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Three Scenarios for a Credit Crisis

Alfonso Desiderio - card Laura Channels

The current financial crisis is also a geopolitical crisis and particularly the American system overall. Limes suggests three alternative hypotheses: Chimera (new agreement, U.S. and China); Chimerica EuRussia + (new Bretton Woods global G8 and emerging countries); havoc with the tightening of the imbalances and conflicts.

http://temi.repubblica.it/limes/tre-scenari-per-una-crisi/

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The Empire

Alfonso Desiderio - card Laura Channels

American hegemony based on the influx of external resources - goods, capital, energy, especially from Asia - is in crisis. The credit of others is explained by the recognition of the primacy of the United States as guarantors of the international system, but America can no longer afford to live with a huge foreign debt and other significant deficits. The American system is a worldwide system, and then the crisis is a crisis of all. It opened a global conflict in which those who may try to download the weakest or adverse consequences to take advantage of the misfortunes of others

http://temi.repubblica.it/limes/limpero-a-credito/

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Phenomenology

The crash financial and economic crises have been frequent occurrences in the economic history of the West. Federico Rampini traces a long history that the stock market crash in Amsterdam in 1637 and finally to the current subprime crisis, through what remains the most economically critical moment in our century: the Black Tuesday of 1929.

Since then, despite the advent of the Keynesian welfare state policies, financial crises have followed every time powered by the same mechanisms of speculation.

According Rampini, differences among the major financial meltdown of the past and the present ones are faster and in greater social impact due to the involvement of investment famiglie.Insolvenze, bubbles, financial crises. Tremble the foundations of the sanctuaries of capitalism. Speculation and mistrust between the West is uncertain about what should I do to avoid disaster .[...]

Just as natural disasters, financial crashes are commonplace, then horribly rates. They are part of the physiological functioning of capitalism. Indeed, their origins date back to the proto-capitalism, as one of the most famous crash in history was the great panic of the stock exchange in Amsterdam in February 1637, when after two years of frenzied speculation collapsed suddenly the prices of futures on the bulbs of tulips. History repeats itself with striking similarities.

What changes in the latest crash is the order of magnitude of wealth destruction, so the audience of the victims. It thickens the interconnection between all sectors of the economy, and between nations far away. Growing popular savings invested in financial instruments, and the privatized retirement entrusts his capital on the stock exchanges, banks, insurance companies. Potential social impact of the crash, then you deeper and deeper, but for the same reason it is more robust arsenal of economic policies to cushion the consequences.

Finally, thanks to technology, the collapse of today have more and more rapidly. The crises of the past developed their tremors over many months, can now learn extraordinary reversals in a few hours. An announcement in New York is reflected in thousandths of a second index of Shanghai and Tokyo, London and Moscow.

Since today the epicenter of a dramatic financial crisis in America, it must be remembered that the very existence of the United States was held in baptism by a crash. The first president, George Washington, was in his first term when he had to deal with the first financial panic. Source there was the reckless speculation in government bonds issued during the war of independence from the states of Massachusetts and South Carolina. In March 1792 the bubble burst, forcing the fledgling nation for emergency measures. Treasury Secretary Alexander Hamilton gave orders to banks to accept securities as collateral for bad loans and to support economic activity: something very similar to the various branches of the emergency created by the Federal Reserve Ben Bernanke in recent months to provide liquidity sistema.Se to more than two centuries in America hit the crash point such as hurricanes, including their international dimension is not entirely new.

One hundred years ago the great panic of 1907 was the first crisis of "global" of the twentieth century. In the month of October, the Wall Street stock index lost 37% of its value, throughout America crowds of investors gave the bank run banks including scenes of violence and despair, the credit system was paralyzed for weeks. The "perfect storm" of that year had as protagonists of the giants of history, President Theodore Roosevelt to the banker J. Pierpont Morgan. The repercussions were immediate and profound even in Europe, and England had come to the aid of former American subjects with a naval expedition of gold bullion. The echo of those events has never been extinguished.

The proverbial superstition of investors called into question the "curse of 1907" when Wall Street suffered another of the worst collapses in its history, October 19, 1987, with a fall of 23% in the Standard & Poor's 500. Already in 1908 the financier Henry Clews in his memoirs identified three main causes of the disaster last year that sound familiar: "The over-investment in the property market, easy credit, the manipulations of high finance."

