Day: October 11, 2008

When’s the Make-Up Test? Tomorrow.

Saturday, October 11, 10pm.

The world’s finance ministers sat for several tests this weekend, and it’s not yet clear how they did.  If we set the bar low enough (i.e., no public criticism of each other), they did OK.  The Italian finance minister did threaten not to sign the communique on Friday afternoon, but this was not particularly meaningful (think about it: if Italy walked out of the G7, how would the markets view Italian risks on Monday morning?)  Everyone else was reasonably polite.

But if we were hoping for specific steps to be announced, then Friday’s list of principles from the G7, and the ensuing vague statements of support from other sets of finance ministers on Saturday have really not taken us very far.

Still, there is time for a make-up test (or two) on Sunday.  The US Treasury is undoubtedly working on some detailed measures to shore up parts or, hopefully, all of the banking system.  Eurozone member countries will be meeting in France on Sunday afternoon, presumably to see how far along they can bring the Germans – particularly with regard to systematic bank recapitalization.  It remains unclear whether anyone in the eurozone will suport the British ideas of blanket bank guarantees at this point.  And it is far from clear if the British will introduce the kind of overall package that in our view could turn the corner, even in a local sense.

The goal, as you know, is to get a clear strategy in place and well communicated by the time the stock market in Tokyo opens at 8pm (US East Coast time) on Sunday.  Let’s see how they do.

The Financial Crisis: What Can You Do?

On Wednesday, one of our readers posted the following comment: “This website offers hope.  Is there a way readers can help the cause?”

I’ve been thinking about that ever since, and I don’t have a good answer. The key decisions are being made by the central bankers and ministers of finance (we call ours the Secretary of the Treasury) of about ten countries, and most of the decisions they make are at their own discretion.

Continue reading “The Financial Crisis: What Can You Do?” →

Paulson Sends Fannie and Freddie to the Rescue

Many readers will see that as an ironic title, but I don’t mean it that way. Federal regulators have directed Fannie Mae and Freddie Mac to buy $40 billion per month in troubled mortgage-backed securities – the same ones targeted by the $700 billion bailout bill. As with the Paulson plan, price is still a question mark – too low and it does no good, too high and it will create losses for Fannie and Freddie – but we see this as a positive step. Fannie and Freddie were effectively nationalized, so we can think of them as part of the Treasury department at this point. One major question about the Paulson plan is whether $700 billion is enough to have a major impact on the market. Using Fannie and Freddie to increase the overall size of the program does increase taxpayers’ potential exposure, but it also increases the chances of having a meaningful effect on confidence in the financial sector. Buying assets this way may be especially important now that it seems much of the original $700 billion will go to direct bank recapitalization – which, we think, is a better use of that money.

While this is a step in the right direction, it still smacks of the incrementalism that has dogged the government’s response to this crisis. We may have reached the point where only a general guarantee of bank obligations will do the trick.

Let us know if you see other tools that Treasury picks up to attack the problem.

Zimbabwe and the Financial Crisis

Or, yet another reason why the financial crisis matters …

In Zimbabwe, site of some of the deepest suffering in the world today, Robert Mugabe reneged on a power-sharing deal with Morgan Tsvangirai and the opposition party. Sure, he might have done it anyway, but it’s a lot easier when the world’s attention is elsewhere and every major power has other things to worry about. We rarely comment on non-economic issues, but in hard times, you can watch for more and more behavior like this.

Please comment if you’ve seen other cases of politicians using the crisis as cover for things they might not try otherwise.

Global Crisis: Latest Analysis and Proposals

Our latest analysis and proposals have been published by the Washington Post (print edition Sunday) in an article by Peter and Simon entitled “The Next World War? It Could Be Financial.” If the world’s leading financial powers cannot agree on a coordinated response, it could be “every nation for itself” – a repeat, on a larger scale, of the emerging markets crisis of 1997-98.  We propose six concrete steps that policy makers – beginning with the G7 and IMF meetings this weekend – can take to limit the risks of such an outcome.

Feel free to comment with criticisms or suggestions.

G7/IMF: What’s Going On

As we’ve discussed previously, this weekend’s meetings of the G7 and the IMF are crucial to halting the financial crisis. This weekend, we’ll be updating you on events as they happen.

Update (Friday evening): The G7 statement is pretty much a general set of principles with which it would be hard to disagree, with very little by way of specifics and really nothing that we hadn’t seen before.  Mr. Paulson’s statement today was similarly vague, although Treasury continues to signal that it will launch some sort of recapitalization program.  I know they want to exude calm and confidence, but the sense of urgency that had building in the last couple of days seems to be slipping away from them.

Update (Saturday morning): Reaction from around the world is mostly disbelief.  Could it really be the case that the G7 does not understand that trade credit is under pressure everywhere, that financing for new projects is drying up, and that Iceland’s experience sends a dangerous signal to investors?  Our piece in the Washington Post Outlook section lays out the very real dangers.  Unless the G7, separately and jointly, act more decisively by the end of Sunday (yes, tomorrow), I’m afraid that next week could be quite difficult.

Update (Sunday morning): Reliable sources indicate that the eurozone member countries, who are due to meet today at the invitation of President Sarkozy, may well be able to announce agreement on some sort of parallel bank recapitalization scheme(s).  It is also hard to imagine that the US will let the day go by without a major announcement.  But it will take a great deal of detail in order to be credible at this point.  And the question of who is and is not given a place on the Great Ark for Bankers will be much on our minds.