a Francoforte sono dei Bari

Bari a Francoforte. Il cavallo germanico e’ stanco e  s’abbevera meno.

6 pm GMT UPDATE: we knew nothing, zis morning,  about today’s European stock exchanges, where someone must agree with the Roubini’s tiny sect.

Whatever they think, they voted today  “pollice verso” to ECB dull uncertainty, going opposite to a last minute rally at  Wall Street, with:  FTSE Eurofirst 300 -3.96%,  CAC 40 Paris -5.4%.


If the German horse drinks less,

at ECB they must cheat.

Two bad news from Germany, for the European deep recession.

Today: -6% manuf. industries orders in Germany.

Yesterday: at ECB they have lost their LAST CHANCE to serve the people they should serve.

ECB cuts rates by 0.75, NOT daring to choose between 0.5 and 1.0.

Please note that, as soon as some world region will succeed to do something in order not to stop (physically impossible), but  to smooth some effects of the “december 2007 – sometimes in 2o10-11” recession, Europe will just crackdown as a whole, in the absence of any policy. And there is no reason to preview that any policy will be undertaken in Europe, before it’s too late: IT IS TOO LATE ALREADY.

All the best macro-economists (except our modest, little Roubini sect, the Truth-Tellers) realised we were in a crisis, although still not grasping it as a complex-deep and  unique one, only in … September 20o8, i.e. 13  months after its dramatic, nuclear-bomb  implosion.

The forecast of a German bank of GDP – 4% is  clearly over-optimistic,  in an average scenario without any European economic policy; eventually, later on just  some social policy, when people’s revolts will diffuse and become violent. The Italian CGIL Trade Union is  unluckily the only one, of the 3 BIG TUs,  to play a democratic, moderate and responsible game; with foresightedness, in order to prevent the crisis to go socially very very bad, catastrophic and  VIOLENT; an ideal ground for Red and Islamic Brigades: we’ll talk this soon, in a next post, à propos of the FRIDAY 12 DEC. GENERAL STRIKE IN ITALY ON BEHALF OF AN ECONOMIC POLICY. Talking Brigades: DO YOU KNOW THAT THERE ARE AT LEAST SOME HUNDREDS  hidden-sleeping Al Qaeda associates in Germany, UK and elsewhere, with a European passport, and all of them received a full military training in the tribal provinces of Pakistan? We know it, from published sources: October issue,  Le Monde Diplomatiqe.

From the Frankfurt BABEL TOWER (read: ECB), board member Mr Bini Smaghi (interviewed zis morning at Italian RAI-RADIO 3) replies to the  -4% provocation, by saying that “such bank economists have vested interests” (conflitto di interessi) in making such forecasts. He, they forecast a GDP upturn in the 2009 2nd semester, but they don’t believe such bullshit, since they are not crazy. They just lie.

Let us fix a 1st Babel Tower dimension: LA MALAFEDE;  at the ECB they are liars  using all their hyperpower and Authority, to  diffuse informational heavy drugs, downers (tranquillanti) to people. MENTONO SAPENDO DI MENTINE.

TODAY: According to Mario Platero (il sole 24 ore correspondent), the worst guesses were 380,000 jobs lost in November: they came out almost 50% more than that. IT IS SURE THAT THE U.S. ARE  LOSING MORE THAN 2 MILLION JOBS across 2008, since thet’re up to 1.7 mn by now.

ft

US job losses steepest since 1974

The US economy lost a stunning 533,000 jobs in November – the largest monthly drop in more than three decades – as the unemployment rate jumped to 6.7 per cent
today, Dec.5; – 14:23

German manufacturing orders collapse

October orders fall 6.1%
today, Dec.5; – 12:19

YESTERDAY: At ECB,  besides being professional and trained liars: either they know little about economics, or they live in another planet (ignoring what happens here), or they have unconfessable aims (like fucking the working class and the Trade Unions, together with large sections of the creative and productive bourgeoisie, etc.). We firmly believe THE 4 OF THEM HOLD, in a satanic mix.

