Le Temps
Wednesday 23 January 2008
On the screens, the January 21, 2008, [market] crash recalls those of other points in history. But it has its own unique quality. It's not a punctual panic following an act of terror, as in September 2001. Nor the reflection of excessive valuations following the popping of a speculative bubble, as in March 2000. This time, the brutal fall in stock prices is occurring while corporate balance sheets - outside of the financial and real estate sectors - are healthy.
This crash constitutes an adjustment to reality, since investors have become aware that financial markets are infected by subpar securities. European shares have lost 23 percent of their value since last June. Investors are indiscriminately getting rid of whatever they can sell, starting with high-performing companies, the only ones from which they can obtain value.
An investor crisis of confidence has moved in with respect to paper supported by rotten American mortgages and other risky credits, all so many bogus conduits of value. The growing aversion to risk seems to have mutated into instinctive disgust towards the very idea of securities. The securities world demonstrated its limits when it allowed itself to lose control of the precise measure of risk.
Central bankers' remedies have only aggravated the crisis of confidence: with massive injections of liquidity into the monetary system and reductions in interest rates, the money supply has experienced its greatest annual growth of all time. Suddenly, the very notion of paper money, a sort of rubber check, has lost its credibility. As a corollary to that disaffection, investors are switching en masse to physical assets such as gold, land and the real estate and infrastructure of countries experiencing strong growth.
Investors' return to the market, once it is finished "cleaning itself up," will absolutely have to be accompanied by a basic rethinking of the adequacy between the value of a physical asset and the financial security it backs.
Condemned to Success
By Jean-Claude Peclet
Le Temps
Wednesday 23 January 2008
US Treasury Secretary Henry Paulson will not be going to the World Economic Forum that opens this Wednesday in Davos. He's working on a stimulus plan to avoid an American recession.
Presented last Friday by George Bush, that plan had the opposite effect from the one anticipated, precipitating the stock markets' biggest fall in seven years. That confirms an old rule of financial psychology: when uncertainty fogs minds, the quality of the messenger takes precedence over the message. A weakened president, slow to react, was obviously not the right person to restore confidence.
We'll see in coming weeks whether Ben Bernanke has more success. Yesterday, the president of the American Federal Reserve announced a massive reduction in key interest rates - three-quarters of a point all at once, something not seen since 1984. Given the present level of inflation in the United States, banks are borrowing money there for free at the moment.
The spectacular measure returned European exchanges to the green and limited the damage on Wall Street. But by taking it, the Fed also played its trump card and put its own credibility in play. If the deflationary spiral resumes because of bad American statistics or new domino effects in the credit crisis - a plausible scenario - the American monetary authorities' room for maneuver will be virtually reduced to zero.
Ben Bernanke is condemned to succeed, and with him, the other central banks. Their cooperation is all the more logical, given that - as former Credit Suisse boss Oswald Grabel recently noted - the present crisis is only partially American. The crisis belongs to a global financial system that has built sand castles from the dubious mortgages issued in the United States. Wednesday, the Bank of China revealed a risk of the loss of $2 billion after having long denied being involved.
A global problem requires a global solution.
-------
No comments:
Post a Comment