When the White House brought out its $700 billion rescue plan two weeks ago, its sheer size was meant to soothe the global financial system, restoring trust and confidence. Three days after the plan was approved, it looks like a pebble tossed into a churning sea.
The crisis that began as a made-in-America subprime lending problem and radiated across the world is now circling back home, where it pummeled stock and credit markets on Monday.
While the Bush administration’s bailout package offers help to foreign banks, it seems to have done little to reassure investors, particularly in Europe, where banks are failing and countries are racing to stave off panicky withdrawals after first playing down the depth of the crisis.
Far from being the cure for the world’s ills, economists said, the rescue plan might end up being a stopgap for the United States alone. With Europe showing few signs of developing a coordinated response to the crisis, there is very little on the horizon to calm rattled investors.
As Mayor Bloomberg said in London today, banks and financial institutuions are international with regulatory and financial entanglement not limited to just one country. At the moment all that is on the table is country by country solutions. He argues pursuasively that this will not work and that world wide co-operative solutions are required. Shovelling money at banks in an ad hoc manner will not necessarily get them lending to each other again.
In the meantime there are a lot of rabbits caught in the headlights.
A major US problem has been leverage that in investment banks expanded to 30-35:1. Just read elsewhere that in Europe there is leverage up to 50:1. Deleveraging will be even more severe with higher leverage.
It’s interesting that energy costs haven’t been talked about. The recent steep upward trend certainly was inflationary, and at the street level meant a reallocation of household spending. How did that tip the scales? Maybe it was the proverbial straw.