As usual, ECB did’nt dare to cut 1% full (just 0.75), even though  its 2%  inflation target is already, fully and even too much satisfied – since (a short lecture  for  ECB dunces and liars):

081204oil-price

a) Summer 2008 breakthrough shift in ALL PRIMARY MARKETS: from inflation to deflation;

b) such a radical change is NOW quickly diffusing  downwards on intermediate and final goods markets;

c) present state-of-the-art: less year-base inflation, quickly converging to the 2% target and overshooting;

d) ST perspective: a DRAMATIC DEFLATION much more than likely:  pretty difficult to avoid, exp. without creativity, innovation and Zeitgeist in economic, social policies and Politics tout court. A horrible  STAG – DEFLATION – Roubini, 2 dec. FT.

wsj

[Crisis Management chart]

ECB, Bank of England Cut Rates

Central banks world-wide delivered sweeping cuts,

with the ECB lowering rates by 0.75 percentage point to 2.5%

and the BOE slashing its key rate by one point to 2%. (Trichet remarks)

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2nd & last (?) rally day

FAQ 1 –  IS THE RALLY ALREADY OVER? IN SUCH A CASE, A  “PLAN C” WOULD BE NECESSARY. FOCUSSING UPON MEAN STREET.

w post

live coverage

Posted at 2:09 PM ET, 10/14/2008

Reid Calls for More Stimulus

In a statement released moments ago by Senate Majority Leader Harry Reid (D-Nev.), he echoed calls by House Speaker Nancy Pelosi (D-Calif.) for an economic stimulus plan aimed at Main Street, now that the Wall Street bailout/rescue plan apparently is underway.

Faq 2. In a severe recession, on the verge of a decade (2010s) depression,  where are the fundamentals of profits actualisation? Likely at about 1/2 of current stock values, i.e. 2/3 down from the Autumn 2007 apex.  A different answer in the ft, by LEX (implicitly assuming we are so close to the bottom floor ?):

Time to buy?

Published: Monday 13 Oct 2008 09:55

With stock markets falling day by day, investment gurus suggest that it is time to buy – taking a 30-year view.  Certainly, there are plenty of companies across the developed world in little immediate danger and trading at eyewateringly low prices. But there is no telling how long a market recovery could take. The Dow Jones Industrial Average took 24 years to regain its pre-crash highs following the Great Depression. Japanese equities are still a quarter of what they were almost 20 years ago.


BREAKING NEWS.  -3% Nasdaq, at 2 pm ET, -4.5% at 3 pm ET

NASDAQ GOES DOWN! WALL STREET PUTS BRAKES TO THE EUROPEAN RALLY

LA FRENATA DI WALL STREET RALLENTA LA CORSA DELLE BORSE EUROPEE A FINE GIORNATA

Market Index Charts

 

At  5pm GMT = 1pm ET (see the self-updating graphs) the Nasdaq was losing 1.35%, at 5.30: – 1.75%, at 6.00: -2.45%; on expectations of  a severe recession hitting ICT profits and consumption (on a Pepsi profit warning). DIJA  + 0.34%, then becoming negative at 5.35pm GMT (1.35 ET).

The rally is over at Wall St., and it lasted JUST 1 day.

Tokyo up a Guinness 14%. Europe on average up 3% (DJ Stoxx 600), but it might be the end of it, and the slide down continue –  although not as catastrophically as last week.

bloomberg

Roubini Sees Worst Recession in 40 Years, Rally’s End (Update1)

By Eric Martin and Rhonda Schaffler

 

Oct. 14 (Bloomberg) — Nouriel Roubini, the professor who predicted the financial crisis in 2006, said the U.S. will suffer its worst recession in 40 years, causing the rally in the stock market to “sputter.”

“There are significant downside risks still to the market and the economy,” Roubini, 50, a New York University professor of economics, said in an interview with Bloomberg Television. “We’re going to be surprised by the severity of the recession and the severity of the financial losses.”

The economist said the recession will last 18 to 24 months, driving unemployment to 9 percent, and already depressed home prices will fall another 15 percent. The U.S. government will need to double its purchase of bank stakes and force lenders to eliminate dividends to save them from bankruptcy, Roubini added. Treasury Secretary Henry Paulson said today he plans to use $250 billion of taxpayer funds to purchase equity in thousands of financial firms to halt a credit freeze that threatened to drive companies into bankruptcy and eliminate jobs.

