Commentary

Panic is the New Black

It’s time to panic again. The first headline I saw this morning screamed “Bloody Friday,” it was in giant, bold blue letters on Marketwatch’s home page. The NY Times ran “Global Shares Plummet on Gloomy Data.” Blood and gloom? That’s no way to start a Friday. I thought those depressing headlines were meant for Mondays – maybe even Tuesdays. Panic is definitely the new black. It seems that the coordinated global financial bailout designed to halt the massive credit crisis (that turned into a paralyzing credit crunch) and save stock markets from further meltdowns cannot stop the world economy from slipping into the dark valley of recession (which sits right next to the canyon of global depression).

Marketwatch noted that Japan’s Nikkei 225 sank by close to 10 percent, led by a profit warning from Sony, the consumer gadget giant. The South Korean government added to the gloom when it registering the slowest economic growth in four years.

A few hours later, European traders were hit with severe indigestion caused by a profit miss by Daimler, the large German auto manufacturer. (Shares in Daimler plummeted by over 11 percent.) Then more dismal news came from Britain’s number crunchers. Economic activity in the land of tea and crumpets declined by a larger than expected 0.5 percent.

James Knightly, and economist at ING Financial Markets in London told the NY Times:

“This is going to be a long-drawn-out downturn of about 5 quarters of negative growth and there will be very few major economies that will escape recession,” said James Knightley, an economist at ING Financial Markets in London. “With asset values falling, real incomes down and corporate profits declining we can see a real drop in investments and the government is in no position to help.”

The mess that started with subprime mortgages in the U.S. exposed a bloated global financial system that was resting precariously on a pile of borrowed sand. Asset bubbles were forming in real estate, the shares of financial companies and commodities – just to name the few major ones. This was due to a flood of cheap money, nonexistent lending standards and drive for profit that cast proper risk assessment into the garbage bin.

Now the credit bubble has morphed into a full-blown credit crunch. The global financial bailout added a small breath of confidence to the international banking system – but it did so at great cost to public finances. Now economies are contracting as consumers rein in spending and business profits evaporate. The problem now is that governments have already used most of their ammunition to save the actors who engineered this historic financial crisis. The sectors of the economy that provide products and service people actually need will be left to struggle alone.

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© 2008 Splendid Marbles.