Turbulence or meltdown?

September 18, 2008

dax-trader-hands-on-head-alex-grimm.jpg *** For full coverage of the financial crisis click here***

The events of the last five days have been traumatic for the world of high finance and banking — and may yet become so for the man in the street if confidence in banks fails to hold.

Venerable finance houses are falling like cards, all manner of exotic and unsound practices are being revealed and many of the old rules — like the competition reugulations that stopped Lloyds buying Abbey National in 2001 — have gone out of the window.

Money markets have all but dried up. “I’m not lending money to you — you might not be here next week,” seems to be predominant mood.

Some commentators say this is the financial world’s Particle Collider moment and we’re all doomed, others that this is merely a painful but long overdue shake-out: a reality check that in the end will bring about a greater degree of prudence and sanity.

What do you think we are seeing here? And what do you think the result will be?

10 comments

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/

Slow recovery or meltdown, what is the point of speculation. If the banking system collapses so does everything else – people just do not understand. Not sure if that Brown bloke does either.

Me? I have my reserved place at the op of a tall building and hope that there is either no queue or some middle eastern fund with the money. S*d’s Law says I will have climbed all the stairs to my alloted space (as the electricity will have failed by then – heh that’s green!) and then the guy will stomp the money. All that climb for nothing!

This has been along time coming.Mortgages,credit cards,and any other institution who deals in financial affairs.The mainly wealthy I believe has made a fortune on
moving house because of financial clout.
Plain greed and selfishness has caused this.
Look at the speed of how HBOS has gone down.Something very wrong there.Going from the 1970s,80s,90s recessions it gets worse before it gets better.Unemployment will rise as this goes round like a plague.And gets worser before getting better.When will this country ever learn.The money men will survive if anybody knows what I mean?

I’ve spent much time over the past year researching the past decade. I now feel I far better understand what was going on.

America will recover within a few years – though the prices of things are likely to be rather different to that which people expect today. The Eurozone faces significant challenges – but, if met, could go from strength to strength. Britain, if anything, has – at every junction – dug its hole a little deeper. British real-estate is so comically over-priced that an 80-90% reduction in prices (as happened in Japan in the early 90s) will be essential if Britain is ever to be competitive again… Our national debts are soaring; and unemployment is rising rapidly… we’re already past the Maastricht maximum safe limit for net debt… and the gross debt is only in-range because the system has been fiddled by PFI and the omission of “liquidity schemes”, to prop-up banks wildly indebted to international markets, from our national accounts.

As international stock markets crash (in a way reminiscent of 1929) and politicians and central bankers scramble in a hopeless attempt to “salvage the world” from the brink of disaster (reminiscent of the beginning of the Great Depression) “…you’ve got to ask yourself one question: Do I feel lucky? Well, do ya, punk?”

A monumental mess is unfolding – one that transcends Western governments and exposes greed (on a biblical scale) with the sham it always has been. A new financial reality will emerge – whatever it is, it will be different – very different.

Posted by Steve | Report as abusive

Sorry Philip you cannot just blame the money men. Every time a “man in the street” places his/her money into a higher yielding position at the expence of a lower yirlding one they create the situation. The lower yielding has to move to higher risk to match the rates, and so on and so forth.

Its regulation or acceptance

I fear that the American political system will ultimately drive the cost of saving the financial system well up into that higher territory.

A large expansion in debt will impose enormous fiscal costs on the US, ultimately hitting growth through a combination of higher taxes and lower spending. It will certainly make it harder for the US to maintain its military dominance, which has been one of the linchpins of the dollar.

The shrinking financial system will also undermine another central foundation of the strength of the US economy. And it is hard to see how the central bank will be able to resist a period of allowing elevated levels of inflation, as this offers a convenient way for the US to deflate the mounting cost of its private and public debts.

It is a very good thing that the rest of the world retains such confidence in America’s ability to manage its problems, otherwise the financial crisis would be far worse.

Let us hope the US political and regulatory response continues to inspire this optimism. Otherwise, sharply rising interest rates and a rapidly declining dollar could put the US in a bind that many emerging markets are all too familiar with.

I desperatly hope this is simply turbulence not a meltdown

Posted by Lec Neli | Report as abusive

I think we are in for a painful few years , however we will survive.

The banking and finance industry is obviously going to be very different and hopefully much more sober and prudent.

In any great period of change there is a shakeout, however the market re-organises itself after a time.

I don’t think this is the Great Depression revisited, that’s just scare tactics, people said that in the 1980s and early 90s, it was tough but it wasn’t a depressions

Two, three, five, seven years of not too nasty global recession, or “new Great Depression”?
– I don’t know!
Our leading financial gurus and regulators now are not “total idiots”; and the public mood against Gordon Brown here is illiterate and stupid. But “how bad does it get?”
I don’t think anyone knows that, right now. The right told us that economics was complicated and yet simple enough for them to “know it all”, and they were wrong.
You think you’ve got a perfect new system; “there’s still a loophole, there’s still a catch”.
How bad a catch? No idea.

Posted by Ian Rogers | Report as abusive

Great Depression.

That is my prediction.
Either we’ll hve the full Great Depression, or a depression of at least half that magnitude.
Firstly, I’ll start by saying that for a few decades we’ve all been hoping the glue wouldn’t unstick and the magic that kept the machine running would still be there.
As such, everyone put their finances into position that they thought were climb exponentially. People invested because people invested. Companies and banks became so immensely leveraged that a 5% drop in their share price removed their companies’ entire value. (e.g. $20bn ‘reserves’ $400bn creditors).
Isn’t it funny how a year ago when the trouble hit, people were wondering ‘will we go into a recession?’.
Now you have for example, professors saying things like this:
“At this point, the U.S. will be lucky to escape with a mild recession”
-Ken Rogoff
Harvard University professor and former International Monetary Fund chief economist
monday 15/9/2008
quoted in this article- http://uk.reuters.com/article/businessNe ws/idUKN1550153420080915?sp=true
This is the dotcom bubble all over again, in that everyone’s throwing money around without knowing the fundamentals, whilst a few savvy academics knew it all along. Take John Paulson the hedge fund king. Then there’s that other guy that took out that massive Short earlier in the year. Nobody yet knows what he’s made.

A fall in property prices of 80-90%? I wish, but I don’t think so. The reason is that demand for property would have surged massively long before we reached that point. I am actually hoping for a 30% drop in the next couple of years as I want to buy and don’t want to sell what I already own – and before Dave Spart logs on to call me a gorilla of greed, what I own will provide me with a modest pension. If prices fell 50% you wouldn’t see me for dust and I would simply be able to afford a bigger place and retire earlier. Given that thousands upon thousands of people must be thinking along exactly the same lines as me, that would surely be the bottom of the market.

No Great Depression – it’ll all come out in the wash.

Posted by Matthew | Report as abusive

It’s a shakeout. And lots of people are making lots of money by shaking as hard as they can. It’s all part of the game.

Posted by Jason | Report as abusive