“This will be the first round of recapitalization of the banks,” Roubini said. “The government has to decide to intervene much more directly in the provision of credit and the management of these companies.” (…)

“The stock market is going to stop rallying soon enough when they see the economy is really tanking right now,” Roubini added. (…)

Roubini said total credit losses resulting from the meltdown of the subprime mortgage market will be “closer to $3 trillion,” up from his previous estimate of $1 trillion to $2 trillion. The International Monetary Fund estimated $1.4 trillion estimate on Oct. 7. Financial firms have so far reported $637 billion in losses, according to data compiled by Bloomberg. 

SEE OUR ESTIMATE (from last Summer) in our blog title: $3 tr, IRAQ cost = SUBCRIME cost.

wsj

Disaster Averted, EU’s Recession Looms

European governments can congratulate themselves on preventing the region’s troubled financial sector from collapsing. But the focus will swiftly return to the bleak macroeconomic outlook.

Actually, we expect the Wall Street worries on the recession to spread tomorrow, Wednesday in Asia and Europe.

Reuters 

Worry over profit outlook halts early stock burst

Tue Oct 14, 2008 12:05pm EDT = 16.05 GMT

By Ellis Mnyandu

 

NEW YORK (Reuters) – The Nasdaq fell in choppy trading on Tuesday as investors sold technology shares on fears that fallout from the credit turmoil would hurt profits despite the U.S. government’s plan to invest in banks to shore up the financial system.

The Dow and S&P 500 were moderately higher after a sharp rise at the open. Concerns about the broad profit outlook overshadowed the Treasury Department’s plan to inject $250 billion in major banks to stabilize the financial system in hopes of averting further damage to the economy.

A profit miss by soft drink company PepsiCo , whose shares were down 9 percent, added to worries over how consumer spending will hold up against declines in home values, stocks and tighter credit.

On Nasdaq, shares of chip maker Intel Corp fell more than 5 percent to $16.02 before it reports quarterly results after Tuesday’s closing bell.

The semiconductor index was off nearly 4 percent, a day after Wall Street roared back from its worst week ever with one of its best single days ever on Monday.

“We may be trying to establish the floor with the credit crisis, and that’s why you had the euphoria in the last day and a half,” said Alan Lancz, president of Alan B. Lancz & Associates Inc investment advisory firm in Toledo, Ohio. “Now people are starting to look at how much damage the credit crisis has done to the economy and earnings.”

The Dow Jones industrial average rose 58.86 points, or 0.63 percent, to 9,446.47. The Standard & Poor’s 500 Index climbed 6.59 points, or 0.66 percent, to 1,009.94. The Nasdaq Composite Index slid 24.42 points, or 1.32 percent, to 1,819.83.

Shares of software maker Microsoft Corp declined more than 5 percent to $24.17. Computer maker Dell slide nearly 6 percent to $14.32.

w post

Posted at 12:03 PM ET, 10/14/2008

Crisis Hits Real Economy: Pepsi Flat

 

PepsiCo. which, like Coca-Cola, has long been considered a “safety stock” — in good times or bad, folks drink soda — said this morning that people actually aren’t drinking soda. Result: The company will cut 3,300 jobs in the United States.

 

The company’s stock is being hammered thanks to a trifecta of bad news from the soda giant this morning: Third-quarter profits fell short of Wall Street expectations, the company cut its full-year outlook and it refused to give guidance for 2009.

 

Nearing lunchtime, shares of PepsiCo. are trading down about 10 percent. 

ft – Global markets rally as US launches bank rescue

Asian and European (Milan closes at + 3.6%) Markets

 (BUT – SURPRISINGLY – NOT WALL STREET !!!)  

are still in rally mood today, Tuesday Oct. 14, but Wall Street’s COLD SHOWER decelerated the European rally at end of the day.

The very short lived rally (1 day ad  a half) was an answer to the week-end instant diffusion of Gordon Brown’s pseudo-nationalisations (Plan B, after the useless Pauson’s Plan A) in US and Europe; in each country measures are undertaken, but also find a lot of social and economic opposition and discussion, A dramatic acceleration in the US where the top 9 banks are partially State owned ($250 bn): Goldman Sachs, Morgan Stanley, JP Morgan Chase, Bank of America, Merrill Lynch (also becoming controlled by Mitsubishi), Citigroup, Wells Fargo, Bank of New York Mellon, and State Street. In Italy it was observed: What about the Made in Italy, if its environment, the districts and supply chains of SMEs, are about to disappear, since they receive no credit?  A much similar question (mutatis mutandis) is posed in the US (see below). 

wp

Dow Soars 11 Percent; Biggest Point Gain Ever
The U.S. government is dramatically escalating its response to the financial crisis by planning to invest $250 billion in the country’s banks, forcing nine of the largest to accept a Treasury stake in what amounts to a partial nationalization.

