Glenn Wilson

At this point the recession train has left the station; the financial and banking crisis train has left the station. The delusion that the US and advanced economies contraction would be short and shallow – a V-shaped six month recession – has been replaced by the certainty that this will be a long and protracted U-shaped recession that may last at least two years in the US and close to two years in most of the rest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. ...

At this point the risk of an imminent stock market crash – like the one-day collapse of 20% plus in US 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.

Thursday midnite update: A few hours after I had written this note the market crash that I warned about is underway in Asia: the Nikkei index in Japan is down 11% and all other Asian markets are sharply down. This reinforces the urgency of credible and rapid policy actions by the G7 financial officials who are meeting in a few hours in Washington and the need to also involve in such global policy coordination the systemically important emergent market economies.
The world is at severe risk of a global systemic financial meltdown and a severe global depression

Yesterday, IBM announced favorable earnings:

IBM posted a stronger-than-expected preliminary quarterly profit and stood by its full-year outlook, defying worries that the financial crisis would hurt demand for its computer products and services.
IBM Preliminary Profit Beats Expectations

But:

Shares of IBM fell $1.55, or 1.7 percent, to close at $89 on Thursday.
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The stock market is the only source of "liquidity" (cash) for some big players. Unwinding and de-leveraging is leading to forced selling of stocks at distressed prices. Which lowers prices and the value of remaining leveraged stocks further. Which leads to more forced selling and reduced prices. So people pull money out of hedge funds and mutual funds forcing those to sell equities in a down market. Investors panic. Where does it end? How low can we go?

What should be done? The United States and Europe should just say “Yes, prime minister.” The British plan isn’t perfect, but there’s widespread agreement among economists that it offers by far the best available template for a broader rescue effort.

And the time to act is now. You may think that things can’t get any worse — but they can, and if nothing is done in the next few days, they will.
Moment of Truth

In this financial catastrophe, last week's unthinkable idea quickly becomes this week's imperative. The Bush administration is wisely contemplating following the lead of British Prime Minister Gordon Brown in having government take ownership shares in many banks to get them more cash and allow them to lend again.
Hoover vs. Roosevelt?

Labels: economy