The crash remains the most nefarious of 1929. Not just for violence of the fall by the Dow Jones had undergone, which lost 13% in one session of 28 October, followed by the sudden end in the next Black Tuesday, the 29th. In fact in history to establish the severity of that collapse were subsequent events. For mistakes in monetary policy and economic measures of President Herbert Hoover, the collapse of Wall Street helped to trigger a spiral of protectionism, the fall in international trade, then the Great Depression. In 1931, the American Stock Exchange had lost 89% of its value from the peaks of 1929 but were far more serious social consequences. The whole world was overwhelmed by deflation: farm prices fell by 40-60%, wages and production Industrial fell, the unemployment rate in America came to 25% in 1933. Four years after the crash on Wall Street, in 1933 an average of one thousand Americans a day suffered the seizure of their home to insolvency. The mass misery and social tensions contributed to the advent of Nazism in Germany. The severity of the crisis of historic proportions inspired innovations: the New Deal of Franklin Delano Roosevelt laid the foundations of the welfare state, Keynesian policies to support employment of large state investment programs in infrastructure. But it was only the increase of war production related to World War II to "cure" definitely the longest recession of the twentieth century. In postwar America in the crash was the most famous of the Savings and Loans. A prolonged banking crisis for years.

Between 1986 and 1995 almost half of the 3,234 savings banks had to close due to bankruptcy. In 1989 Congress created a separate federal agency, the Resolution Trust Corporation to take losses, repay depositors, to absorb the portfolio of failed institutions, and investigate the responsibility of the disaster. As filed for bankruptcy, the federal government found itself temporarily owner of disparate items that customers had provided as collateral to banks for trust: the Resolution Trust Corp. ended among other paintings by Picasso and Andy Warhol, a colonial-era distelleria of whiskey, and 800 bottles of chilled sperm of a Brahma bull for breeding.

The latest crash is still fresh in memory: the shocks caused by international shocks such as insolvency of Mexico (the crash of Tequila Bonds in 1995), the Asian financial crisis of dragoons in 1997, the bankruptcy of Russia in 1998. [...] The lessons that history teaches us of the crash are extraordinarily simple.

Three constants are repeated for centuries. Every financial disaster is invariably preceded by a "bubble", a period of speculative excesses. Each bubble is fueled by lax monetary conditions, easy credit, and the conviction of the masses of investors that a certain category of investment is intended to increase infinity. Whether it is real estate, stocks or oil, there will always be a "theory" to show the absolute rationality of prices and ever increasing absurd.

The second historical constant: for every self-respecting crash follows a period of reform, development of new rules, more restrictions and controls.

The third constant: the new laws enacted as soon as the race rages around them and prepare for the advent of the next bubble.

Federico Rampini, La Repubblica, 10/02/2008

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IMF Crisis: The worst crisis since 1930, Italy in recession in 2009

In its latest report on the world economy, the IMF does not mince words and defines the economic crisis of recent months as "the worst since 1930." The Fund describes global economy slows down from +5% in 2007 to 3.9% in 2008 to curb more than +3% in 2009, a pace that many experts consider the edge of recession. According to analysts of the Fund "the world economy is entering a growing economic depression because of the most dangerous financial shock to the advanced economies by the year

Thirty. " In July, the IMF estimated the world economy grew by 4.1% in 2008 and 3.9% in 2009. But now things have changed. "Many advanced economies - the report said - are close, or already entered a recession, while growth in emerging economies has weakened." The guilt and 'especially the financial crisis, which after the collapse of the subprime in August 2007 is "worse in the last six months" and has entered a "tumultuous new phase in September." "There is no recovery in sight - the report says - and when it will be gradual." However, the IMF provides that "a gradual recovery is expected to emerge towards the end of 2009." There are three driving factors: the prices of raw materials, which are stabilizing, the U.S. housing sector crisis, which should touch the bottom at the end of 2009 and the emerging countries, which continue to trawl. The IMF expects the U.S. economy will grow by 1, 6% this year, 0.3% more than previously estimated in July, but will slow dramatically in 2009, rising only 0.1%, 0.7 % less than in July. In hard braking the ' Eurozone will grow by only 1, 3% this year (-0.4% compared to July) and just 0.2% in 2009 (-1% compared to July). Among the European economies, Italy is among the worst, surpassed only by Ireland. Our country in 2008 and 2009 will go into recession and will shrink the GDP respectively by 0.1% and 0.2%. Germany too bad that the Fund will increase by 1 second, 8% this year and will post zero growth next, while France will see its GDP rise by only 0.8% and 0.2% in 2008 and 2009. Braking Britain, whose economy is' still expected positive growth of 1% this year and negative growth of 0.1% next year. Outside Europe braking Japan, whose GDP will increase from 2.1% in 2007 to +0.7% in 2008 and +0.5% in 2009. China will see its GDP shrink slightly and stellar pass from 11.9% last year to +9.7% and +9.3% this year and next. India too slow going from 9.3% to 7.9% in 2008 to +6.9% in 2009. "Looking ahead - says the World Economic Outlook - financial conditions remain very difficult, restricting the prospects for global economic growth." "According to the baseline scenario - the report says - the actions of U.S. and European authorities succeed in stabilizing financial conditions and avoiding further systemic events. However, even winning the U.S. plan will have an application that aims to remove financial statements of the activists' most dangerous counterparty risks remain at exceptionally high levels for some time and a slow return to a more liquid financial market. " "However - continues - they are very likely other losses in the banking sector as the economy decelerates. In this situation, the financial institutions' ability to rake fresh capital remains very difficult and limits on credit creation will continue at least through 2009. "

