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January 19, 2008
Tim Colebatch in the Age says that gllomy predictions based on the write-offs of $US80 billion of losses by the Wall Street firms---Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehmann Brothers and Bear Stearns-----could:
turn out to be too bleak, and Wall Street quickly recovers its footing, and this crisis turns out to be just another blip in this long global boom. Or it could be that, with stockmarket values in the US and Australia now down by roughly 15% since the crisis began, we might be entering a serious financial meltdown, that ends the global boom and remakes the financial world into a new order.
He says that it is just too early for any of us to know the answers. Well, the always optimistic bulls are in retreat on the economy and on the stock market, as they can see that it will be an ugly year for equities in the US and across the world.
What is looming in the US is a severe recession, and the massive and growing financial losses for financial institutions, households and the corporate sector will have a big effect on the financial markets and on the US and global stock markets. That is why President Bush is calling for a $150 billion tax cut stimulus.
Bruce Petty
Colebatch then asks: Is the world's largest economy headed for recession? If so, how severe would it be? Would it spell the end of the extraordinary boom that has seen global output expand by about 4% a year on average through this decade? And what would it mean for Australia, a major beneficiary of that boom, and — like the US — a nation that has grown heavily dependent on spending the savings of others?
One judgement, that of Glenn Stevens of the RBA, is that while global growth is likely to slow sharply this year, the odds are that the slowdown will be concentrated in the US and Europe, with Asia experiencing only the spillover effects of reduced US demand for its exports. Nouriel Roubini says that it is more than 'slowdown' in the US:
The United States has now effectively entered into a serious and painful recession. The debate is not anymore on whether the economy will experience a soft landing or a hard landing; it is rather on how hard the hard landing recession will be. The factors that make the recession inevitable include the nation's worst-ever housing recession, which is still getting worse; a severe liquidity and credit crunch in financial markets that is getting worse than when it started last summer; high oil and gasoline prices; falling capital spending by the corporate sector; a slackening labor market where few jobs are being created and the unemployment rate is sharply up; and shopped-out, savings-less and debt-burdened American consumers who — thanks to falling home prices — can no longer use their homes as ATM machines to allow them to spend more than their income.
He adds that on top of this recession there are now serious risks of a systemic financial crisis in the US as the financial losses are spreading from subprime to near prime and prime mortgages, consumer debt (credit cards, auto loans, student loans), commercial real estate loans, leveraged loans and postponed/restructured/cancelled LBO and, soon enough, sharply rising default rates on corporate bonds that will lead to a second round of large losses in credit default swaps. The total of all of these financial losses could be above $1 trillion thus triggering a massive credit crunch and a systemic financial sector crisis.
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Gary,
Peter Hartcher asks a good question in the SMH:
And he has a go at answering the question.