The Great Credit Unwind Of 2008 (Mike Whitney)

"The current crisis is not only the bust that follows the housing boom, it’s basically the end of a 60-year period of continuing credit expansion based on the dollar as the reserve currency. Now the rest of the world is increasingly unwilling to accumulate dollars."

– George Soros, World Economic Forum in Davos, Switzerland.

 

Global market turmoil continued into a second week as stock markets in Asia and Europe took another tumble on Monday on growing fears of a recession in the United States. China’s benchmark index plummeted 7.2% to its lowest point in six months, while Japan’s Nikkei index slipped another 4.3%. Equities markets across Asia recorded similar results and, by midmorning in Europe, all three major indexes — the UK FTSE “Footsie”, France’s CAC 40, and the German DAX — were all recording heavy losses. It’s now clear that Fed Chairman Bernanke’s ’surprise’ announcement of a 75 basis points cut to the Fed Funds rate last Tuesday has neither stabilized the markets nor restored confidence among jittery investors.

At the time of this writing, the storm clouds are swiftly moving towards Wall Street where markets are likely to be roiled on the very day that President Bush will give his farewell State of the Union speech.

In Monday’s Financial Times, Harvard economics professor, Lawrence Summers, made an impassioned plea for further government action in addition to the Fed’s rate cuts and Bush’s $150 billion “stimulus plan.” Summers believes that steps must be taken immediately to mitigate the damage from the sharp downturn in housing and persistent troubles in the credit markets. He suggests a “global coordination of policy,” which is another way of admitting that the Fed has lost control of the system and cannot solve the problem by itself.

Summers is right, although it’s easy to wonder why he remained silent while the markets were soaring and the investment banks were reaping trillions of dollars in profits on a “structured investment” swindle which has left the global financial system teetering on the brink of catastrophe. Now that the US economy is sliding towards recession, Summers is calling for “transparency”. How convenient.

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