Nicolas Sarkozy said he expected a concrete time table and agenda for wide-ranging reforms of the global finance architecture. Emerging countries could join the summit, including China, Brazil, India, South Africa and Mexico, reports Le Monde. Gordon Brown is again the EU’s point man, proposing a fundamental reform of the IMF to deal with global crisis. The FT Deutschland lists his proposals that include a stronger supervision role for the IMF, and a mandate to the Financial Stability Forum – an informal group of regulators, central bankers, representatives of the finance ministry and the IMF from the largest economies - to coordinate the reform efforts. Brown also calls on the community to advance trade talks to avoid that the financial crisis turns into protectionism. So far, it appears to us, we are still at the goal-setting stage of policy. There are no concrete proposals.
Werner Mussler in the Frankfurter Allgemeine welcomes Brown’s reform plans as a concrete contribution in times when all politicians talk about the need to improve the international financial architecture. His most controversial proposal is a global supervision of the 30 biggest financial institutions, a subject of conflict within the EU already for years.
The latest deterioration in the financial crisis comes amid new data showing that the US economy is headed for a severe recession. The overt reason for yesterday’s decline in stock prices was the news of a sharp fall of retail sales in September. Here is the chart.
There is also significant stress now in Hungary where both shares and the forint plunged yesterday, as the country is now facing to a decade of living dangerously beyond its means. And in Russia, a medium-sized bank faced a classic run yesterday, and shuts its to despositors.
Italy’s economy
The Bank of Italy has yesterday produced a very grim analysis on the impact of the financial crisis on the Italian economy, according to Corriere della Sera. While there are no risks to fiscal policy in the remainder of this year, there big risks in 2009. The credit crunch is also affecting consumers, who find it more difficult to obtain credit. Italy is now in the middle of a deep recession, made worse by the banking crisis.
The Naked Capitalism blog continues an interesting simple chart, which simply consists of a trend in the Dow Jones. Now this is something one does not normally do for stocks (though it is perfectly legitimate to do this for real house prices given their stationarity).
If you assume that the entire 1990s/2000s rise in stock prices was a bubble, then yesterday’s market crash only takes us to a level that is still a good distance above the long-term trend line.
The FT reports that economists now expect both US and European interest rates to fall significantly. Ben Bernanke yesterday said that the Fed will use all the tools at their disposals, which he said shortly before the last 0.5 percentage point cut. (We agree. The point is only that these interest rate cuts mean little if Libor/Eurobor stays high)
Ben Bernanke on the financial system
The Wall Street Journal has a nice long passage from Ben Bernanke’s latest testimony to Congress, in which he talks about some of the deeper issues. He said for example that the US urgently needs to address the too-big-to-fail problem, as this has created too much moral hazard in the system. He proposed to Congress very radical legal changes to introduce a fiduciary system for banks to give government oversight, including the right to unwind banks that have become too large. He also made the point that housing is the key to solving the problem, and that it is very difficult to prevent the decline in prices, but that government has to try this nevertheless. (He did not say it, but we read it that way, that he fears that housing markets might badly overshoot on the way down. In that case, all those 30-35% peak-to-trough estimates have to be revisited. It could be a lot worse).
Hans Tietmeyer’s almost return
FT Deutschland has a nice page one story about the almost come-back of Hans Tietmeyer, Bundesbank president in the 1990s, and Kohl’s man for managing the economics of unification. Merkel has created an expert group to make proposals for the upcoming G8 summit, and had asked Hans Tietmeyer to lead it. When she announced it to the Bundestag, there were of roars of protests, as parliamentarians knew something Merkel did not – that Tietmeyer was a member of the supervisory board of Hypo Real Estate, which had to be bailed out by the government large because the supervisory board did not do its job. Tietmeyer later withdrew his name, and Merkel was reeling.
(This episode also tells that we should not perhaps too much leadership in this question from Berlin. Merkel and her team give the impression that they are a little overwhelmed)
EPP nominates Barroso for a second term
European Commission president Jose Manual Barroso has been spending the best part of the last two years to get reelected, and this campaign now looks like succeeding. The centre-right EPP, the largest section in the European Parliament, has nominated him for another term after the EP election in June. It seems that all the Christian Democrat elites are behind the decision. Jean-Claude Juncker made the suggestion to nominate Barroso at this early stage, according to the Frankfurter Allgemeine.
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