Put your money under the futon

Henry Hilton

First it was the R word, now it is the B word. The onset of the U.S. recession has been quickly followed by the day of the bailouts.

As the prospects for the global economy take a nosedive, the measures available to policymakers have had to change dramatically. However much the hard-pressed public may moan, it’s patently clear that the authorities are now eating their words. All their earlier talk of leaving it to the markets to solve the growing financial mess has been effectively junked. Those in negative equity with 125% mortgages may have to go to the wall but national and, indeed, global priorities require a more robust response.

The problems facing the entire economic system are seen to be too important to be left to stockbrokers, risk assessors and insurance guys. The sound of major financial collapses can no longer be ignored and the strenuous promises of yesteryear that the markets should handle their own sub-prime loan problems have been quietly forgotten.

Endless lectures by central bankers on the subject of “moral hazard” and the dangers of causing precedents through permitting government intervention to bail out crumbling banks are now history. The fact that Bear Stearns has just been sold for peanuts thanks to the efforts of the Federal Reserve and JPMorgan Chase to salvage something from the wreckage underlines the new reality. Rumors that other institutions are in trouble have been circulating for months as the liquidity crunch has left banks everywhere reluctant to lend to each other despite the endless cutting of rates.

Yet, it’s not only an all-American mess. There have been plenty of nasty surprises elsewhere and it won’t do for European politicians to claim that their versions of capitalism are necessarily any more efficient or transparent. The Brits have had a major shock to the system by the nationalization of Northern Rock and the guaranteeing of its future by almost limitless amounts of taxpayers’ cash. Prime Minister Gordon Brown is also discovering that the electorate may be tempted to take revenge on his government for mismanagement as property prices continue to fall and state borrowing can only increase in a bid to shore up the slowing down of what had been a decade and more of decent economic growth.

The French, too, have problems in pointing the finger at les Anglo-Saxons as additional details gradually emerge over the Societe Generale imbroglio. It may well be that so-called “rogue trader” Jerome Kerveil had his accomplices who could yet be heading to the slammer and that the supervisory arrangements were far from adequate.

With markets and key institutions looking vulnerable elsewhere, Japan has now added its own novel twist to the global plot. By an unfortunate coincidence, the sensitive issue of who — if anyone — should replace Toshihiko Fukui as head of the Bank of Japan is playing itself out at exactly the time when clarity and a show of confidence is the obvious requirement.

This highly political crisis concerning the next boss at the BOJ has been an accident waiting to happen for months and the confusion can only add both to Japan’s vulnerability and the misfortunes of Prime Minister Yasuo Fukuda and his Liberal Democratic Party. The accelerations in the value of the yen — or if you prefer the continuing weaknesses of the dollar — must be damaging to Japan’s major exporters, much as similar currency shifts against the greenback are causing alarm in Beijing and throughout Euroland.

This global “economic angst” is clearly far from over. Observers in the United States are warning that their massive housing problems may take 12 to 18 months to play themselves out, and in the meantime, the contagion can only grow in Japan and elsewhere. Be prepared for further bailouts and keep your powder dry by going liquid. Put your money in the bank or, if you don’t trust the guys who got us into this mess in the first place, under the futon.

3 Comments

mikeylikesit at 12:01 AM JST - 25th March

who is Henry Hilton? It would be nice to have something a little more than a name with commentaries and editorials. I mean, is this person a JT staffer? Outside commentator? What qualifications? Most news services include a one sentence bio at the end of opinion pieces.
Altria at 09:56 AM JST - 25th March

Time to stock up on gold, canned food and ammunition.
ka_chan at 01:54 AM JST - 26th March

Guess the party is over and that's left is the hangover but the hangover will be a doozy. After all, the last time we partied this hardy, was the twenties. But don't worry, the other shoe hasn't dropped yet.