A REJOINDER ON POLICIES. 

From today’s update in Section 2 of our “AAA updates on subcrimes” page:

Wall Street and the global financial system are pro tempore nationalised in US and Europe.

The stock and credit markets historical BLACK WEEK  (6-10 Oct. 2008) has wiped out Paulson’s Plan B. Europe and the US hurried up to adopt Gordon’s Brown PLAN B – and the Labour Premier from a lame duck suddenly became the prophet of Financial Socialism, Hood Robin. As Lex (Brownian Motion in Europe. FT, Oct. 13) puts it

The lugubrious British premier, out of sorts at home and seriously adrift in the polls, has been styled as a swashbuckling conductor in the Spanish press, and a “magician” in France. Europe has apparently bought into Mr Brown’s conviction that this is a severe, but transient crisis of confidence that can be overcome by piling on more and more government debt.

While the wisdom of that strategy is questionable, it is clear that there is strength in numbers. If governments all muck in together, using taxpayers’ money to recapitalise banks

What about Mean Street, the middle, lower and under classes?

There is no alternative (against the persisting risks of the severe recession to degenerate into a 2010s depression) than a Robin Hood policy for the poor and the middle class. As the historian Howard Zinn puts it, arguing in advance for an Obama New Deal (Beyond the New Deal, The Nation, April 7 – oL March 20),
We might wonder why no Democratic Party contender for the presidency has invoked the memory of the New Deal and its unprecedented series of laws aimed at helping people in need. The New Deal was tentative, cautious, bold enough to shake the pillars of the system but not to replace them. It created many jobs but left 9 million unemployed. It built public housing but not nearly enough. It helped large commercial farmers but not tenant farmers. Excluded from its programs were the poorest of the poor, especially blacks. As farm laborers, migrants or domestic workers, they didn’t qualify for unemployment insurance, a minimum wage, Social Security or farm subsidies.
Still, in today’s climate of endless war and uncontrolled greed, drawing upon the heritage of the 1930s would be a huge step forward. Perhaps the momentum of such a project could carry the nation past the limits of FDR’s reforms, especially if there were a popular upsurge that demanded it.

wp

Low-Wage Workers
Low-wage workers have been hardest hit by the economic downturn, yet most remain hopeful about the future. 

 

PLAN B IN THE US

slate

Take On Me

By Daniel Politi

Posted Tuesday, Oct. 14, 2008, at 6:42 AM ET (our bold characters)

The U.S. government is officially switching gears. In news that almost all the papers banner across the front page, the Treasury Department will be announcing that the U.S. government plans to invest up to $250 billion in the nation’s banks in a move that will effectively translate into a partial nationalization of the financial institutions that take federal money. In addition, the government would provide insurance on all deposits in non-interest-bearing accounts and insure certain types of bank debt. The New York Times calls it the Treasury Department’s “boldest move yet” to deal with the financial crisis. The Wall Street Journal does the best job of summarizing that the move “intertwines the banking sector with the federal government for years to come and gives taxpayers a direct stake in the future of American finance, including any possible losses.” USA Today points out that Europe’s moves to prop up banks across the pond, “set the pattern for the U.S. plan” because if the Bush administration failed to act “in a similar fashion, investors might have moved money abroad to seek safety.”

The move represents a dramatic shift for Treasury Secretary Henry Paulson, who had previously opposed the idea of taking equity stakes in banks. The Los Angeles Times specifies that while the government still plans to go ahead with its plan to buy toxic securities, “the new strategy is likely to move that into a secondary position.” The new program will be divided into two parts. First, the government will devote $125 billion to buy a minority stake in nine of the nation’s top financial institutions and then make the other $125 billion available to thousands of banks and thrifts across the country. Executives from the nine big banks met with Paulson yesterday and while some weren’t happy with the plan, they all agreed to participate. The Washington Post says Paulson told the executives they needed to agree to it for the good of the American economy, illustrating that while “officially the program was voluntary, the banks had little choice in the matter.”

