NY Times writer Joe Nocera has consistently had some of the more interesting analysis of the financial crisis these last few weeks. His article today is very much a must read. For policymakers in Washington, it contains this rather ominous warning:
Sad to say, the crisis does not appear to be winding down. One reason the market acted so skittishly Monday is that it simply can't wait six weeks or so before the government is ready to start buying the first $250 billion worth of toxic securities from troubled firms. In normal times, this would seem blazingly fast. In these compressed times, it seems terribly slow. The markets want to know - right now - whether the bailout plan will work.
Another reason is that certain ominous dates are fast approaching. One is Oct. 23, when the auction will take place to settle the credit-default swaps relating to the Lehman bankruptcy. I saw one estimate that the amount of money firms will owe each other could be as much as $400 billion. Why? Firms that insured against the risk of a Lehman default are going to owe billions to other firms - but they'll want to collect from the firms with whom they laid off the risk. And so on down the line. The upshot is that many firms are not going to have the money to pay off the insurance claims they owe, and they are likely to be ruined.
A third problem, though, is that confidence keeps eroding. The latest wrinkle is that many hedge fund investors, fearing big losses, no longer have confidence in their hedge fund managers. Thus, hedge fund managers are preparing for huge withdrawals at the end of the year, and so they are selling billions of dollars worth of stock preparing to pay redemptions. That is one reason the stock market is under pressure.
"It becomes a self-fulfilling prophecy," said one hedge fund manager. Firms fearing redemptions sell off stocks, which hurts their performance. Which undermines their investors' confidence. Which means there are likely to be even more redemptions. Around and around it goes.
I think Senators Reid and Pelosi are going to have to come back to Washington and help the President and his Administration manage what is becoming a truly global crisis. NDN was very clear in our writing these last few weeks that we did not believe the big Bush Bailout would stop the crisis. It hasn't. It is already now way past time to move to plan B.
And what is perhaps most disturbing at this point is the inability of the American President to pull together global leaders to fashion a coordinated and informed global response to the crisis. Bush's low standing here and abroad is itself now contributing to the spread of the crisis, and is doing so much to weaken America.
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