Fear and emotion are the rule every day in the global financial markets. We have seen shock and awe financial bailout plans, the overnight consolidation of many troubled financial services giants, and a liquidity crisis that impacts markets across the globe.
In Germany, the collapse of the rescue plan for Hypo Real Estate may mean a disaster in that country similar to the recent bankruptcy of Lehman Brothers in the United States. Also, consider that in the Netherlands, Ireland, and Greece, bank rescue has become the order of the day while Iceland is in the middle of an economic meltdown.
Recently, South Korea urged banks to sell foreign assets to raise dollars and promised to use its currency reserves to shield lenders from the financial crisis engulfing the United States and Europe. Meanwhile, National Australia Bank continues to lose value due to worldwide concern about the resilience of the financial system and China’s economy will not escape an economic slowdown if its exports are hit by this widening world recession
The United Kingdom has just announced the details of a £50bn rescue package for its banking system. The bailout includes a proposal to use taxpayers’ money to invest in banks. This plan was two weeks behind the bailout plan in the United States and financial stocks in the United Kingdom crashed due to the plans delay.
The truth is that bad mortgage loans have been bundled and sold to banks in every country in the world. So, nobody is immune from this mortgage crisis and economic contraction in this age of globalization. It is a global reality that international leaders do not seem to understand.
The problem is that this is the first deep recession in an increasingly global economy. So, the actions of each country need global coordination. Indeed, there is a real need to attack this economic crisis with international unity and cooperation. A unilateral approach to the crisis will not be effective and will make this downturn last much longer.
Already, the dubious result of handling a global economic recession without coordination can be seen in Germany and Ireland. Ireland announced that it would insure bank savings while Germany (Angela Merkel) decided it would not. The next day, with money pouring out of Germany toward safer harbors, the country then decides to reverse itself and insure bank deposits.
Of course, the European Union has criticized these unilateral moves by Ireland, Germany, Denmark and others to guarantee bank deposits. The real question is what were these countries suppose to do? Should they wait for a run on their banks and slide into the economic abyss? The European Union should have acted more quickly and with better leadership in this global economy. There also should have been much better coordination from Europe with the actions of the Treasury in the United States as well.
In America, the Dow Jones Industrial Average is down about 40% from its all-time high. Since the financial markets have now lost more value than the average bear market of 28%, it is safe to assume that the country is in the middle of a deep recession or maybe something even worse.
However, as global markets continue in a free fall, and well known financial pundits tell the average investor to get out of the financial market since it may fall by another twenty percent, it is important to understand that the country is not going to go bankrupt.
The problem is that in the near term it may not feel that way on Main Street in America. The unemployment rate could increase to around eight percent, and many good people will lose their jobs. Inflation will eventually escalate and many small businesses will close for good. Meanwhile, a lack of spending on non-discretionary items this holiday season will make for many long, bleak days in the retail industry.
However, it should be understood that economic recession cycles are a normal part of living in a world of inexact balances between supply and demand. This may well be a deep recession, but remember the words of John Rockefeller after the stock market crash of 1929. He said; “These are days when many are discouraged. In the 93 years of my life, depressions have come and gone. Prosperity has always returned and will again.”
It took awhile but he was right then and his words will prove to be correct about this current financial crisis once again. It’s a deep recession in an increasingly global economy and international economic cooperation is the best formula to bring it to an end.