By pretty much forcing the nine big financial institutions to take government money, officials wanted to make sure there would be no stigma associated with receiving the funds, which would have made the entire plan useless. The WSJ and USAT have the full list of the nine banks that will now be partially owned by taxpayers: Goldman Sachs, Morgan Stanley, JPMorgan Chase, Bank of America, Merrill Lynch, Citigroup, Wells Fargo, Bank of New York Mellon, and State Street.

The amount of money each bank will get won’t be uniform—the WSJ has the specific numbers—but essentially the Treasury will buy up to $25 billion in preferred stock in each of the financial institutions. The stock each bank issues “will pay special dividends, at a 5 percent interest rate that will be increased to 9 percent after five years,” the NYT details. The government also added a provision that would allow taxpayers to benefit if the stock value of the financial institutions increases.

The NYT notes that while financial institutions that accept government money won’t be required to eliminate dividends or fire their chief executives, they will “be held to strict restrictions on compensation.” But the WSJ isn’t impressed and notes that the restrictions “are relatively weak compared with what congressional Democrats had wanted.” Key Democratic lawmakers emphasized yesterday that they fully expect the government to impose strict limits on compensation, signaling that a failure to do so could put in doubt whether Congress releases more of the $700 billion after Treasury officials burn through the first installment.

The LAT says that some in the banking industry “reacted with alarm” when details of the plan began appearing in news reports and they predicted the government would soon hear from hundreds of angry banks that were left out of the first phase of the program. “This worked in Sweden, where you have about 14 banks,” one “industry insider” said, adding that it’s little surprise that Paulson, a Wall Street insider, would choose to pump up big New York financial institutions first. “It’s like picking your kids,” he said. The WP notes that there is a risk the banks will use the government money “to bolster their balance sheets” instead of increasing lending, but regulators will apparently pressure the financial institutions not to let that happen.

(…) If there’s a clear winner in all this it’s the British government. Of course, that could all change if the rescue plans that are taking shape around the world fail. But as of now, Prime Minister Gordon Brown, went, in a matter of days, from lame duck to global leader as the plan he announced last week to inject billions into British banks was quickly taken up by European leaders and now the United States. “He’s the cat who got the cream,” a British historian tells the WP. “It was a gift from heaven for him to have this crisis in his field of expertise.”

For their part, investors are cheering. News that European leaders were planning to prop up banks, coupled with anticipation for a new U.S. program, sent stock prices soaring yesterday. The Dow Jones industrial average ended more than 900 points higher, the largest point gain in history, for an 11 percent gain, the biggest since 1933. As the WSJ highlights in its front page, history has shown that these quick gains can be short-lived, which is why no one was ready to say that yesterday marked a turning point in the ongoing crisis.

Roubini Hood on Nottingham meltdown

picture: a wikimedia 2001 photo of the Nottingham monument, under GNU Free Doc. license (from Robin Hood wiki).

 

SINTESI

E’  già in corso una  recessione U-shaped che durerà 2 anni (2008-10), e non e’ escludibile una depressione L-shaped per i 2010s, secondo i tempestivi commenti del prof. Roubini alla Black Week. DE(E)PRE(CE)SSION!

La sua analisi e’ implacabile, e mette nel sacco tutti i falsi profeti di auto-cure del capitalismo finanziario moribondo.

Cure drastiche, dure e Roubini-Hoodiane: vedere i punti finali del doc allegato. Un appello ai 2 meeting di Washington:

– o fermate il vecchio mondo con politiche Marx-Keynesiane,

– o sarà depressione e fame. Socialismo o depressione.

Come sanno già i nostri lettori, noi precisiamo che le politiche (benche’ sinora balbuzienti e  post-factum) sono GIA’ in un territorio socialista, ma quello sbagliato: lo statalismo di Lorsignori, come il Goldman Sachs  Socialism. Roubini Hood, col suo keynesismo coerente, fornisce un prezioso stimolo ad una piattaforma di lotta di classe internazionale per un Altro Socialismo.

Sulla sciocchezza delle politiche sin qui pensate, basti ricordare quello che osservano anche i commentatori più moderati:

a) gli US insistono a  non nazionalizzare le banche, quindi usano mezzi incoerenti anche coi loro discutibili fini di “Financial Socialism”;

b) la dis-unione europea si sta coprendo di ridicolo.

