The global financial system is experiencing the equivalent of a mega-earthquake, and its impact will soon be felt by untold millions across the world.
By PINCHAS LANDAU
This is not - cannot be - a normal column. It is being written on a day, during a week, in a month, that are all the furthest removed from normality in the global financial system, that anyone has seen since...well, probably since the global financial system imploded in 1931, leading to you-know-what.
It is especially difficult to convey the enormity of what is happening to people who are not plugged in to the markets and not abreast of the trends that have developed over recent months. A simple analogy would be to geologists watching 'the Big One' - the mega-earthquake we are told is inevitable and that, when it occurs, will lay waste to Southern California - develop on their measuring instruments and computer screens. Its impact will soon be felt not just by the unfortunate people in its immediate vicinity, but by untold millions of others across the country and across the world. Everyone else lives their life in a permanent state of denial, so that even when it happens, they carry on as normal. The geologists, however, can only warn, watch and wait - and when it finally happens, track it in real time.
It's probably not a good analogy, because the impact of man-made disasters is very different to those of natural ones. But it helps to convey a few ideas, notably the sense of helplessness. Enormous forces have been unleashed and are now spiralling out of control. Thus the major development of this past week has been the triple attempt by the Federal Reserve Bank - last Friday and on Monday on its own, and on Tuesday in conjunction with other central banks - to restore functionality and, most critically, confidence, to the credit markets. By Thursday it seemed that these efforts had failed, and this failure in itself made the situation far worse than it had been a week earlier.
The evidence of failure was available in almost every market: record lows for the dollar against most currencies are the most visible aspect, but at least the currency markets remained orderly. In many parts of the bond and money markets, forced selling and panic selling found no buyers available, resulting in 'air pockets' in which prices dropped precipitously, with no regard to the inherent 'value' of the security on sale or viability of the entity that issued it.
Over the last few months, the Fed has tried to stem the panic first by using orthodox tools (interest rate cuts) and now unorthodox ones (creating special borrowing channels to fund banks and brokers that are strapped for cash). But because the problem is not - or at least not only, or mainly - one of liquidity, but rather of the underlying solvency of many institutions and entities which have borrowed too much and/or whose own debtors cannot repay their loans, the Fed's responses have been in vain. Indeed, they seem to have backfired, serving only to highlight the growing desperation of the authorities and hence the severity of the situation.
landaup@netvision.net.il