Juergen Stark keeps a framed sheet of deutsche marks bearing his signature on his office wall at the European Central Bank in Frankfurt. He should consider adding a sign saying "In Case of Emergency, Break Glass."
The rescue package cobbled together to prevent Greece from defaulting has trashed investor confidence in the common currency project. I hope the Bundesbank, where Stark learned the craft of central banking before joining the ECB's board, has a locked safe somewhere in the basement containing a blueprint for a euro exit strategy.
The "New Normal," as the bond mavens at Pacific Investment Management have dubbed the post-credit crisis environment, turns out to be a world where scenarios move from impossible to inevitable without even pausing at improbable. Flocks of black swans go winging by with a frequency that is dulling our sensitivity to just how extraordinary these financial times are. Call it crisis fatigue.
The next market earthquake — a derivatives black hole in the accounts of a big bank, a failed government bond auction by a euro member, war in Korea, a hedge fund relearning the lesson that markets can remain irrational longer than you can stay solvent — poses bigger risks than usual.
Not only is the universe of money more dysfunctional than ever, policy makers are almost out of ammunition and ideas.
The new normal is decidedly weird. Consider your likely response if I had bet you three years ago that the following would come to pass: many of the world's biggest banks are state-controlled; a global tax on securities trading looks inevitable; the financial industry is hooked on central bank liquidity, with firms still unwilling to lend to each other; the corporate bond market is shut; policy makers have resorted to buying government debt to cap surging borrowing costs; some nations are unable to borrow at all; and Germany wants to ban some sovereign credit- default swap trades to divert the spotlight away from the spreading collapse in government creditworthiness.
The money markets are dying as the financial community decides it's safer to recycle tarnished debt for cash via the central banks rather than risk lending and borrowing with the institution next door.
Transactions between US commercial banks have slumped to about $162 billion (Dh595.8 billion) from a peak of $494 billion in September 2008, the month that Lehman Brothers Holdings filed for bankruptcy protection. The ECB said last week it expects European banks to have even bigger loan losses this year than in 2009.
The new normal makes the Federal Reserve and the ECB the lenders of first resort. There's no way central banks can switch off their life-support machines while the money markets are still a heartbeat away from flat-lining.
