Good morning, allegedly. While I was at a monastery all weekend, IMF managing director Dominique Strauss-Kahn was shaking things up in Kuala Lumpur by telling people that advanced economies are in a, yes, depression. Excerpt:
"The worst cannot be ruled out," Strauss-Kahn said in Kuala Lumpur, where he was attending a gathering of central bankers from Southeast Asia. "There's a lot of downside risk."Ten days ago, the IMF cut its world-growth estimate for this year to 0.5 percent, the weakest pace since World War II. Stimulus packages alone won't succeed in dragging the global economy out of recession unless confidence is restored in the banking system, Strauss-Kahn said today.
"All this will work if, and only if, the different countries are likely to do what they have to do in terms of restructuring the banking sector," he said. "And today it's not done."
It's going to be an interesting week. I was reading Friday's Times at the monastery, when I caught a monk glancing at the headlines. I offered him a section of the paper, and he said thanks, but he is not permitted to read newspapers. What a wise abbot he has...
Add to Del.icio.us
Add to Technorati
Add to Digg
Add to Newsvine
Add to Facebook
Add to StumbleUpon
Subscribe
I'm not sure that our banking system as of a year or two ago should have our "confidence." The word "restored" suggests that what we need to do is go backwards in time, whereas I'm suspecting that that is the last thing we need.
Perhaps if we create a new banking system worthy of trust, that system will receive our confidence.
everytime I see a story about this "stimulus" package, I have to resist the urge to call for smelling salts. This dumb thing will not solve anything, but will leave massive amounts of debt to be paid off later. I can't figure out is Obama actually believes it will help or if he thinks it's politically necessary to be seen "doing something". I just don't see how this whole thing is a fixable problem. Even if we do manage to go back to some form of what we had before, we'll just be putting off a bigger, badder day of recogning for later.
Friend - "restoring confidence" in the banking system doesn't mean turning back the clock. It simply means ensuring that, in the future, both those who seek to lend to, invest in, or borrow from the banking system can be reasonably confident that the banks in question are in fact solvent, & that the info on their balance sheet accurately represents said solvency.
This is entirely compatible with shuttering & liquidating hopelessly insolvent banks (large and small). See, e.g., Sweden's early '90s crisis, or the RTC's handling of the S&L crisis. Indeed, such "controlled demolition" is often a sine qua non for restoring confidence, since failure to do so can lead lenders/investors to express their lack of confidence by withhold funds from _all_ banks (solvent and insolvent)...thereby shuttering bank lending & triggering runs even on healthy institutions.
We have little or no visibility into bank mortgage portfolios, but every month real estate values fall and more loans are underwater.
Banks are not marking down their mortgages to tell us how bad it is now, let alone how bad it could be if values fall more. Then there are second mortgages and home equity loans. Then there are car loans. Then there are credit cards. As more people lose their jobs, all of these loans are at risk. We only find out when WaMu, Wachovia, Countrywide, Downey are taken over, and 10 big banks get bailout funds. Not to mention Fannie Mae and Freddie Mac.
Then there are credit default swaps and other derivatives. JP Morgan Chase had 75 times their capital in derivatives.
15 big banks had more than their capital in derivatives.
Nobody knows what those are worth. It's like gambling on who will get bailed out and who won't.
It's very hard to restore confidence since nobody can guarantee real estate prices, or incomes. As foreclosures and bankruptcies increase, the statistical models say that this has never happened since 1939. And nobody knows how bad it will get.
"Is there a formal definition of 'depression'?"
Not really. There are some attempts. One is a decline in real GDP greater than 10% and another is a recession lasting more than three years. Going by that Japan could be in a Depression, but we're not or not yet. If I understand it two more quarters like the 4th quarter of 2008 and we will have declined 11.9% in real GDP so have entered a Depression by the one definition. To reach the "three year" definition I believe would take until 2010.
So the answer is either
1: No one knows what a depression is
2: We are not in a depression
3: We may be entering a depression, but we're not there yet
Note that "Yes, it's a depression" is not an answer I listed as plausible. It's just gloominess from a perpetual gloomy gus.
Post a Comment
By submitting these comments, I agree to the beliefnet.com terms of service, rules of conduct and privacy policy (the "agreements"). I understand and agree that any content I post is licensed to beliefnet.com and may be used by beliefnet.com in accordance with the agreements.