With markets in Asia down between 4% and 5%, Europe is following suit. Maybe the $810 billion bailout package that was sold on the premise that it would stop a financial meltdown is not living up to its billing. (Has anyone found those Iraqi WMDs?) But it could simply be that this global financial crisis is taking a bit longer to surface in Europe than it did in the U.S.
How bad is the stock market damage? Japan's Nikkei fell 4.7% to a four-year low and Hong Kong stocks tumbled 5%. European stocks opened lower -- the Dow Jones Stoxx 600 Index lost 3.9%; UK's FTSE 100 and France's CAC-40 Index both lost over 5% of their value, while Germany's DAX declined 4.8%. How can this be happening? Weren't the combination of a $700 billion worth of reverse auctions to buy financial toxic waste and another $110 billion of tax breaks enough to cure what ails the global economy?
In a word, No. Europe has similar problems to those in the U.S. -- financial institutions that borrowed too much money to take on more risk than they could manage. And by creating a single currency that integrated many European economies, the EU is facing its biggest financial challenge since its creation in 1992. So far, it has taken piecemeal steps to deal with problems at particular financial institutions.
Here are some of the EU rescue highlights:
- Germany took two big steps -- its government guaranteed all private savings accounts and it arranged a 50 billion euro bailout for Hypo Real Estate, a German lender.
- UK raised its deposit guarantee to £50,000 from £35,000
- Belgium's Fortis, a large banking and insurance company based in Belgium but active across much of the Continent, also received a 11.2 billion euros bailout.
- Ireland officials and banking chiefs discussed a possible rescue plan for its commercial banks after guaranteeing deposits and other liabilities at six big banks
In my opinion, the global integration of markets is one of five reasons for the financial crisis. This suggests to me that it will take a global response to cure it. Perhaps we can come up with another $20 trillion to bailout all of Wall Street's mistakes -- there does not seem to be a limit on how much money can be created by global central banks.
But will all that money restore trust in our financial system or will it just create more inflation?
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter
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Reader Comments (Page 1 of 1)
10-06-2008 @ 9:44AM
william lindblad said...
Yup. Why I have been crying wolf for so long. Former Blogger Lita E. of Miami will back me up. All of this was discussed a year ago.
It all starts with housing and the amount of money being pumped in. It far exceeded domestic supply and there is now no need to guess as to where it came from.
I have said this before. When Lenin needed hard currency he had only one answer - Armand Hammer. When Chairman Mao needed loot - where did he turn? China had a good supply of U.S. dollars long before Henry K. and Tricky Dick. There is a bank of Mao. Very obscure, changed names and is so far back in time that I don't think that the present Chinese central bank is really aware. Chinese system of investment is much different than ours when it comes to retirement funding. Where are those funds invested? If any large amount are in SIV/MBS or any other piece of toxic paper?
Think there are problems across the pond? Wait.
10-08-2008 @ 2:08AM
charles said...
I think your analysis is spot on. I just wrote a book No Time To Think about speed of mass communications and the impact it has...and talk on the book's blog (www.notimetothinkbook.com) about how fast this banking/credit crisis is happening compated to the fairly slow pace of the banking failures which followed the 1929 stock market crash
10-10-2008 @ 3:13PM
PeeKa said...
Thanx for the post
http://peekablog.net/2008/10/what-caused-the-financial-crisis/