Some economic crisis links (10.6.2008)

The New York Times reports that Wall Street's disease is spreading to Europe and around the world. In addition to that bad news, it also reports that the European Union lacks the institutional, political and regulatory resources needed to successfully confront the crisis. Given this unfavorable environment and the possibility of additional deterioration in the future, stock and oil prices are plunging, according to a second Times report. The export economies are not immune to the problem since they depend upon the United States and other developed countries to buy their goods. Consequently a global recession looks more likely now than it did before Congress passed the final version of the Paulson Plan.

The Financial Times adds to this bad news. It reports that

European financial stocks cratered on Monday, as worries about the extent of the crisis in the sector deepened after finance ministers failed to reach a consensus on how to react.

"The banking system doesn't work any more. It is just broken. Banks are arriving at a recession with no capital and the central bank is the lender of only resort. People are just unsure about what to do," said Robert Quinn, European equity analyst at Standard and Poor's.

The FT also claims that "Wall Street stocks were set for a sharply lower start on Monday as heightened concerns that the financial crisis was deepening around the globe outweighed another round of authorities' intervention to shore up confidence."

Yves Smith of Naked Capitalism concisely summarizes the emerging situation when she states that

Investors are finally waking up to the notion that it isn't just the US financial system that is in trouble, but that pretty much every advanced economy (save Japan, although Canada has yet to produce any bad headlines) has a banking system in not-so-good health. And economies that may indeed have sound banks will nevertheless be pulled down by the large number of institutions in their trading partners that are afflicted.

Smith also discusses the questions raised by Lehman's efforts this past summer to become a bank, which the Fed denied, the subsequent Lehman failure and Goldman Sachs and Morgan Stanley's successful efforts to gain a banking license.

According to the Wall Street Journal, Germany arraigned a bailout of Hypo Real Estate while also guaranteeing all consumer bank deposits. "[T]he governments of Belgium and Luxembourg arranged a deal under which French lender BNP Paribas SA will take over the Belgian and Luxembourg operations of Fortis NV for roughly €15 billion in cash and stock" [links added]. And UniCredit announced a program to strengthen its capital position by the end of this year. The Journal then states

The crisis in Europe now has broadened from the implosion of U.S. mortgage-related assets to a mounting unwillingness among European banks to lend to one another and a growing loss of confidence among investors and in some cases depositors. Adding to the predicament, governments from Ireland to Germany are trying to reassure their increasingly anxious voters. Denmark and Austria were also preparing extra protection for consumer deposits in the wake of the German move.

Other European banks could face similar funding strains to those of Fortis and Hypo, requiring public or private financial aid, as investors avoid making the kind of short-term loans that banks depend on for funding. In a sign that banks' borrowing costs are rising, the euro London interbank offered rate, or Libor, a measure of the rates at which banks lend to one another, hit 5.33% Friday, compared with 4.95% on Sept. 1.

Mike Whitney now believes the Bush regime should have declared a state of emergency to deal with the crisis early on. He also suggests that it is not too late to take this path. Presumably a government agency empowered by a declaration of an emergency would have the powers needed to manage if not solve problems as they arise. His technical solution: Inject capital into the banks.

His summary judgment

The levies have already broken, and the water is flooding into the city. The Federal Reserve will be forced to act. Expect an emergency rate cut of 50 basis points or more in the next 10 days coordinated with cuts in the other G-7 countries. Also, expect another bailout by the time Obama or McCain take office. As the French premier, Francois Fillon, warned on Saturday the world is "on the edge of the abyss".

Update I (10.6.2008)

The Dow dropped below 10,000 for the first time since 2004, according to a New York Times report.

Update II (10.7.2008)

The Wall Street Journal depicts the situation at the end of the day as bleak.

On Monday, the Federal Reserve and European governments stepped up relief efforts, above and beyond the $700 billion rescue package approved by the Congress last week. But markets around the world responded with a massive vote of no confidence. European stocks saw their biggest drop in at least 20 years, and the Dow Jones Industrial Average dropped below the 10000 mark, a stark sign that the crisis may be outpacing policy makers' ability to contain it.