Center of Concern | Fri, Oct 10, 2008
Headlines this morning spoke of global stock markets plunging from Wall Street to Japan. Across the globe we’re witnessing a massive sell-off. And it’s making our problems worse.
Trust has broken down in credit markets and rightly so. With the spectacular collapses of major banks and insurance firms in recent days we have learned that major, esteemed institutions were engaging in recklessness and unsustainable business practices. Debt to asset ratios were maintained at levels upwards of 33:1, placing these firms at incredible risk if even a few investments went bad, which they did.
And now, banks and investors are spooked. Everyone wonders who can you trust? Which institutions are safe? And if the whole system is crumbling at our feet, is it better to get what’s mine and go home?
If this were a spy movie, we’re at the point where our hero is face-to-face with the enemy and the fate of the world hangs in the balance. The struggle seems to be favoring the nefarious forces and our hero needs to make the decision to flee and save herself or stand her ground and fight. If the movies teach us anything, the first thing our hero needs to do is not panic. This is the moment, when our hero gathers her wits, assesses her situation and surroundings, calls in her allies and develops a new strategy to save her own life and the world.
Unfortunately, in recent days, investors are fleeing. Banks aren’t lending. Depositors are pulling their money. Stock markets across the globe are gripped with a selling frenzy, further pulling capital from healthy businesses and global markets and spurring perilous drops in stock markets across the globe. Pension and retirement funds are quickly losing value, putting millions at financial risk. The effects are beginning to be seen in the real economy as tighter credit markets and reduced consumer spending force businesses to cut production and costs, further adding to the constriction. And the problem has spread to Europe, Japan, and the developing world where already strapped governments and large numbers of people living in poverty now face worsening economic conditions. It’s a steep and slippery slope toward another depression.
Rather than continue down this path, now is the time to decide to stand our ground. We need to develop a thoughtful solution that addresses near term credit needs, long-term solvency issues, and sound regulation for ongoing accountability and transparency in global financial markets.
To do that, Wall Street needs a time out. Rather than continue to have traders and investors make rash decisions – often driven by panic and fear – we need to pause and collectively get a handle on the problem. The first step is to stop the madness – suspend global stock markets, or at least suspend selling.
Then we need to use our time wisely and bring together a global team of creative and talented economists representing a wide spectrum of schools of thought - and not coming from the very banks and investment firms that are failing. This group would be tasked with drafting a comprehensive global response that will offer lasting solutions, and a new financial architecture, rather than a continuation of the same failed polices or a return to the status quo that allowed greed and recklessness to run rampant through global financial markets.
During this timeout, Central Banks and governments can set up the infrastructure to begin meeting the short-term capital needs that businesses rely on to keep operations going between influxes of revenue. Doing so will help shore up the real economy and prevent further loss of jobs and failures of otherwise sound businesses.
In an era with truly integrated global economies, there can be no America First response to this crisis. The situation is so severe, that now more than ever, America needs her allies. It’s time that we act together and for the global common good.