What we are seeing today is not as bad as the worst days of the crisis, but it ins’t much consolation for investors who had gotten back in the pool on the belief that the system had been patched up reasonably well and the economy was on the mend.
All the authorities did was patch up a predatory banking system with duct tape and bailing wire and hoped enough cheerleading would restore confidence. And after the banks got their bailout money, the mood seemed to be “we spent so much on them, we don’t have anything left for anyone else.” The alarming rise in government deficits, which was primarily the result of the crisis (falls in tax revenues and increases in automatic stabliizers like unemployment payments) and not discretionary spending, has led to a deadly combination of austerian policies (which is making debt to GDP ratios worse, see Ireland, Latvia, and Greece for proof), dysfunctional government responses, faltering recoveries, and deliberate shredding of social contracts. It’s like watching a house burn and then having people throw Molotov cocktails at it.
The pattern of serious financial crises is the market meltdown hits first, then the real economy plunge takes place later. Our officialdom had been patting itself on the back that “better” policy responses had stopped the sort of damage that the US suffered in the Great Depression and Japan experienced in its post bubble hangover. But the GDP revisions of last week included some stunning reductions to 2008 figures which called the comparatively cheery story we’ve been told into question. And the powers that be have refused to take the important step of writing bad debt down. Zombification was treated as the solution to our woes, when the result of past financial crises shows that taking the losses early which does result in a worse initial GDP hit, leads to much better outcomes. And here, the casualty has been not only growth but to a fair degree our political system, as the corporocrats have used the crisis to solidify their position.
The numbers as of this hour (I’m on a poor person delayed Bloomberg, but the amplitude ain’t gonna change much with something a tad fresher):
S&P down 3.63% (yowza), Dow down 3.31% (updated as of close, double yowza, Dow down 512, or 4.3%, S&P down 4.8%)
Oil down 5% to just under $87 a barrel
The yen has weakened markedly as a result of the Japanese intervention but is still in nosebleed territory at 79. The euro is at 1.41
The immediate trigger for the wipeout was yet another bad data release, this of consumer confidence, on top of general wobblies (yields on Italian and Spanish government debt have gone into “beyond redemption” terrain, and Italy is so large that any program would require measures well beyond what the Eurozone has in place). The narrative from Bloomberg:
A global rout in equities drove the Standard & Poor’s 500 Index to its worst nine-day slump since March 2009, while two-year Treasury yields plunged to a record low amid concern the economy is weakening. The yen pared losses, recovering from the biggest drop versus the dollar since 2008 that was triggered as Japan sold its own currency.
The S&P 500 fell 3.2 percent to 1,219.56 at 2:03 p.m. in New York, an 11 percent drop from its April 29 peak and weakest level in eight months. The MSCI All-Country World Index slid 3.5 percent as Brazil’s stocks slumped to a two-year low and Switzerland’s entered a bear market. Two-year yields declined as low as 0.26 percent…..
Concern the global economy may relapse into a recession has driven investors out of stocks and into the relative safety of Treasuries, the Swiss franc and yen and is spurring speculation the Federal Reserve will start another stimulus program. Japan’s moves to sell the yen, which this week neared a post-World War II record, and expand an asset-purchase fund follows efforts by the Swiss central bank to curb the franc’s gains. The European Central Bank resumed bond purchases and offered banks more cash to stem the spread of the debt crisis.