2nd Anniversary Issue…
The financial crisis is widely accepted as having started in August 9 2007, with the BNP’s announcement that it was suspending redemptions from three of its funds that were heavily exposed to the US securitisation market (click here for the BNP August 9 2007 press release).
Just three months beforehand, the OECD released its 2007 World Economic Outlook, in which it commented that:
The suggestion that the Federal Government might extend its guarantee to managed funds in return for the funds becoming banks is, as Glenn Dyer has observed for Crikey, sheer bunkum.
On the lender side, this sector of the finance industry largely arose to make money out of lending practices or financial products that were too adventurous for banks themselves.
On the “depositor” side, investors in these companies knew full well that they weren’t making deposits that can be withdrawn at call—as with a bank—but investments.
There’s an excellent article in The Age today on the mad methods of neoclassical economists. The author is Martin Feil, who was once a director of the Industries Assistance Commission–a previous incarnation of what is now called the Productivity Commission:
The article is entitled We can’t live on moonbeams and air.
I plan to tackle similar issues in my next two Debtwatch Reports. November’s (the 28th, which is also the second anniversary issue–I started the report in November 2006) focuses on the data that neoclassical theory directs the attention of economists to, and the data that the theory causes them to ignore. Crucially, the latter includes private debt–and Feil makes a similar set of observations. On the data that the RBA’s neoclassical economists consider important:
The import of Gerard Henderson’s diatribe in today’s SMH is that the media has done a “soft” job on my views, which have only gained notoriety because of the extreme prediction I have made—about the forthcoming economic downturn qualifying as not merely a recession, but a Depression. It seems I’ve only got attention because of my extreme views, while the media has let the side down by doing a “tabloid” job only and not subjecting my views to scrutiny.
Many elements of the recently announced package are justified. When the economy is about to go into a debt-induced recession, government spending both boosts demand, and provides the private sector with cash flow needed to meet its debt repayment commitments.
Equally vital was the guarantee of all bank deposits. A run on the banks would be disastrous, and this guarantee ensures that this will not happen.
This week, financial markets truly succumbed to The Panic. The US Dow Jones and S&P500 Indices lost 21%; Australia’s All Ordinaries fell 16%. “Buy and Hold” gave way to “Get Out At All Costs”.
When we look back with the eyes of history, the ninth day of the tenth month of 2008 will be the Black Thursday on which the world’s biggest ever speculative bubble finally burst.
The Stock Market Crash of 2008
Just two years ago, Central Banks appeared triumphant. Inflation, the scourge of the 1970s and 80s, appeared dead, the financial crisis of the Tech Wreck had been contained, economies worldwide were booming, and stock markets and house prices were spiralling ever upwards.
Then along came the Subprime Crisis, and we received a rude reminder of why Central Banks were created in the first place: to ensure that the world would never again experience a Great Depression.
Just a quick heads up to all blog readers that I’ll be on Channel Ten’s “Meet the Press” on Sunday morning at 8am, and Channel Nine’s “60 Minutes” on Sunday evening at 8.30pm.
You all know the movie plot: the Evil Scientist has laced the town’s water supply with a poison. All will die unless The Antidote is added, and he holds the city to Ransom. All seems lost until the Hero rides to the Rescue with The Antidote. The Hero puts the Evil Scientist behind bars, and all is well (until The Sequel anyway).
Are there any parallels here with Paulson’s currently terminated Wall Street bailout?
In my column in Crikey yesterday (see below) I promised to provide some “back of the envelope” calculations on why the Paulson plan can’t work.
It’s not my usual standard or style of analysis–just a simple text-only flowchart mapping out of the possible consequences of a US$2 trillion bailout, financed by either bond issues or printing money–but a promise is a promise, so here it is. Since the images are quite difficult to read, I’ve attached the Powerpoint file as well.