SUMMARY

DIAGNOSIS

 

The crisis was caused by the largest leveraged asset bubble and credit bubble in the history of humanity where excessive leveraging and bubbles were not limited to housing in the U.S. but also to housing in many other countries and excessive borrowing by financial institutions and some segments of the corporate sector and of the public sector in many and different economies: an housing bubble, a mortgage bubble, an equity bubble, a bond bubble, a credit bubble, a commodity bubble, a private equity bubble, a hedge funds bubble are all now bursting at once in the biggest real sector and financial sector deleveraging since the Great Depression.”

 

PROGNOSIS

 

another rapid round of policy rate cuts of the order of at least 150 basis points on average globally;

a temporary blanket guarantee of all deposits while a triage between insolvent financial institutions that need to be shut down and distressed but solvent institutions that need to be partially nationalized with injections of public capital is made;

a rapid reduction of the debt burden of insolvent households preceded by a temporary freeze on all foreclosures;

massive and unlimited provision of liquidity to solvent financial institutions;

public provision of credit to the solvent parts of the corporate sector to avoid a short-term debt refinancing crisis for solvent but illiquid corporations and small businesses;

a massive direct government fiscal stimulus packages that includes public works, infrastructure spending, unemployment benefits, tax rebates to lower income households and provision of grants to strapped and crunched state and local government;

a rapid resolution of the banking problems via triage, public recapitalization of financial institutions and reduction of the debt burden of distressed households and borrowers;

an agreement between lender and creditor countries running current account surpluses and borrowing, and debtor countries running current account deficits to maintain an orderly financing of deficits and a recycling of the surpluses of creditors to avoid a disorderly adjustment of such imbalances.”

 

We just received this mail from Prof. Roubini, and reproduce here the entire document – for its clarity, objectivity, relevance, and the emergency in which subcriminal rentiers and their Reaganite State have thrown our own lives; we, the prisoners of the collapse of our capitalist cages, much alike the victims of the Twin Towers.

Thanks, Professor Roubini Hood!


Nouriel Roubini: The world is at severe risk of a global systemic financial meltdown and a severe global depression

 

The U.S. and advanced economies’ financial systems are now headed towards a near-term systemic financial meltdown as day after day stock markets are in free fall, money markets have shut down while their spreads are skyrocketing, and credit spreads are surging through the roof. There is now the beginning of a generalized run on the banking system of these economies; a collapse of the shadow banking system, i.e. those non-banks (broker dealers, non-bank mortgage lenders, SIV and conduits, hedge funds, money market funds, private equity firms) that, like banks, borrow short and liquid, are highly leveraged and lend and invest long and illiquid, and are thus at risk of a run on their short-term liabilities; and now a roll-off of the short term liabilities of the corporate sectors that may lead to widespread bankruptcies of solvent but illiquid financial and non-financial firms.

 

On the real economic side, all the advanced economies representing 55% of global GDP (U.S., Eurozone, UK, other smaller European countries, Canada, Japan, Australia, New Zealand, Japan) entered a recession even before the massive financial shocks that started in the late summer made the liquidity and credit crunch even more virulent and will thus cause an even more severe recession than the one that started in the spring. So we have a severe recession, a severe financial crisis and a severe banking crisis in advanced economies.

 

There was no decoupling among advanced economies and there is no decoupling but rather recoupling of the emerging market economies with the severe crisis of the advanced economies. By the third quarter of this year global economic growth will be in negative territory signaling a global recession. The recoupling of emerging markets was initially limited to stock markets that fell even more than those of advanced economies as foreign investors pulled out of these markets; but then it spread to credit markets and money markets and currency markets bringing to the surface the vulnerabilities of many financial systems and corporate sectors that had experienced credit booms and that had borrowed short and in foreign currencies. Countries with large current account deficits and/or large fiscal deficits and with large short-term foreign currency liabilities and borrowings have been the most fragile. But even the better performing ones – like the BRICs club of Brazil, Russia, India and China – are now at risk of a hard landing. Trade and financial and currency and confidence channels are now leading to a massive slowdown of growth in emerging markets with many of them now at risk not only of a recession but also of a severe financial crisis.

 

The crisis was caused by the largest leveraged asset bubble and credit bubble in the history of humanity where excessive leveraging and bubbles were not limited to housing in the U.S. but also to housing in many other countries and excessive borrowing by financial institutions and some segments of the corporate sector and of the public sector in many and different economies: an housing bubble, a mortgage bubble, an equity bubble, a bond bubble, a credit bubble, a commodity bubble, a private equity bubble, a hedge funds bubble are all now bursting at once in the biggest real sector and financial sector deleveraging since the Great Depression.

