This morning I woke to listen to a debate on Radio 4 about yesterday’s G7 meeting and the resulting 5 point plan that was issued. In summary the “plan” provided the following promises;
- 1. Pledge to save key banks from collapse
- 2. Action to free-up credit and money markets by providing ample amounts of liquidity from central banks
- 3. Support for the part-nationalisation of banks and other institutions by the taxpayer purchase of shares
- 4. Stronger deposit protection schemes to reassure savers their money is safe
- 5. Force banks to disclose the true state of their losses
Frankly there is nothing new here and this is certainly not going to end the crisis engulfing us all now. On a day when stock markets plummeted to levels not seen since spring 2003, this was not the clarion call we all desperately need.
In one way or another all of the measures above have already been tried and have done nothing to alleviate the seizure of credit markets.
If anything things have got much worse.
In time the failure of Lehman will probably come to be viewed as the watershed. Whether or not history views this as the critical mistake, which tipped us over the edge, remains to be seen, but for my part I actually think the critical mistake was made much earlier. In underwriting the bailout of Bear Stearns in March, the Fed sent out what proved to be a fatally unrealistic message to markets that they would act as lender of last resort for all financial institutions. Given the size and severity of the problems facing financial markets, they were never going to be able to meet this implicit commitment in the event of the situation worsening.
As it turned out the Fed and US Treasury compounded this mistake by not preparing a proper bailout plan. That, which was recently passed, was clearly thrown together extremely quickly and rushed through Congress. Looking back now I am pleased it hit so much opposition. While I burned myself in the markets, trading the bailout, this was totally my fault. Had I stuck to my bearishness earlier in the year and used the system properly, I would have cleaned up. However now that I am mentally over the losses I am starting to look forward again and I wonder whether or not the entire bailout will go through. After all there are provisions for providing the money in tranches, based on successful completion of preceding stages.
In particular the US bailout does not allow for the US Government (read taxpayer) to take equity stakes in the institutions they bailed. The risk/reward ratio is nowhere near enough in favour of those shouldering the exposure of the bailout not working. An extremely pertinent reminder of how much risk US tax payers have taken on was the news that the debt clock on Time Square now needs an extra digit! http://news.bbc.co.uk/1/hi/business/7660409.stm
I have to give Gordon Brown credit in that his plans for the UK bailout, while not the complete solution, has made provision for the State to take some ownership. (It was quite tragic listening to John Humphries criticise Alastair Darling for taking Preference Shares as opposed to Ordinary Shares, as these were not “voting” – he totally missed the point that Preference Shares get first call on dividends!!!)
However it is not the prospects of the bailouts, which are causing me to feel more positive.
A good friend of mine, who can only be described as an ultra-bear, predicted Dow 8,000. While I have to tip my hat to his providence, even he did not expect the pace of decline. It has been simply staggering, unprecedented (there’s that word again!), mind-blowing, insane and any number of other superlatives you can think of.
In fact it is the speed at which events have unfolded that gives me hope for the future. 2009 is bound to be extremely difficult, but I would expect now that we can feel somewhat confident a bottom will be found during the year. This will lead to a period of consolidation, then giving way to growth.
I have written ad nauseam that Society has changed manifestly since the 1930′s. In particular modern technology and communications mean that we have grown accustomed to things happening much faster.
While we are going to need something along the lines of Roosevelt’s “New Deal” to see us through this, circumstances are conspiring that this is going to be forced on the next generation of political leadership.
Who’s up for Obama’s “Great Plan”?…………