This is not – cannot be – a normal column. It is being written on a day, during a week, in a month, that are all the furthest removed from normality in the global financial system, that anyone has seen since…well, probably since the global financial system imploded in 1931, leading to you-know-what.
It is especially difficult to convey the enormity of what is happening to people who are not plugged in to the markets and not abreast of the trends that have developed over recent months. A simple analogy would be to geologists watching ‘the Big One’ – the mega-earthquake we are told is inevitable and that, when it occurs, will lay waste to Southern California – develop on their measuring instruments and computer screens. Its impact will soon be felt not just by the unfortunate people in its immediate vicinity, but by untold millions of others across the country and across the world. Everyone else lives their life in a permanent state of denial, so that even when it happens, they carry on as normal. The geologists, however, can only warn, watch and wait — and when it finally happens, track it in real time.It’s probably not a good analogy, because the impact of man-made disasters is very different to those of natural ones. But it helps to convey a few ideas, notably the sense of helplessness. Enormous forces have been unleashed and are now spiralling out of control. Thus the major development of this past week has been the triple attempt by the Federal Reserve Bank, last Friday and on Monday on its own, and on Tuesday in conjunction with other central banks – to restore functionality and, most critically, confidence, to the credit markets. By Thursday it seemed that these efforts had failed, and this failure of itself made the situation far worse than it been a week earlier.
The evidence of failure was available in almost every market: record lows for the dollar against most currencies are the most visible aspect, but at least the currency markets remained orderly. In many parts of the bond and money markets, forced selling and panic selling found no buyers available, resulting in ‘air pockets’ in which prices dropped precipitously, with no regard to the inherent ‘value’ of the security on sale or viability of the entity that issued it.
Over the last few months, the Fed has tried to stem the panic first by using orthodox tools (interest rate cuts) and now unorthodox ones (creating special borrowing channels to fund banks and brokers that are strapped for cash). But because the problem is not — or at least not only, or mainly — one of liquidity, but rather of the underlying solvency of many institutions and entities which have borrowed too much and/or whose own debtors cannot repay their loans, the Fed’s responses have been in vain. Indeed, they seem to have backfired, serving only to highlight the growing desperation of the authorities and hence the severity of the situation.
The extent to which the crisis has intensified was highlighted by Martin Wolf, the FT’s senior columnist, who noted that “The mainstream has now caught up” – meaning caught up with the pessimistic prognostications of the doom-and-gloom brigade. That is largely true, in that mainstream commentators are now agreed that there is a recession, that it is likely to be more severe than any since 1974 and, more importantly, that the losses from the global debt crisis will be far higher than they were prepared to believe not long ago. Indeed, Wolf himself is conducting a weird joust with arch-bear Nouriel Roubini as to the likely final bill for the crisis, with the numbers now ranging between one and three TRILLION dollars.
Roubini et al used to be considered off the wall, but the mainstream is now where they were not long ago – forcing him to adopt even more extreme positions. But the fact that the consensus is now saying and writing things that were unutterable in polite society only three months ago – such as, just for instance, that the US government will be obliged to ‘save’, i.e. nationalise, the banking system at taxpayer expense, which would at a stroke raise the ratio of US national debt to GDP by some 20 percentage points — is the true measure of the speed and extent of the financial catastrophe engulfing the world. For once, the terminology employed by kids today – ‘awesome’, ‘unbelievable’ and ‘amazing’ – is genuinely applicable. It may even be an understatement.