SF, I'm really sorry to hear that. You sound like a guy with a lot of positive energy, so I'm sure that you will bounce back from this setback.

MNb, I think you are looking in the wrong place. Trade flows are no longer all that illuminating in this context, since flows on the capital account tend to dominate, not neccesarily because of their size, although this is often the case, but more because of their volatility relative to much stodgier trade flows. And the biggest linkage of all is the linkages in risk aversion, which don't even depend on any cross-border flows at all, but manifest themselves in high correlations between the returns on risk assets across countires and sectors.

The Eurozone should be relatively well insulated due to the absence of major macroeconomic imbalances, apart from the PIGS (Portugal, Italy, Greece, Spain) and Ireland. However, they do face certain headwinds: the aforementioned linkages and correlations, a strong currency, minimal fiscal and monetary stimulus, and highly leveraged banks...and swine flu*

*The PIGS have never found an alternative to their historical adiction to inflation and competitive devaluations. Their entry into the Eurozone has removed this option, while causing large misallocations of resources due to inappropriately low interest rates.

Smyslov_Fan wrote on 09/28/08 at 22:45:34:


I tried to make clear the slight setback in Europe has nothing to do with the American crisis. This setback also predates the housing crisis.  My own stocks also began to fall (a big Dutch bank administers them) before. You cannot maintain that this American crisis is the cause of this setback. (Yeah, a socialist living in a developing country has to make some compromises).

Smyslov_Fan wrote on 09/28/08 at 22:45:34:


This is new to me. You are not the only one not having complete information. I would like to see this confirmed.

Smyslov_Fan wrote on 09/28/08 at 22:45:34:


There seems to be a language problem indeed. I agreed with you on this point on Fox News. At the other hand I don't understand exactly what you mean with "you also buy into this superficial conclusion." What conclusion exactly?

Anyhow, I dispute that the whole crisis plus the question what to do only should be approached from a technical-economical point of view overstepping political issues. To intervene (and how) or not is a political choice with different consequences for different groups of the American population. Before approving I first exactly want to know all the hows and why's. Seeing the results of the Congress' voting I am not the only one. Antillian has a very good point here on bad communication.
Especially historians should know that way too often an appeal on General Interest is used to hide the pursuit of selfinterest. I have no indication yet that the Bush government is an exception, but welcome any other information.

For Antillian: Dutch trade with the EU (import/export): 61/75%; with the rest of Europe (then not member yet): 11%/8%; with North America (including Canada): 8%/4%. The data are pretty old (1994), but haven't really changed since then. They are probably significantly higher for the UK, but not for the other members of the EU. The importance of the international market is often overrated. The EU should on the long term worry more about energy supply from Russia and the Middle East than about this American crisis.
The big difference with 1929 is of course that the economical structure of Europe is much sounder now. 1929 was just 10 years after a devastating World War; one of the biggest economies of Europe was put in a hold. These are just two of the differences.
The fall of Fortis is unfortunate, but has more to do with the management overstretching than with the American crisis. There is no reason to fear a downward spiral in Europe as far as I can see. The intervention of the Benelux-countries is quite elegant and energetic. Still there are a few questions left here as well.

MNb wrote on 09/26/08 at 21:58:30:


Surely, the reverse if actually true? International markets are far more interlinked now than there were in 1929. Some banks in Europe are already having trouble getting credit. Further, I can't imagine how a deep downturn in the world's largest consumer marker could not have severe ramifications for the rest of the world.

I'm also an economist by training, and work in the financial markets, hence anything I say should be discounted accordingly:

I think the TARP is a reasonable attempt to buy time to allow various inexorable forces to work their way through the system without locking up the markets. Of course its less than desirable to be commiting such huge sums on the fly, but we're in a triage situation here, and life-and -death decisions have to be made quickly and often arbitrarily.

Bottom line is that there is too much debt in the system, and not enough income to service it. Essentially, TARP takes some of this debt and parks it in a taxpayer fund, hence diffusing the debt. It doesn't deal with the debt overhang, but reduces the concentration of said debt in systematically important institutions.

The TARP addresses both liquidity and solvency concerns. Wrt the latter, firstly they will 'overpay' for the assets in the sense that they will undercut the market price of risk, but 'we the people' are in a better position to price actuarially than balance sheet constrained institutions, so perhaps this is not such a disaster. More importantly, the intervention stabilises balance sheets. The big problem with these dodgy assets is not that they're worth 50c on the dollar, but that they may be worth anything from 10c to 90c on the dollar. It's this uncertainty that is casuing bank runs, not the point valuation itself.

