Sentiment

I’ve spent quite a bit of time over the past week talking with people caught up in the financial crisis, one way or another.  Some of these people are deeply involved in finance, while others are quite far from finance but now see many more connections that they previously realized.

Three thoughts keep reappearing in these conversations:

1) People’s expectations have definitely been shaken up.  For some it was the original Paulson proposal ($700bn to be used at his discretion), coming only days after he and Mr. Bernanke said that the economy was “fundamentally” fine – by which they meant we would dodge a recession.  For others it was President Bush’s first speech on the subject, in which he said that if Congress did not pass the relevant legislation (now called the TARP), there would be very bad consequences.  And for others it was the dramatic sequence of events last weekend, from the meeting of the G7 to the abrupt U-turn on bank recapitalization, first by the Europeans and then by the US.  In any case, pretty much everyone I’ve talked now understands that we are no longer facing “business as usual”.

2) At the same time, there is still great confusion about what is going on, precisely why, and what are the options going forward.  I think this confusion is quite general, and I regard myself as no exception.  In fact, as one of my colleagues at the Peterson Institute for International Economics wisely noted last week, “if someone says they are not confused by the current situation, they are not leveling with you.”  As a result, we start to think about changing things we do, but it is reasonable to hesitate before taking real action.  I was asked earlier this week (for a weekend show produced by Marketplace, which will air on Saturday) what I am doing differently, compared with a month or a year ago.  The answer is nothing much, at least in terms of investment or spending, at least for now.

3) And it’s the “at least for now” part that is worrying.  Obviously the “authorities” (jargon for the people who run the country) in G7 and other industrialized countries woke up to the true situation about 5 or 6 days ago, and they took what is – for them – dramatic action.  I have never seen them move so far so fast, and we have tried to recognize and applaud those moves at every opportunity.  But now we wait, holding our breath, to see the effect on confidence.  I look at the US and European stock markets, as does everyone else, and my mood swings with it.  But I also look at what is happening in credit markets, particularly in emerging markets.  This does not look encouraging.  I think it is time to work seriously on measures that will reduce the costs of and speed the recovery from what appears to be a serious imminent global recession.  This is now our priority; to help, please post your ideas as comments here.

3 thoughts on “Sentiment

  1. You know, I have to tell you, I really enjoy this blog and the insight from everyone who participates. I find it to be refreshing and very informative. I wish there were more blogs like it. Anyway, I felt it was about time I posted, Ive spent most of my time here just lurking and reading, but today for some reason I just felt compelled to say this.

  2. Hi Simon, James –

    Thanks for continuously posting your updates/thoughts. Regarding your concerns about the emerging market economies, I think it would be helpful if you connected the dots a little further as to how they will be impacted and which ones would be most affected. There is the clihe “American sneezes and the world catches a cold” of course but I think it’s hard for readers to feel concern for other economies when the domestic economy is doing so badly.

    The pieces of information are in many of your posts. Regarding whether or not the US can afford the bailout, it is a valuable piece of information that Treasury rates usually decline as investors flee to safety while emerging market sovereign bond rates decline.

    I also think the Hungarian crisis is a great illustration that weaker, debtor emerging economies face. Specifically I mean that as their economies fall into a steep recession they are being forced to balance their budgets/reduce spending. In the case of Hungary, their problem is further exacerbated by the fact that they are unable to control their own monetary policy (which is controlled by the ECB). So, to combat economic shocks, governments typically have monetary policy (interest rates) and fiscal policy (government spending). In the case of Hungary, they will have neither. This is a complete disaster.

    But the questions that I don’t understand are: What impact will this have on their economy and their people? What impact will this have on US economy, if any? Why should ordinary people be concerned about problems in faraway lands? I would suggest that some time be spent on these questions if you really want to increase awareness of the coming emerging market crisis.

    Thanks,
    Eugene

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