A financial crisis unmatched since the Great Depression, say analysts
Tuesday March 18 2008
A century after John Pierpont Morgan rescued the New York stockmarket from a 50% sell off in share prices, his blue-blooded Wall Street bank was yesterday once again at the heart of attempts to contain the deepening global financial crisis.
In an echo of the "bankers' panic" of 1907, JP Morgan responded to what is being billed as a meltdown of historic proportions by agreeing to buy its stricken rival, Bear Stearns.
The length and severity of the crisis that broke over global markets last summer has had analysts delving into their history books. George Soros, who was largely responsible for Black Wednesday, the last bout of serious financial turmoil to afflict the UK, believes there has been nothing to match the events of the past nine months since the Great Depression.
Alan Greenspan, the former chairman of the Fed and the man blamed by many for setting off the boom-bust in the US housing market, agrees with the man who broke the Bank of England. Writing in the Financial Times yesterday, Greenspan said: "The current financial crisis in the US is likely to be judged as the most wrenching since the end of the second world war."
The first 25 years after the war were relatively trouble free. Britain had devalued the pound in 1949 and 1967, but the first real systemic threat to the financial system arrived in 1973 with the secondary banking crisis that affected the "fringe banks" that had provided money to speculators during the property boom. When the crash came, the Bank of England launched a "lifeboat" to prevent the crisis spreading.
Similar action by the Federal Reserve in 1998 contained the fallout from the collapse of Long Term Capital Management, a hedge fund that lost money in the aftermath of Russia's decision to default on its debts. By comparison with recent events, LTCM now seems to be a minor market wobble.
Students of the markets say the only recent parallel with the current turmoil is Japan in the 1990s, but other than that they have had to study the 1930s, when 9,000 banks failed, 1907 when JP Morgan told Wall Street enough was enough after a 50% drop in shares, and even to the series of economic and financial upheavals during the final quarter of the 19th century.
Ben Bernanke, chairman of the Fed, spent years as an academic studying the Great Depression and his actions over the past six months have been interpreted as a sign that he is determined the lessons from the past should be understood.
Julian Jessop at Capital Economics said: "In our view the Fed is taking the right steps to prevent the recession from developing into a full blown depression that resembles the debt/deflation spiral that Japan found itself trapped in for more than a decade in the 1990s, or even the economic and financial disasters in the final quarter of the 19th century and the 1930s in the US."
Jessop added that all three episodes were characterised by the central bank's failure to prevent the money supply from contracting. "What we have seen from day one in this crisis is that the Fed recognises it needs to take whatever steps are necessary to prevent the money supply from falling and to inject as much liquidity as required to prevent a Japanese-style debt/deflation spiral from developing."
Japan's problems in the 1990s were caused by the pricking of a real estate and stock market bubble in the late 1980s that resulted in banks seeking to liquidate massive losses. The Japanese government was criticised for failing to take action quickly enough to prevent the economy suffering a series of recessions. Unlike today, however, the crisis had no global reach; the rest of the world boomed as Japan languished.
Tuesday March 18 2008
A century after John Pierpont Morgan rescued the New York stockmarket from a 50% sell off in share prices, his blue-blooded Wall Street bank was yesterday once again at the heart of attempts to contain the deepening global financial crisis.
In an echo of the "bankers' panic" of 1907, JP Morgan responded to what is being billed as a meltdown of historic proportions by agreeing to buy its stricken rival, Bear Stearns.
The length and severity of the crisis that broke over global markets last summer has had analysts delving into their history books. George Soros, who was largely responsible for Black Wednesday, the last bout of serious financial turmoil to afflict the UK, believes there has been nothing to match the events of the past nine months since the Great Depression.
Alan Greenspan, the former chairman of the Fed and the man blamed by many for setting off the boom-bust in the US housing market, agrees with the man who broke the Bank of England. Writing in the Financial Times yesterday, Greenspan said: "The current financial crisis in the US is likely to be judged as the most wrenching since the end of the second world war."
The first 25 years after the war were relatively trouble free. Britain had devalued the pound in 1949 and 1967, but the first real systemic threat to the financial system arrived in 1973 with the secondary banking crisis that affected the "fringe banks" that had provided money to speculators during the property boom. When the crash came, the Bank of England launched a "lifeboat" to prevent the crisis spreading.
Similar action by the Federal Reserve in 1998 contained the fallout from the collapse of Long Term Capital Management, a hedge fund that lost money in the aftermath of Russia's decision to default on its debts. By comparison with recent events, LTCM now seems to be a minor market wobble.
Students of the markets say the only recent parallel with the current turmoil is Japan in the 1990s, but other than that they have had to study the 1930s, when 9,000 banks failed, 1907 when JP Morgan told Wall Street enough was enough after a 50% drop in shares, and even to the series of economic and financial upheavals during the final quarter of the 19th century.
Ben Bernanke, chairman of the Fed, spent years as an academic studying the Great Depression and his actions over the past six months have been interpreted as a sign that he is determined the lessons from the past should be understood.
Julian Jessop at Capital Economics said: "In our view the Fed is taking the right steps to prevent the recession from developing into a full blown depression that resembles the debt/deflation spiral that Japan found itself trapped in for more than a decade in the 1990s, or even the economic and financial disasters in the final quarter of the 19th century and the 1930s in the US."
Jessop added that all three episodes were characterised by the central bank's failure to prevent the money supply from contracting. "What we have seen from day one in this crisis is that the Fed recognises it needs to take whatever steps are necessary to prevent the money supply from falling and to inject as much liquidity as required to prevent a Japanese-style debt/deflation spiral from developing."
Japan's problems in the 1990s were caused by the pricking of a real estate and stock market bubble in the late 1980s that resulted in banks seeking to liquidate massive losses. The Japanese government was criticised for failing to take action quickly enough to prevent the economy suffering a series of recessions. Unlike today, however, the crisis had no global reach; the rest of the world boomed as Japan languished.
No comments:
Post a Comment