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Walker's World: What comes next?

Globally, there are mounting risks of sovereign defaults, in which countries might not be able to honor their debts. The current spreads they have to pay on their bonds suggest that Pakistan and Argentina are in real trouble, with Ukraine close behind. The political implications of a default by Pakistan, a nuclear power with a Taliban problem, need little elaboration.
by Martin Walker
Chicago (UPI) Oct 15, 2008
To understand where we are in the financial crisis, think of it this way: The ship has stopped sinking and its big leak is sealed, but the vessel is still a long way from port, the storm continues to rage, and up on the bridge the officers are squabbling about who is the captain.

Much can still go wrong. A global slowdown has certainly begun, and the odds are that it may become a global recession. Unemployment, bankruptcies and credit-card debt are rising ominously around the world, not least in China. New car sales are down in the United States and Britain by an unbelievable 30 percent. Big investment projects are being canceled, such as Michelin's new $700 million plant in Mexico. Inflation is coming down fast, but remains too high for comfort, particularly in Britain, Russia and India.

And for the next 100 days, nobody will be in charge. The White House appears to be vacant until a new president is installed in January. When George W. Bush talks, nobody listens; he has become, in George Orwell's memorable dismissal of 1930s prime minister Stanley Baldwin, "not even a stuffed shirt -- just a hole in the air."

As far as Wall Street and world markets are concerned, only Treasury Secretary Hank Paulson and Fed Chairman Ben Bernanke speak for the United States. And their words are enfeebled by their policy flailing over the past three months -- above all for Paulson's disastrous decision to let Lehman Brothers sink into bankruptcy.

This was the nearest we have come to a Creditanstalt moment, named after the Austrian bank that failed on May 11, 1931, the event that most European historians see as the event that forced Britain off the gold standard and launched the Great Depression.

Lehman's bankruptcy meant that the Reserve Primary Fund "broke the buck" in its money-market fund, since its Lehman assets suddenly became worthless. Reserve Primary, America's oldest money fund, only held $785 million of Lehman securities in its $65 billion of assets, but that was enough to make each dollar invested worth only 97 cents. And with that, hundreds of billions were pulled out of the money markets, and inter-bank lending froze for fear of further bankruptcies.

The Group of Seven statement of the weekend and the massed bailout of the British, European and American banks mean there probably will be no such Creditanstalt moment again. And that in turn means that we have a longer breathing space for the real recovery to begin, which requires banks to start acting like banks and lending again.

This will not happen overnight. The banks are still frightened, and so are the stock markets, which is why the Dow fell by almost a full percentage point Tuesday. They are right to be nervous. There are still a lot of crocodiles in the swamp, starting with the unresolved Credit Default Swaps. And the housing slump will not be over until the backlog of unsold houses comes down to six months or less. But by then, a lot of small businesses could be facing bankruptcy, unless the banks can help tide them over the gap between paying their payrolls each month and the 60 days or more the companies have to wait to get paid by their big customers.

Globally, there are mounting risks of sovereign defaults, in which countries might not be able to honor their debts. The current spreads they have to pay on their bonds suggest that Pakistan and Argentina are in real trouble, with Ukraine close behind. The political implications of a default by Pakistan, a nuclear power with a Taliban problem, need little elaboration.

World trade is unlikely to provide much relief. A year ago it cost $2,700 to ship a 40-foot container from Hong Kong to Rotterdam. Today it costs $900, which is to say that the shipping industry is in real trouble -- just as an unprecedented tonnage of new shipping is being built.

The slowdown is happening. Spending on advertising in Britain first turned down in August, fell 17 percent in September, and now in October the industry is looking at the lowest rates for TV ads in 15 years. Nissan has slashed its Spanish workforce by a quarter after what it called "a dramatic decline" in sales. In Holland, the "consumer lifestyle" division of Philips saw sales drop 8 percent with declining sales in India and China, which had been the group's bright spot.

And yet the medium-term outlook remains very promising, with the likelihood of recovery by the end of 2010. All of the main drivers look positive. Start with demographics. The real problem of mass aging does not hit Europe and North America until 2012, and China's labor force does not start to shrink until 2018.

All over the world, the people now entering the workforce are better educated and more adapted to technology than their predecessors. Almost 60 percent of human beings have a cell phone; we are connected, we are consumers, and the new middle class of China and India and the Middle East may be under pressure, but they and their ambitions are not going away.

Although the oil price has dipped below $80 a barrel, let us hope it does not drop too much further, because we do not want to ruin those new investments in alternative energy systems that are likely to be a great driver of growth for the coming decades. Thin-film photovoltaics and new high-efficiency windmills, plug-in cars and smart grids and smart appliances are going to shift us from a carbon-heavy toward a carbon-light economy. Smart irrigation and seed technologies will change agriculture, and more education in nutrition should ensure we change it for the better.

The future is still glittering, provided we get through this rough patch. And that really means one thing: that the governments and taxpayers who now call the shots at the banks make sure they start lending again. But governments and bureaucrats have not often been good at picking winners to invest in; historically they have tended to lend to those who employ the most voters rather than to those who will make best use of the money.

That is the really worrying part of the coming boom in alternative energy. Do you want entrepreneurs and competition and the creative destruction of capitalism deciding which new post-Kyoto technologies are going to prosper? Or do you prefer banker-bureaucrats putting the money where government ministers tell them?

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US offers banks capital infusion
Washington (AFP) Oct 14, 2008
US authorities unveiled plans Tuesday to inject billions of dollars into banks to ease a global credit crisis, but the move appeared to provide little relief for ailing stock markets.







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