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The Berlusconi government's anti-crisis measures

In a recent meeting, Berlusconi said the government has provided € 35 million to be allocated to families for the new born. This would € 5,000 to be returned later with a 4% interest to be found in a fund at the disposal of the Secretary to the Prime Minister, Carlo Giovanardi.

Nothing for now on the taxation of the thirteenth. The government said it "must deal" pointing out that resources are scarce.

Otherwise, the invitation of the Prime Minister to be optimistic and take note of the proposals made by the employers' associations: thirteenth addition to the tax relief, particularly dear to trade associations, the request for tax breaks for companies that reinvest profits, came from Confindustria. But the government said "must deal" stressing that the resources are scarce. Also
Development Minister Claudio Scajola said that the fund will be released a week from 600 million in credit to enterprises in difficulty allocated by the Prodi government but blocked by the Constitutional Court. Dumbledore's Economy Minister Giulio Tremonti who merely take note of the requests.
The president of Confindustria, Emma Marcegaglia, said that companies - even aware of the difficult economic situation - they should be supported by the taxation of profits reinvested in capitalization, an automatic increase in the maximum tax credits from 516,000 to one million and rising to 40% of the cap on the deductibility of interest expense. As
possible further government intervention in favor of banks, Marcegaglia said: "We believe that banks can be strengthened, but it is important that there is no interference of politics and that they keep their private structure. It 'true that intervention, however, as the other countries may be useful "
To those who wondered if the banks had given guarantees for loans, Marcegaglia said:" From Faissola has come a very strong commitment to support the claim. Tomorrow we have the second table with the banks on the trust and public administration. "
The meeting was attended, in addition to Berlusconi, Tremonti and Scajola, Gianni Letta, Undersecretary to the Presidency, the Ministers of Infrastructure Matteoli, the Civil Service Renato Brunetta.

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policies against depression

In '29, out of the crisis affected countries adopted almost all the same policies, inspired by Keynesian principles and then to more state intervention in the economy. But not right away. The rulers were quick to intervene, because the economic concepts related to the effect that a liberal state interference in the economy was considered harmful. Economists who followed the liberal orthodoxy were convinced that the market alone would be able to eliminate the crisis and restore economic balance. The state should restrict itself to having to provide a sound currency and a government budget in balance. The results of neoliberal policies were not satisfactory, and the United States claimed the presidency in favor of the Republican Hoover Franklin Delano Roosevelt Democrat. Domestic demand was supported by the policy of "Deficit Spendig" (deficit spending) that drew on the theories of Keynes. The state went so everywhere a number of public works (land reclamation, construction of roads, electrification, etc. ...), which provided useful goods, but not sold on the market and which provide remuneration to workers who could well have money to spend to support private consumption. In the U.S. intervention was implemented with the "New Deal" (New Course) of President Roosevelt. Even in Italy the state intervention was particularly decisive. Were carried on the "Battle of Wheat" and "reclamation", were built many public works, he conceded the household workers and expanded social insurance. In 1933 he was made a public institution, the IRI (Institute for Industrial Reconstruction), which took its industrial shareholdings held by banks saved with the aim of later selling them to individuals. But only the reset and the outbreak of the Second World War finally put an end to the long depression of the thirties and could riassorbile unemployment.

