The Crisis Continues

Morris Segall      2009 economy, crisis, economy

The current panic in worldwide equity markets beginning overseas and today hitting the U.S. reflects a new round of concern due to continuing bank losses starting with Asian and U.K. banks and extending to further losses being reported by U.S. banks. A year ago we wrote about the worsening credit crises in banking here and abroad, “Is Something Burning”, January 22, 2008. At that time, the equity markets were in severe decline and we warned about breaching cycle lows. A year later we are witnessing a repeat as the Dow falls again below 8000 and the S & P 500 Index approaches the lows of 2002-03. Despite all the efforts by governments and central banks to stabilize the banking system we face a new round of asset writedowns. We are struck by the difference in this credit downturn and the savings and loan debacle of 20 years ago. In our opinion this adverse credit cycle is being extended by the preponderance of paper backing and leveraging the asset bubbles in real estate and consumer lending. While hard assets will reach an defineable intrinsic value in a reasonable period of time after the asset pricing bubble bursts, paper asset valuations are more ephemeral. They are subject to the vagaries of investor psychology and risk appetites. The new round of bank losses have more to do with the re-pricing of market value of paper assets than a new decline in hard assets and this is more difficult to stabilize. Government and central bank “bailout” programs are fighting to stablilize assets that have no hard value and increasingly illiquid. The cost of saving the world’s banking system is becoming staggering and may result in the system essentially becoming nationalized at least for a period of time. We are entering uncharted territory in the post war economic period with governments and central banks becoming the buyers and market makers for privately held debt.