Have we wasted our crisis?

By Felix Salmon
July 28, 2009
comment, we've wasted our crisis. Not that I want another one, of course -- although I fear that given the amount of complacency in the markets right now, the chances of a second big shoe dropping continue to rise alarmingly. But asset markets have a way of setting the mood of policymakers, and right now that mood is that things ain't broken any more. As a result, they are pretty unlikely to get fixed.

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The bond market is on fire right now: Treasury is selling $115 billion of notes this week, with the 10-year bond yielding a whopping 5.1 percentage points more than the inflation rate — the widest spread since 1994. Meanwhile, total corporate bond issuance in the first half of 2009 was an all-time high of $1.791 trillion — more than anything we saw during the boom. This is what it looks like when markets clear: bond investors are seeing attractive yields, bond issuers are seeing abundant liquidity, and there’s an enormous amount of pent-up demand for financing from the long wintry months when no deals could get done at all.

Meanwhile, the S&P 500 is closing in on the 1,000 mark, after having dropped below 700 in March. The primary market in stocks is already heating up again in places like China and Brazil, and assuming that stocks manage to stay at their current levels or higher will surely reopen in the US as well in 2010. Are we really back to normal already, as far as the markets are concerned?

I fear the answer might be yes. Or, rather, I fear that the relatively happy state of the stock and bond markets has removed a necessary degree of urgency from the regulatory-reform debate, which vastly increases the chances that changes will be small and ineffective. I also worry about all this new debt: the deleveraging trend seems to be unwinding itself, and the chances of moving to a more sensible and less leveraged world of more equity and less debt are diminishing by the day.

Pace Rahm Emanuel’s famous comment, we’ve wasted our crisis. Not that I want another one, of course — although I fear that given the amount of complacency in the markets right now, the chances of a second big shoe dropping continue to rise alarmingly. But asset markets have a way of setting the mood of policymakers, and right now that mood is that things ain’t broken any more. As a result, they are pretty unlikely to get fixed.

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