Here’s One For The History Books

Don’t panic, Kevin’s got it under control – our banks are as safe as houses he reckons (pardon the pun).

There’s no escaping the fact that this week has been a week from hell and will probably go down in the history books as exactly that.

Australian shares had their worst day since the crash of 1987, losing more than 8%, as mounting recession fears sent equity markets tumbling around the world.

The benchmark S&P/ASX-200 stock index recorded its biggest one-day loss in its 16-year history, dragging the value of the main share index below $1 trillion. The broader All Ordinaries recorded its worst day since the October 1987 crash.

– ASX-200 loses 8.3%
– Stocks plummet 16% for the week, worst since 1987
– Value of ASX-200 falls below $1 trillion
– European markets plunge on opening

It gets me back to people like John K. Galbraith, who, as far back as 1998 issued a stern warning that was all but ignored:

“This is the warning of the present time. We had a slight indication of that in August and September [ Long Term Capital Management crisis in 1998] . It’s a warning that everybody should have in the back of her or his head. The effect of the speculative collapse is something which economists have not yet, even to this day, fully appreciated, because it is not the collapse that causes the trouble, but the further effect on investment, and also the further effect on consumer spending.”

A very large part of our present consumer spending is based on debt creation, credit cards, or the impression given by stock market gains or real estate gains.

If and when the end comes, the economic effect will be the drying up, the slump, in consumer expenditure and, of course, the economic effects of that.”

I guess now we are likely to learn what he meant by ‘if and when’

Malcolm Maiden expressed his astonishment today:

“The continuing sharemarket crisis is like nothing I have reported on, and I have witnessed some doozies: the long, painful market slump in the seventies that followed the 1973 OPEC oil price shock, the October 1987 market crash, the Long Term Capital Management crisis in 1998, the 2001 dot.com meltdown and the World-com-Enron crisis that followed, and 9-11, to name some of the highlights, or lowlights.”

This is one is different because it is more than a year old, and there is still no clear picture about how it is going to be fixed.

The slump induced by the OPEC oil shock was also a slow burn, but Fed boss Paul Volcker eventually sterilised inflation by controlling money supply. The market slumps in 1987 and 1998 were much shorter in duration, and were solved essentially by liquidity injections.

The dot.com crisis was self-inflicted, and allowed to run its course, and the World-Com-Enron crises were also allowed to work their way through the markets ahead of accounting reform.

Already in this crisis we have seen liquidity injection of unprecedented magnitude, a raft of bank rescues, unprecedented co-ordinated central bank rate cuts this week, and the nationalisation of failed operators in the US, Britain and Europe, including Fannie Mae and Freddie Mac, the groups which between them finance half of America’s $US12 trillion mortgage market. None of it has so far unblocked what are, in essence, crucial global financing arteries

I’ve got to admit, as someone whose been expecting the worst for some time now, even I’m a little stunned at the sheer ferocity and magnitude this crisis.

It makes me wonder how politicians and business leaders can claim that they never saw this coming. I guess Galbraith’s observations of the 1929 Crash , in part, answers that question”… “Long-run salvation by men of business has never been highly regarded if it means disturbance of orderly life and convenience in the present. So inaction will be advocated in the present even though it means deep trouble in the future. Here, at least equally with communism, lies the threat to capitalism. It is what causes men who know that things are going quite wrong to say that things are fundamentally sound.”