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Will Governments Wait Until Panicked Again Before Acting?

Politics / Financial Markets 2011 Sep 17, 2011 - 11:47 AM GMT

By: Sy_Harding

Politics As the downturn worsened severely in 2008, governments around the world finally jumped in with massive panicked rescue efforts.
In March, 2008 there was the $29 billion bailout of Bear Stearns, in May the $178 billion in stimulus checks to consumers, in July the $300 billion for at-risk homeowners, in September the $25 billion bailout of automakers, and the $200 billion bailout of mortgage provider Fannie Mae, and in October the $700 billion bailout of banks.


The efforts continued after the Obama Administration came in, with the $787 billion ‘average American’ stimulus (cash for clunkers, tax rebates to home-buyers, etc.) in February, 2009, followed in March by the $1 trillion additional bank bailout, and in April by the global G-20 nation $1 trillion global stimulus measures. 

Finally global economies, which had reached the point of looking over the abyss into a potential second global Great Depression, began to pull back from the brink. And by July, 2009 the ‘Great Recession’ had ended and the economy began to grow again. The stock market, which always moves three to six months ahead of the economy, had already bottomed in March, 2009 and was in its next bull market.

Surprisingly, much of the specific bank and automaker bailout costs were subsequently repaid, and the government actually made profits on some of the other assets it took over. 

However, the problem was that as severe as the recession had been, it had not been severe enough to correct all the excesses of the previous partying on easy money, and bursting of the real estate bubble. To get that taken care of in one shot would probably have required another Great Depression.

For instance, while home prices had declined significantly by the time the 2007-2009 recession ended, houses were still overpriced, consumers remained over their heads in debt, and the economy was not robust enough to encourage companies to do much hiring or expansion of their operations.

As a result, the economy slowed again last summer and was on the brink of another recession.

With hardly any hesitancy the Fed rushed in with its controversial QE2 stimulus measures. And with the economy not near as weak last summer as it was in 2008, that $600 billion of stimulus alone halted the slowdown, and produced several months of renewed economic growth. It also rescued the stock market, pushing it up to its recent April top.

However, even the combination of the severe recession of 2007-2009, the slowdown last summer, and the renewed slowdown this year, has still not corrected all the excesses of the previous partying on easy money, and bursting of the real estate bubble.

The glut of unsold homes is still there, indicating home prices have further to fall. Banks remain in potential trouble, still saddled with troubled assets, their stocks plunged back to their levels of 2008. And now its governments around the world that are over their heads in debt rather than consumers.

Meanwhile this year, for the first time since 2008, the stock markets of ten of the twelve largest economies in the world are in worsening bear markets, indicating they see serious troubles ahead for global economies. The only exceptions are the stock markets of the U.S. and Canada, and the economies of both have been slowing rapidly all year, and are now barely above recessionary levels.

A series of smaller slowdowns or even small recessions to gradually complete the job of working off the remaining excesses would be preferable to another severe recession.

Yet there seems to be no sense of urgency among governments and global central banks to try to rescue the situation while smaller efforts might get the job done even if only temporarily (as happened with QE2).

In Europe, where the major problem is the worsening debt crisis that is threatening to topple governments into defaults, and banks into a financial crisis to rival that of 2008, euro-zone officials argue week after week about what they should do, but do little more than provide assurances that they will do something.

In the U.S, where the major problem is the rapidly slowing economy, the Federal Reserve is not talking about doing much of anything. Its latest statements are that it will continue to wait and see, will discuss the situation again at its FOMC meeting next week, but is fairly limited in what it can do anyway. In a speech two weeks ago, Fed Chairman Bernanke called on Congress to step up to the plate. But as evidenced by the deadlock right up to the last minute a few weeks ago over simply raising the U.S. debt ceiling, the Administration and Congress are grid-locked on every issue, eyes only on next year’s election, and not able to act at this point.

Will governments again wait until a salvageable situation worsens all the way into a severe crisis and they are forced to act in panic? That seems the likely outcome of what is going on if it doesn’t change quickly.

Sy Harding is president of Asset Management Research Corp, publishers of the financial website www.StreetSmartReport.com, and the free daily market blog, www.SyHardingblog.com.

© 2011 Copyright Sy Harding- All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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