The mass of red covering the trading screens of stock markets from Asia to Europe this morning confirms that attempts to wish away the credit crisis by marking up share prices in the last few weeks has come to grief. Adding to the uncertainty was the total failure of the International Monetary Fund’s annual meeting in Washington to offer anything but platitudes. The IMF is increasingly seen as an irrelevance, with events far beyond its reach and control.
In today’s Financial Times, Chris Giles comments: “Many of the fund’s most powerful members were angry that the IMF was so feeble just at the time it should be centre stage. The global credit squeeze was, after all, truly transnational, having its roots in the US sub-prime mortgage sector, but its consequences spreading worldwide. The fear, privately expressed by central bankers, is that the credit squeeze is the first of many disorderly episodes that will result from the huge global trade imbalances that have emerged over the past decade. These have kept interest rates artificially low worldwide and encouraged reckless lending.”
At the epicentre of the global economic and financial storm is the United States, where Wall Street fell a dramatic 367 points last Friday amid growing fears that the sub-prime housing market mortgage crisis was far from over and that the economy was heading for recession. Selling on Wall Street started when the building equipment firm Caterpillar cut its profit forecast, blaming the state of the economy, and lower-than-expected earnings from Wachovia, the fourth largest bank in the US. This is against the background of a dollar that is in freefall - the consequence of massive trade and government deficits - and the refusal of countries like China to revalue their currencies.
The IMF was supposed to discuss the dollar’s crisis but failed to do so. It was planning to make proposals about what countries like China and Saudi Arabia could do with their massive dollar holdings and came up with with nothing. David Dodge, the outgoing Canadian central bank governor, was disappointed. “This is precisely the time we need the fund’s ability and skills to deal with global imbalances,” said and warned: “The longer the imbalances go on, the greater risk that we will end with a rather messy denouement.”
This is a banker’s way of talking about a crash and global slump. All the signs point in that direction. The globalisation process was fuelled by credit which has now turned into totals of debt that are impossible to calculate. This debt itself has been sold and resold by banks using fantastically complex derivative packages that hardly anyone understands. In Britain, large parts of economic growth have become utterly dependent on house price inflation, with people remortgaging to buy goods like cars. Others have borrowed up to 10 or more times their income to buy homes at prices way beyond their financial means. People are in some cases reportedly using credit cards to pay their monthly mortgages. A collapse in house prices in Britain is entirely likely as the credit crunch continues to unravel. Meanwhile, at the IMF the US Treasury Secretary Henry Paulson declared: "Fortunately, the global economy's underlying strengths should limit the negative effects that the turmoil might have on global activity.” So that’s alright then!
AWTW communications editor