A Market Vote of No Confidence

September 17, 2008

The AIG bailout was meant to avoid financial Armageddon.  Market jitters instead escalated.  For the second time in three sessions, the Dow Jones Industrial Average fell by more than 4.0%.  There had previously been no days with a drop that steep subsequent to 2002, when there were two instances.  2001 had three such moves, two in the immediate aftermath of the 9/11 attacks.  In 2000 when the dot-com bubble burst, a decline of over 4.0% occurred on just one day, and the whole decade of the 1990’s, including the Asian debt crisis, had just three daily drops of as much as 4%.  Money markets were as frozen today as they’ve been since the sub-prime mortgage problem began thirteen months ago.  In the past 24 hours, the dollar has fallen 1.8% against the Swiss franc, 1.7% relative to sterling, 1.3% against the euro, and 1.2% against the yen.  Oil prices are 6.0% higher, and gold — the ultimate head-for-the-hills refuge of last resort — has leaped 11.5%.  If officials are unable to get the money market functioning again and to slow this rapid implosion of wealth, it will not be long before central banks reconsider their opposition to cutting interest rates.  It is in times like these that monetary policy changes are not limited to scheduled meetings.

Today’s financial press is full of editorials declaring the exposure of the perils of over-enthusiastic deregulation and poor enforcement of remaining regulations.  The New York Times blames the breakdown on a “markets-are-good-government-is-bad ideology,” which remains powerful.  I suspect that the markets’ emphatic vote of no confidence today reflects more than a loss of faith in hands-off government, the banking system, and the present government’s ability to crisis-manage its way out of the present situation. It even may reflect more than a reassessment of the length of this crisis from a year or two to a decade or generation.  Panic stems too from doubts that new political leadership coming to power in 2009 will have the wherewithal to steer the economy for the better.



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