Good Monday Morning!
World equity markets dived on Monday as investors dumped both stocks and the dollar on fears more US banks could be vulnerable to the credit crisis that sank Bear Stearns.
An emergency cut by the US Federal Reserve to its discount rate and a weekend deal for JPMorgan Chase to buy investment bank Bear Stearns at a fire-sale price added to a sense of crisis sweeping through global markets.
The volatility spilled over into commodities on Monday, with oil soaring to fresh highs above 111 dollars a barrel and gold jumping to new heights beyond 1,032 dollars per ounce as investors sought a safehaven from the storm.
In Asia, Tokyo stocks plunged by more than 4.0 percent at one point before recovering some ground to close 3.7 percent lower, ending below the key 12,000 points level for the first time since August 2005.
Hong Kong shed 5.2 percent, Shanghai declined 3.6 percent, Seoul gave up 1.6 percent and Sydney was off 2.3 percent.
In European morning trade, Frankfurt was the worst affected of the main markets, plunging 3.06 percent, London lost 2.11 percent and Paris sank 2.61 percent. Madrid was off 2.14 percent and Zurich fell 2.83 percent.
You Cursed Brat! Look what you’ve done!
What a world, what a world…
I’m melting… I’m melting.
Paul Krugman lays out the fundamental question in all of this:
So here’s the question we really should be asking: When the feds do bail out the financial system, what will they do to ensure that they aren’t also bailing out the people who got us into this mess?
The people who got us into this mess are not, as Krugman describes, stewards of sagacity:
Between 2002 and 2007, false beliefs in the private sector — the belief that home prices only go up, that financial innovation had made risk go away, that a triple-A rating really meant that an investment was safe — led to an epidemic of bad lending. Meanwhile, false beliefs in the political arena — the belief of Alan Greenspan and his friends in the Bush administration that the market is always right and regulation always a bad thing — led Washington to ignore the warning signs.
By the way, Mr. Greenspan is still at it: accepting no blame, he continues to insist that “market flexibility and open competition” are the “most reliable safeguards against cumulative economic failure.”
Nor are they paragons of productivity
Nobody expects an investment bank to be a charitable institution, but Bear has a particularly nasty reputation. As Gretchen Morgenson of The New York Times reminds us, Bear “has often operated in the gray areas of Wall Street and with an aggressive, brass-knuckles approach.”
Bear was a major promoter of the most questionable subprime lenders. It lured customers into two of its own hedge funds that were among the first to go bust in the current crisis. And it’s a bad financial citizen: the last time the Fed tried to contain a financial crisis, after the collapse of Long-Term Capital Management in 1998, Bear refused to participate in the rescue operation.
Bear, in other words, deserved to be allowed to fail — both on the merits and to teach Wall Street not to expect someone else to clean up its messes.
Oh and its not simply that the Bush administration believed that regulation is a bad thing. As Eliot Spitzer wrote in an op-ed published, ironically, on February 15th:
Several years ago, state attorneys general and others involved in consumer protection began to notice a marked increase in a range of predatory lending practices by mortgage lenders. Some were misrepresenting the terms of loans, making loans without regard to consumers’ ability to repay, making loans with deceptive “teaser” rates that later ballooned astronomically, packing loans with undisclosed charges and fees, or even paying illegal kickbacks. These and other practices, we noticed, were having a devastating effect on home buyers. In addition, the widespread nature of these practices, if left unchecked, threatened our financial markets.
Even though predatory lending was becoming a national problem, the Bush administration looked the other way and did nothing to protect American homeowners. In fact, the government chose instead to align itself with the banks that were victimizing consumers…
Not only did the Bush administration do nothing to protect consumers, it embarked on an aggressive and unprecedented campaign to prevent states from protecting their residents from the very problems to which the federal government was turning a blind eye.
There are some, including Greg Palast, who believe:
[Last] week, Bernanke’s Fed, for the first time in its history, loaned a selected coterie of banks one-fifth of a trillion dollars to guarantee these banks’ mortgage-backed junk bonds. The deluge of public loot was an eye-popping windfall to the very banking predators who have brought two million families to the brink of foreclosure.
Up until Wednesday, there was one single, lonely politician who stood in the way of this creepy little assignation at the bankers’ bordello: Eliot Spitzer.
Who are they kidding? Spitzer’s lynching and the bankers’ enriching are intimately tied.
What a world when the Wicked Witch of the West has all the money and/or influence and if she melts, we melt with her. Meanwhile, Joshua Micah Marshall cites reader SW, who takes the presidential candidates to task for ignoring all of this:
…I know why Clinton and McCain are not talking about it: too many of their biggest supporters had too much to do with what happened, and benefited from the deregulation of the past twenty years for which both (and their allies) had a great deal of responsibility. (Remember that Hillary stood by while her colleague Chick Schumer killed the bill to tax hedge fund managers, who earn scores of millions every year, at income, rather than capital gains, rates.) What about Obama? Is he not up to the task of educating people about what the repeal of the Glass-Steagall Act did to the markets many Americans poured their retirement and college savings into? Does he know that the Federal Reserve is about to bail out bankers, investors, and outright thieves who helped drive down the dollar, and brought the credit markets to a near standstill? Does he understand the problem? I wouldn’t know.