I've been in the bearish camp for years, and my natural inclination is Mellonesque: 'liquidate labour, liquidate stocks, liquidate farmers'. But I have to say: the things I've seen in the last week or two have even scared a grumpy old bear like me. The market has suffered a heart attack. You don't see it in the equity market; equity is a call option on the value of the firm, and that's broadly retained it's value*. But the debt markets have become completely degenerate. Look at CP markets, look at the TED spread, look at the interbank funding freeze. If this continues, this will have grave, system-wide implications, as like it or not, the free flow of credit is the life-blood of the economy.

Two rebalancings have to occur: 1) the financial system has to shrink, and (2) the US consumer has to retrench and repair their balance sheets. I expected this process to play out over a period of years, and for there to be a lot of pain all round. This is the best case scenario. However, if the process plays out not over a period of years but a period of weeks, which would seem to be what would happen without vigorous govt intervention, the pain will be absolutely excruciating and very wide-ranging. 

So one can discuss the details of the TARP etc, but no-one should doubt the necessity of intervention on a titanic scale. This isn't going to solve any problems, but will hopefully buy us some time to engage in an orderly workout.

* that's the bull case. Bears would argue that equities are in la-la land.

Too many "isms" and "ists."  The bailout is not about saving a couple of Wall Street banks, but about the American economy as a whole.  Rightly or wrongly, policymakers are worried about the potential for a downward spiral.  The basic fear is that failing institutions will be forced to sell assets at discounted prices in order to raise cash.  This would cause the prices of these assets to decline  and further depress their carrying value on the books of *other* financial institutions.  This makes it harder for these institutions to obtain funds from counterparties and investors, leaving them unable to extend credit to the real economy -- including Main Street -- and more vulnerable to fail.  

Most people don't realize how interconnected this all is or how heavily the system relies on banks lending to each other.  But I still say "rightly or wrongly" because whether any or all of this downward spiral would actually happen is, of course, a matter of debate.  There are some economists who have pointed to the strength of the regional banking systems to argue that Main Street would be insulated from the woes on Wall Street.  Others have speculated that there is a large enough pool of foreign capital -- esp in Asia -- that will enter the US economy to keep the credit markets flowing.  But as the bailout is now expected to be implemented, I suppose this will now become a debate for monday-morning quarterbacks and historians.  

Capitalism distributes wealth very unequally but the only thing socialism/communism distributes equally is poverty...

A few points for S_F:

1. Have you never gone off-topic? Then why be dismayed if others do?
2. The way one looks at this American financial crisis cannot be separated from ones political views. I find it amusing that two guys with completely different political backgrounds like Drkodos and me recommend the same recipe: do nothing.
3. You call this a global issue. I have explained why I think that Europe hardly will be affected; you haven't countered my arguments. It is true that the European economy shows a slight setback; but this was already the case before the American crisis bursted. The first reaction of Japanese banks (they try to buy as many cheap American financial institutions as possible) indicates that overthere there are not real worries either.
4. While it's right that the only institution being able to help the American financial instutions is the US government you haven't made clear why it should.
5. In Bush' proposals I see nothing that confirms your instinct. Can you explain how exactly the corporate leaders are held responsible? Have they to write "I will never be greedy again" a thousand times?
6. As a few people have pointed out the major long-term effect will be that the American taxpayer will have to suffer the next five years or so. Illwill tempts me to accuse the neocons of criminal intent as the next president very well might be a Democrat. The neocons might rejoice the prospect of criticizing the next Democrat government of bleeding the American people out. As long as its not clear to me that the American taxpayers will suffer more from the bankruptcies than from governmental intervention I maintain my analysis that Bush' proposals are meant to protect the interests of the upper class. I will withdraw this statement the moment someone explains me how the responsible corporate leaders are going to pay and how the interests of the ordinary people are protected.
7. Bush also listened to his aides (Rumsfeld and Cheney) when he decided to invade Irak. I don't get why this should be a point in his favour now.
8. Fox News makes the stereotypal and rather stupid mistake of equalizing governmental intervention with socialism. According to this logic Mussolini's Italy was a socialist country as well.