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... and Some Differences

are still more in common than those that distinguish what is happening in these month from the deep crisis of the last century, both technical / financial and economic, come in order:

1. Looking at stock prices in recent years and the path that led to the highest elevations of 2007, we see a reduced volatility and rising every day excursions of limited scope, and before October 29, 1929 was used to observe actions interrelated + 50% in a single sitting. Even the increases and volatility of the last 90 years and the first months of 2000 were significantly more intense the period 2003-2007, in this sense the excitement for the new economy was a decidedly more like the euphoria preceding the '29.

2. The interest rates of maturity of the current crisis are quite different from those of that time, indeed the rates of recent years have been about a ¼ of those who turned in the late 20's / 30's. You must also remember that on the diffusion of stock markets was minimal and not comparable to the present, in fact few and restricted stock markets across the globe, "open outcry" among other things, against the dozens of markets "telematics" in today, which involves a number of players, speed and a number of operations even remotely comparable, almost like move a bullock cart to a Formula 1 car. The economic context in which they gained the recent market losses equity is, strictly speaking, still growing, one, albeit limited, that expansion has little to do with the Great Depression. Until proven otherwise the amount of wealth at the global level continues to grow and the IMF has projected for 2008 and 2009 global growth rates above 4% a year, so even a trace of depression measured.

The very fact that in 1929 the USA is the great flywheel of industrialization, is very different from the framework of a globalized economy with a large number of industrialized countries, both emerging and established, producing and consuming wealth, in a context free-market spread. There are many realities, inter alia, that will limit the damage caused by the crisis, the actors who will remain at the window taking every opportunity to acquire interesting companies at well, just think of the Middle East or to finance major new Chinese investors may make purchases of large American companies in sensational saldo.Grande and substantial is the difference of the countermeasures taken to crisis started: in 1929 the same bankers, to avert a disaster, put your wallet to make purchases on public and sensational listed shares went down in history when JP Morgan, along with other bankers, at a session proclaimed loudly its purchases of securities on the NYSE further, trying to spread optimism, which was never actually sent.

In these days instead of the banks to ask for help to governments and supranational institutions that are currently treating only the symptoms, by injecting large amounts of cash to prevent the collapse, but will endeavor to discuss new and more effective rules for the markets trying to eliminate those carcinogens that financial engineering has introduced in recent years and reducing overall is speculation that the leverage now far too large within the system.

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Some Similarities ...

In the speech with which, on October 2 last year, has called for the approval of the Paulson plan by the House of Representatives (850 billion dollars American taxpayers can not be used to purchase securities evaluated) President George W. Bush has raised the scenario of a "long and painful recession" as a direct consequence of inaction. Although he has not directly called into question the American Great Depression began with the stock market crash of 1929, the reference to those dramatic years is implied for every American. It's worth analyzing the two situations, highlighting some similarities. First among the elements assonant be recorded that both crises explode after a long period of Republican domination. In the years before the Great Depression, in fact, had three successive Presidents 'red', which shared a We endeavor to laissez-faire economic and tax cuts. In the last three decades of U.S. government policy was similar: after the mandates Ronald Reagan and Bush Sr., the scepter of power has been twice in the hands of Bill Clinton, a Democrat who seemed to have lost the legacy of progressive ideas of a Roosevelt and a Lyndon Johnson, also resulting in neutral, if not accommodating, compared to the excesses of financial speculation, in Clinton, as noted, the following two terms of George W. Bush, on whose total subservience to the dictates of economic power has been said and written so much here that is not worth anything more. Another element common to the crisis of the thirties and the current is that in both cases are the most vulnerable populations, particularly minorities, who suffer the effects more dramatic. In the late 20's, the collapse of the cotton market broke up the widespread system of sharecropping and millions of African-Americans had to emigrate to the cities of the American South, where racial discrimination made it almost impossible to access new opportunities and even work to support programs promoted by the government. One thing above all: about half of African-Americans and Latinos who have purchased property in 2005 did so through sub-prime mortgages (the same indicator, applied to the subset of white people, do not get to 20%) . Considerations political and ethical issues aside, then as now the vast economic inequality in the country is an important element of vulnerability of the system: 20 years, despite the growth in wages, the real benefit of the government were the rich, it was granted significant tax relief. Eighty years later, the bill is always the "Forgotten Man" spoken of by Roosevelt in a famous speech in 1932: the man in the street, losing jobs, housing and finance. The collapse of the housing market makes it illiquid assets of banks that eventually collapse, while the country is screwed into a recession more and more dramatic. Thus, the Forgotten Man, as well as forgotten, is also ruined and helplessly at the unfortunate spectacle of a system that uses their taxes to bail out banks, the main cause of his downfall.

