As he is often wont to do, Ambrose Evans-Pritchard worries, in dire terms, about the poor prospects for growth and stability, It would be easy to dismiss him as histrionic were it not for the fact that some commentators who have been right so far about the progress of the credit crunch, are also hyperventilating. Witness Nouriel Roubini’s latest offering, “The Coming Systemic Bust of the U.S. Banking System: ‘Dead Stocks Rallying’“. By comparison, Evans-Pritchard is almost cheery.
In truth, this piece isn’t Evans-Pritchard’s best work (he and others have covered parts of this ground before), but some observations were nevertheless interesting and likely to elicit reader reactions. so I’m providing extracts.
From the Telegraph:
The world’s two biggest financial institutions have had a heart attack. The global currency system is breaking down. The policy doctrines that got us into this mess are bankrupt. No world leader seems able to discern the problem, let alone forge a solution.
The International Monetary Fund has abdicated into schizophrenia. It has upgraded its 2008 world forecast from 3.7pc to 4.1pc growth, whilst warning of a “chance of a global recession”. Plainly, the IMF cannot or will not offer any useful insights.
Its “mean-reversion” model misses the entire point of this crisis, which is that central banks have pushed debt to fatal levels by holding interest too low for a generation, and now the chickens have come home to roost. True “mean-reversion” would imply debt deflation on such a scale that would, if abrupt, threaten democracy.
The risk is that these same central banks will commit a fresh error, this time overreacting to the oil spike. The European Central Bank has raised rates, warning of a 1970s wage-price spiral. Fixated on the rear-view mirror, it is not looking through the windscreen.
The eurozone is falling into recession before the US itself. Its level of credit stress is worse, if measured by Euribor or the iTraxx bond indexes. Core inflation has fallen over the last year from 1.9pc to 1.8pc
The US may soon tip into a second leg of this crisis as the fiscal package runs out and Americans lose jobs in earnest. US bank credit has contracted for three months. Real US wages fell at almost 10pc (annualised) over May and June. This is a ferocious squeeze for an economy already in the grip of the property and debt crunch…..
The awful reality is that Washington has its back to the wall. Fed chief Ben Bernanke thought the US could always get out of trouble by monetary stimulus “à l’outrance”, and letting the dollar slide. He has learned that the world is a more complicated place.
Oil has queered the pitch. So has America’s fatal reliance on foreign debt. The Fannie/Freddie rescue, incidentally, has just lifted the US national debt from German ‘AAA’ levels to Italian ‘AA-‘ levels.
China, Russia, petro-powers and other foreign states own $985bn of US agency debt, besides holdings of US Treasuries. Purchases of Fannie/Freddie debt covered a third of the US current account deficit of $700bn over the last year. Alex Patelis from Merrill Lynch says America faces the risk of a “financing crisis” within months. Foreigners have a veto over US policy…
My view is that a dollar crash will be averted as it becomes clearer that contagion has spread worldwide. But we are now at the point of maximum danger. Britain, Japan, and the Antipodes are stalling. Denmark is in recession. Germany contracted in the second quarter. May industrial output fell 6pc in Holland and 5.5pc in Sweden.
The coalitions in Belgium and Austria have just collapsed. Germany’s left-right team is fraying…
This is the healthy part of Europe. Further south, we are not far away from civic protest. BNP Paribas has just issued a hurricane alert for Spain….
China, India, East Europe and emerging Asia have all stolen growth from the future by condoning credit excess. To varying degrees, they are now being forced to pay back their own “inter-temporal overdrafts”.
If we are lucky, America will start to stabilise before Asia goes down. Should our leaders mismanage affairs, almost every part of the global system will go down together. Then we are in trouble.
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A good companion story from Businessweek
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How Bad Will It Get on Wall Street?
As the credit crisis grinds on, the prospects for a quick recovery darken
by David Henry and Matthew Goldstein
It has been a year since the global credit markets first seized up, and four months since the dismantling of Bear Stearns. Yet bad things keep happening, from the failure of IndyMac and the stock routs of Lehman Brothers (LEH) and others to the market’s collective yawn at the Treasury Dept.’s plan to bolster mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE). Once again, the optimists who thought the crisis was over have been proven wrong. “People underestimated how bad things were last summer,” says Frank Partnoy, a former Wall Street derivatives trader turned professor at the University of San Diego Law School.
Did they ever. July’s rat-a-tat-tat of dismal news suggests that the scope of the credit crunch is much broader than most people thought. Traders, investors, bankers, and economists are waking up to the possibility that Wall Street’s recovery from the worst financial disaster since the Great Depression could grind on for years. And they’re realizing that while the debacle was of Wall Street’s making, its aftermath will weigh on banks, other companies, and consumers alike.
One thing is for sure: The new normal won’t be as fun as the recent past. Banks will be smaller and fewer. Capital will be harder to get for some consumers and companies. And more of that capital will be parceled out by lightly regulated hedge funds and private equity firms, for better or worse, as the balance of power on Wall Street shifts.
Why hasn’t the healing begun? The answer lies in the mechanics of leverage, or borrowed money, which banks not only provide to customers but also use themselves.
Full article:
http://www.businessweek.com/magazine/content/08_30/b4093023467572.htm
Regarding the doomsayers — and I’m not saying they’re right — you might find this post with its graph of bank failures during previous rough patches in the economy to be interesting.
Banks will be smaller and fewer.
Actually isn’t ‘larger and fewer’ more likely at this point?
“And more of that capital will be parceled out by lightly regulated hedge funds and private equity firms, for better or worse, as the balance of power on Wall Street shifts.”
I seem to recall Yves sharing a factoid from a year or so ago that indicated less than 20% of capital was provided by banks and other financial institutions within the Fed’s orbit. That is, more than 80% was beyond the reach of either the Fed or other government regulation.
So, if we’re headed now to even more — as per BW article — then, we need to ask, what relevance does the Fed actually retain?
Where is the support for the statement that US debt has been downgraded to AA-, or is this just reckless hyperbole?
Anon of 1:02 PM,
If you read what AEP said, it was that US debt had “lifted” to the level of AA- Italy. It would have been nice if he had said what ratio he was using. I’m assuming debt to GDP. It seemed clear that he was looking at the US’s real debt level, now that the government is moving towards standing behind Fannie and Freddie while trying to pretend that any support will be limited, on a comparative basis.
Bit of an overreaction I think. Things are unstable now, but as I wrote recently, it is always darkest before dawn. Things should recover by year end. We are already seeing signs of that.
@Andy said “Bit of an overreaction I think. Things are unstable now, but as I wrote recently, it is always darkest before dawn. Things should recover by year end. We are already seeing signs of that.”
Many people make predictions Andy, on the net, in magazines/newspapers, on TV. Many, including the pundits on TV, have been wrong to date. So tell us WHY we should put any stock in your prediction above? Are you just shilling or do you have some actual logic to back up your pronouncement with?
“Annd we’lll ALLLLL go DOWWNNN to-GGETHERRRRR . . .” A good old ‘Stupid Nam War’ tune one doesn’t hear on the radio anymore. . . . Hum a few bars, and we’ll soon fake it.