While you were sleeping, Asian markets followed the U.S. down. Japan's Nikkei lost 9.6% as a real estate investment trust and an insurance company -- Yamoto Life -- filed for bankruptcy. Markets in Hong Kong, Korea, Australia, Singapore and Thailand fell between 6.5% and 8%. In Europe, markets opened down 10%. Fear is rampant with the volatility index (VIX), a measure of fear, closing at an all time high of 63.92.
By chance, there is a meeting of G7 finance ministers in Washington this weekend, and there will be a push to do something by Sunday night. I think it would be a triumph if everyone in the meeting could agree on a common definition of the key problem: the freezing up of short-term lending markets (the TED Spread, a measure of short-term lending risk, hit a record 4.23%), the lack of capital in the global banking system, or investors fleeing the stock market.
Why would this help? Part of the reason that global efforts so far have failed is that there does not appear to be a common understanding of what is wrong and what it will take to fix it. This has been reflected in uncoordinated tactics -- flooding the markets with liquidity, cutting interest rates, guaranteeing money market funds, injecting capital into banks -- in the UK only -- and our DOA $700 billion reverse auction plan.
Agreeing on a common definition of the key problems would go a long way to crafting a coordinated global strategy that would work. For instance, if the problem is short-term credit markets, global financial leaders might find a way to guarantee repayment of short-term loans, such as Commercial Paper (CP).
If they agree that what's needed is a more solid banking system, they could try the cull and capitalize approach. In arguing for this approach, the New York Times notes that when FDR declared a bank holiday in 1933, he sent bank examiners to decide which banks to close. When the healthy ones reopened, people had confidence that they were truly safe.
Of course, this approach worked because FDR had spent years holding fireside chats in which he gained the trust of Americans. So they were confident that he was acting in the best interests of the country. If our current president holds a press conference and utters hollow words with a deer-in-the-headlights look on his face, the effect is not the same.
At its core, the loss of confidence reflected in the global market plunge is a leadership problem -- and that means that political leaders around the world must stop hiding behind their finance chiefs and take ownership of the crisis.
At least in the U.S., we will have to wait until November for that.
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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