Commentary By Ron Beasley
On the economy the White House Considers Doing Little Or Nothing. The reality is there is nothing they can do. A second look at this from John's post is worthwhile. And watch the whole thing, you owe it to yourself.
Doctor Doom is Doctor Doom but he has also been right. The reality is there is very little anyone can do because this is not a US problem it is a worldwide financial problem and so there is little Obama or anyone else in the United States can do. If you think Roubini is a pessimist here is Kurt Cobb.
Back in May in response to a question during an interview I suggested that when the sovereign debt of a major nation is finally questioned, it will signal the endgame for the worldwide bull market in just about everything. That moment has arrived, and my thesis will now be tested.
And, I'm not talking about the United States. I'm talking about France. The downgrade of U.S. government debt by one ratings agency was more political theater than careful, cold calculation. U.S. Treasury bonds rallied on the news. But in France it is a different matter. French banks are known to be heavily exposed to the sovereign debt of what are now infamously called the PIIGS, that is, Portugal, Ireland, Italy, Greece and Spain. What changed this week was that market participants began to think that this matters. They think the problem is so big that it could impair the credit of the French government which will ultimately be saddled with cleaning up the mess. And, who wants to stick around for that?
Nicole Foss, part of the duo who write for the popular financial site The Automatic Earth, once explained to me that liquidity and confidence are the same thing. Liquidity means I'm willing to part with my cash to lend it to you or to buy something from you. When my confidence in you is shattered, I won't lend to you. When my confidence in my own future prospects is shattered, I won't buy from you because I think I may need the cash later. That, it seems, is where much of the world finds itself today.
But the problem for French banks isn't necessarily that they are in worse shape than many other banks in the world. It's that people believe this to be so. And, as that belief spreads, it will become a self-fulfilling prophesy. At first, one, then two, then 10, then 20 banks and so on will refuse to lend to French banks. And, with each withdrawal of a source of funds French banks will become less creditworthy.
But if this loss of confidence isn't stopped soon, it will spread to non-French banks that have large financial ties to French banks. A cascade of financial ruin will be unleashed. We have built of world of huge financial institutions with heavily incestuous relations. They are like rafts all strapped together which doesn't help much if all the rafts are sinking.
As Roubini said above the problem is an over leveraged economic system and we are not just talking about governments but individuals and corporations as well. The only way out is to excuse some of the debt. You may find this immoral and perhaps it is. Yes the wealthy will be hurt but they will be hurt even more by a complete collapse of the financial system.
In 2008 I said I couldn't understand why anyone would want to take on mission impossible -president of the United States. The world economy was too broken to be fixed by any one nation.