 

At this point the recession train has left the station; the financial and banking crisis train has left the station. The delusion that the U.S. and advanced economies contraction would be short and shallow – a V-shaped six month recession – has been replaced by the certainty that this will be a long and protracted U-shaped recession that may last at least two years in the U.S. and close to two years in most of the rest of the world. And given the rising risk of a global systemic financial meltdown, the probability that the outcome could become a decade long L-shaped recession – like the one experienced by Japan after the bursting of its real estate and equity bubble – cannot be ruled out.

 

And in a world where there is a glut and excess capacity of goods while aggregate demand is falling, soon enough we will start to worry about deflation, debt deflation, liquidity traps and what monetary policy makers should do to fight deflation when policy rates get dangerously close to zero.

 

At this point the risk of an imminent stock market crash – like the one-day collapse of 20% plus in U.S. stock prices in 1987 – cannot be ruled out as the financial system is breaking down, panic and lack of confidence in any counterparty is sharply rising and the investors have totally lost faith in the ability of policy authorities to control this meltdown.

 

This disconnect between more and more aggressive policy actions and easings, and greater and greater strains in the financial market is scary. When Bear Stearns’ creditors were bailed out to the tune of $30 bn in March, the rally in equity, money and credit markets lasted eight weeks; when in July the U.S. Treasury announced legislation to bail out the mortgage giants Fannie and Freddie, the rally lasted four weeks; when the actual $200 billion rescue of these firms was undertaken and their $6 trillion liabilities taken over by the U.S. government, the rally lasted one day, and by the next day the panic had moved to Lehman’s collapse; when AIG was bailed out to the tune of $85 billion, the market did not even rally for a day and instead fell 5%. Next when the $700 billion U.S. rescue package was passed by the U.S. Senate and House, markets fell another 7% in two days as there was no confidence in this flawed plan and the authorities. Next, as authorities in the U.S. and abroad took even more radical policy actions between October 6th and October 9th (payment of interest on reserves, doubling of the liquidity support of banks, extension of credit to the seized corporate sector, guarantees of bank deposits, plans to recapitalize banks, coordinated monetary policy easing, etc.), the stock markets and the credit markets and the money markets fell further and further and at accelerated rates day after day all week, including another 7% fall in U.S. equities today.

 

When in markets that are clearly way oversold, even the most radical policy actions don’t provide rallies or relief to market participants. You know that you are one step away from a market crash and a systemic financial sector and corporate sector collapse. A vicious circle of deleveraging, asset collapses, margin calls, and cascading falls in asset prices well below falling fundamentals, and panic is now underway.

 

At this point severe damage is done and one cannot rule out a systemic collapse and a global depression. It will take a significant change in leadership of economic policy and very radical, coordinated policy actions among all advanced and emerging market economies to avoid this economic and financial disaster. Urgent and immediate necessary actions that need to be done globally (with some variants across countries depending on the severity of the problem and the overall resources available to the sovereigns) include:

 

another rapid round of policy rate cuts of the order of at least 150 basis points on average globally;

a temporary blanket guarantee of all deposits while a triage between insolvent financial institutions that need to be shut down and distressed but solvent institutions that need to be partially nationalized with injections of public capital is made;

a rapid reduction of the debt burden of insolvent households preceded by a temporary freeze on all foreclosures;

massive and unlimited provision of liquidity to solvent financial institutions;

public provision of credit to the solvent parts of the corporate sector to avoid a short-term debt refinancing crisis for solvent but illiquid corporations and small businesses;

a massive direct government fiscal stimulus packages that includes public works, infrastructure spending, unemployment benefits, tax rebates to lower income households and provision of grants to strapped and crunched state and local government;

a rapid resolution of the banking problems via triage, public recapitalization of financial institutions and reduction of the debt burden of distressed households and borrowers;

an agreement between lender and creditor countries running current account surpluses and borrowing, and debtor countries running current account deficits to maintain an orderly financing of deficits and a recycling of the surpluses of creditors to avoid a disorderly adjustment of such imbalances.

 

At this point anything short of these radical and coordinated actions may lead to a market crash, a global systemic financial meltdown and to a global depression. The time to act is now as all the policy officials of the world are meeting this weekend in Washington at the IMF and World Bank annual meetings.