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The Contagion in Europe

POLICY FAILS U.S. NOW AND GLOBAL INSTABILITY

Monday, September 29 is the most hectic day much of the last twenty years on Wall Street that Congress in Washington. Despite the long preparatory negotiations, the U.S. House rejects (with 228 votes against, 205 in favor) rescue package of 700 billion dollars developed by Treasury Secretary Paulson and President Bush. Another vote can be no earlier than Thursday, October 2, to seek agreement on a new text, while in the evening the president authorizes the use of foreign exchange stabilization fund.

A Wall Street news of the rejection of the plan sent the stock market into a panic: the Black Monday market of the S & P 500 fall marks the most wide crisis of 1987, while European stock markets have lost between 4 and 5% on concerns about the soundness of some large banks.

Nobody expected that the systemic failure in America could come from politics, but it's true: both Barack Obama and John McCain are calling on their parties to cooperate, but you lose precious time. Already the delay of a week leading to the closure of Wachovia, the fourth U.S. bank, recorded Sept. 28 at the last minute by Citigroup. The vote on the plan that would satisfy both parties has failed miserably, not only from the right are opposed ideologically motivated against state intervention in the market, but by adding 95 Democratic "no" to consider the package packaged to save the Republican Wall Street and greedy bankers who stole behind the American middle class.

After days of feverish negotiations with Modig the Paulson plan, while the markets remain in a wait state close to fibrillation, Friday, October 3rd the Bush plan becomes law, launching a total floor bank rescue and support the economy of 850miliardi dollars.

But markets no longer believe the assurances of politics: October 6, despite the U.S. plan, is launched, the global lists are facing a new "Black Monday". The global stock markets burn 2.2 trillion dollars, led to falls in bank stocks, oil and telecoms.

TSUNAMI OF OCTOBER TO THE TOP WORLD, ONE YEAR IN BURNED 25 thousand BILLION DOLLARS

Autumn of 2008 for world stock markets is the worst period 1933. The S & P 500 index on Wall Street, believed to be the main barometer of the health of global finance, mark ups and downs on a scale unique in history, and international experts are now well understood that the financial crisis is going to transformed into a global recession.

The Week 6 to 10 October will be remembered for the wave of "panic selling, sales by panic: a real tsunami is not just about Wall Street, but also other major world indices are in deep red. According to the World Federation of Exchanges (WFE), the total capitalization of stock markets around the world marked a loss of just under 21 thousand billion dollars and a half times the U.S. GDP. In the month of September on the bonfire of panic selling has been burned almost 6.85 trillion dollars, bringing the total destroyed to 25 trillion dollars last year.

PARALYSIS OF THE LIQUIDITY UPHEAVAL IN THE EUROPEAN CREDIT

"We all underestimated the effects of this crisis," admits the manager of one of the most important hedge fund in London.

But what has actually deteriorated to such an extent as to rush things?

The price of ABS, that is, the paper built on toxic home loans, for the launch of the week October 6 to 12 has remained more or less the same, and the cost of credit default swap rose slightly, we can not say words that have emerged sudden depreciation in the affairs of other banks.

That system, in the cleaning process, it was still in midstream was known. But the actual bailouts from the state of Fannie Mae and Freddie Mac and the "virtual" AEG, combined with the failure of Lehman, and the collapse of Wachovia, rather than create new liabilities have undermined the credibility of the system, triggering a rush to withdraw deposits at banks and freezing of U.S. and UK made the interbank market. None taken more money to anyone, challenge even the healthiest banks' operations that are no longer able to manage normal cash flows.

All this was compounded by the crisis of credibility to the financial authorities and U.S. and European policies, given the controversy, the silences and uncoordinated measures taken by governments in the Old Continent. For financial institutions, trust is the main factor. This explains the sharp rise in Libor rates, while government bond yields are falling to historic lows, driven by a huge flow of incoming demand by all. Institutional investors, large and small, as well as investors fleeing from risky assets and seeking safety in the only port left, the securities guaranteed by the state.

Beyond the heightened concerns of an impending recession, the shares have come to represent the financial activity most ill-treated: directly, because the lack of confidence leads to getting rid of bank securities and insurance indirectly, because the stock markets have remained (in addition to government bonds), one of the few functioning markets. With that money now non-existent, for those who need or want to make cash sale of shares is the only viable solution.

source "ilsole24ore"