How quickly it goes, and how long it lingers

ARTICLE: “Fear, Rumors Touched Off Fatal Run on Bear Stearns: Executives Swung From Hope to Despair in the Space of a Week,” by Kate Kelly, Wall Street Journal, 28 May 2008, p. A1.

SPECIAL REPORT: “Paradise lost: A special report on international banking,” by Andrew Palmer, The Economist, 17 May 2008.

Sitting down recently with this world-class broker-dealer firm’s senior management, you naturally talk about Bear Stearns, sort of the LTCM of this go-around (Long Term Capital Management from the 97-98 scare/collapse). When there is over-reach, and too much risk incurred, somebody’s gonna get singled out for cannibalizing—as in, all their competitors pull out their knives and dig in.

The price of our financial system’s willingness to experiment is that we regularly screw up by going too far.

But here’s the chart from the Economist that spooks: over time the crises seem to require longer recovery times, as in, the number of quarters til earnings at pre-crisis levels are resumed.

Black Monday in 1987 created a 4 quarter shadow. The Junk bond mess of 89-90 required seven quarters. The Mexico liquidity crisis in 94-95; five quarters. The LTCM/Russia/Asian flu of 97-99 was only 1 quarter (here, at least). The Dotcom plus Enron was four quarters, and the subprime/liquidity crisis of 07 and counting projects to 8 to 10 quarters—for now at least.

This makes me think of Cox and the SEC wanting to push a global rule set for managing transaction flows across national markets. Eventually, a big enough crisis, meaning one that spreads across the globe and costs everybody a bunch of quarters, will force the issue.

Comments

[Louis Heberlein]

Words left out of Tom's last sentence ... "and bring our next economic transformation."

[Hans Suter]

4 quarters here, 8 quarters there and another 10 quarters and - whoops - Life is over.

[Louis Heberlein]

The economy gurus speak of the Moral Hazard of encouraging growing reckless economic risk taking by bailing out current losers too often and two easily. There is a political equivalent of moral hazard for mentoring Core states encouraging fast, wide scope political and social transformations in gap countries without relevant historical or cultural roots ... it is the expectation that America would always be there to deal with any rough consequence, even those from stupid actions. So an Obama role may be to dampen that type Moral Hazard.

[Michael Liss]

We are focusing on the symptoms, not the cause, when we wring our hands over individual bank excesses. The core of Tom's work, of which I am a big fan, is that economic interdependence is the best route to global security. A stable financial system is the essential keystone to this vision, but the current system of "floating currencies" and fractional reserve banking provides anything but a stable system.

I would be interested in seeing Tom explore the impact of a monetary system that is controlled by fiat of the central banks, which is not tied to any independent source of value, on the stability of the interconnected financial system and the governments that reside therein. To put the question more simply: Can a stable financial system (which is necessary for Globalization to reach its potential) exist when governments (through their central banks) can print money and create credit out of thin air?

[Louis Heberlein]

We frequently have 'the glass is half full or the glass is half empty' debates on economic conditions and issues, including liquidity risk. The only ways to keep the glass full is to not let anyone sip, or keep it under a running faucet.