Business | Economy
Global financial crisis may not be all that bad
Concerted efforts by central banks to boost liquidity could pay off soon as S&P sees the possible end to major writedowns
- Reuters
- Published: 00:05 March 26, 2008
London: Maybe, just maybe, the financial world is not about to implode.
Such is the level of disaster mongering surrounding the latest phase of the eight-month-old credit crisis that you could be forgiven for thinking we will all soon be hoarding food and reverting to a barter economy.
At the very least, some market pricing and financial commentary has invoked a systemic collapse akin to 1929's stock market crash and the Great Depression that followed.
Let's put that in context. US historians estimate that in the first 10 months of 1930 some 744 US banks failed - rising to a total of 9,000 by the end of the 1930s.
Losses
Savers lost the equivalent in today's money of $140 billion in deposits by 1933. US unemployment rose to 25 per cent from four per cent in 1929 and prices and incomes fell by 20 to 50 per cent over the same period.
The debate, as German government spokesman Thomas Steg noted this week, has become "hysterical".
This crisis is serious, for sure. But there is a pretty good chance it is not 1929 - even if the US Federal Reserve has adopted depression-era tactics to address it. "To justify a repeat of last week, you really have to start believing this is going to be 1929 again," said Jim O'Neill, chief global economist at Goldman Sachs. "With the Fed moving so quickly, I think that is unlikely."
But with investors already positioning for a "worst case" scenario, there is a chance of a large pendulum swing.
Last week, a survey by Merrill Lynch showed a majority of 193 fund managers were overweight cash in March, signalling extreme caution.
"People are one-way; they've got the cash; they believe equities are cheap," said Merrill consultant David Bowers. "They just need a catalyst to know when it is safe to go back into the markets."
Evidence
Whatever the catalyst for a turn, it will first need to offer evidence the problem is not getting any worse.
One important development this month was that Standard & Poor's (S&P) said the end was in sight for writedowns of the subprime mortgage assets that sparked the crisis.
The US government's release last week of an additional $200 billion of cash from housing finance agencies to plough into the distressed mortgage market is another major boon.
No magic bullets. But when a turn comes, it may happen fast.
"We have all learnt, many times, that every moment of crisis is always also one of opportunity," said Max King at Investec Asset Management.
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