Post-crisis, but hard work lies ahead

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By Cees Bruggemans, Chief Economist of FNB.

With respect, but the world is no longer in crisis.

Instead, its clean up mode is far advanced if incomplete.

It doesn’t mean there can’t still be ugly surprises as yet more is unearthed we didn’t know about. But as things stand we are post-crisis.

To be in crisis means to see fear settle on everything like a wet blanket, financial markets becoming dysfunctional, witness heavy financial losses being raked up, and seeing crisis managers tearing out the little hair they still have (Ben Bernanke coming to mind).

After initial tremors only noticed by insiders around Easter 2007, the real fear only struck in a generalized way in early August 2007. Precisely three years ago.

Many bankers worldwide together woke up to the reality they might no longer trust their counterparties, given what they knew (mostly about their own balance sheets).

From then on it took time to get to the truth, but by mid 2008 even commodity markets finally woke up with a bang, only then realizing that their relentless driving up of prices was sheer lunacy, pricking that bubble.

It took another three months to detonate Lehman, and much else besides, as the Paulson/Bernanke duo faced Congress and offered considered opinions and ultimatums (always respectfully, off course, for decorum is well advised when wanting to mount a rescue).

That moment of truth in September 2008 created real fear. Six months earlier, at Davos where the great and good gather annually, fear had already be in the air, just as in nature we find the animal kingdom giving plenty of warning a natural catastrophe is about to strike.

The animal spirits are all kindred on that score.

But September 2008 was different in magnitude, for shock was transmitted globally in real time through daily television, but especially internet and mobile phones.

Seeing cardiac arrest in motion is terrible. Here the larger part of the whole world went into shock, first its financial markets, and not long thereafter the real sectors too, as trade finance imploded, orders were cancelled wholesale and a majority of businesses adopted the fetus position (not forgetting to suck their thumbs).

That was a crisis. The kind you are not supposed to come back from in one piece. As had happened in 1929-1933 and ever since has demonized the world.

And yet the world’s leading policymakers threw a few clever switches, and within weeks the ship started turning, even if many observers took months to wake up to that fact.

From thereon there was no looking back, even if every step of the rescue had been complex, with not a few mistakes being made and many lost chances.

Still, it was unpleasant last November to discover in stages that the demons weren’t quite slain. Dubai proved to be a sideshow, but the real focus this time fell on Europe, all of it.

For if that European crisis was fronted by Club Med sovereign debt going wrong, the real exposure was to potentially bankrupt European banks, with the entire European Project and the Euro currency at its centre being up for discussion.

Yet this time market dysfunctioning never reached the dimensions of the earlier Anglo-Saxon banking crisis. Though politically Europe was late in responding, the ECB was there when it was needed. And eventually all pulled through and could markets start to calm down.

The worst was after all not going to happen, even if some problems were pushed out in time, to be addressed piecemeal in more digestible ways through 2015 and even beyond.

The 2Q2010 was ultimately on a par with 4Q2008 as a crisis moment, even if its intensity didn’t come close. The policy responsiveness, however, proved likewise effective, if enacted by an entirely different crowd.

Since those fearful days of May 2010, it turns out European growth is more robust than imagined. The Euro turned at death’s door at 1.19$, but has since recovered back to 1.32$ as the focus is back on the US, its slow growth, the promise of Bernanke’s put, and what that does to capital flows and Dollar.

The global mindset may still be unsettled, and deeply suspicious, regarding ultimate debt loads, deleveraging, inflation solutions, deflation disasters, double-dip growth relapses, the Chinese property market and anything else coming too mind.

But this doesn’t deflect from the reality that global activity levels and income are rising, households and businesses are spending more, though at various paces around the world, and that recovery proceeds, even if resource utilization in the rich developed countries remains very low and will take a decade to improve.

We are post-crisis, but this doesn’t mean we need to feel jolly about it. Instead, years of hard work lie ahead to fully undo the crisis damage.

What applies worldwide is also true in South Africa, if to a much milder degree than in some developed countries.

Source: Cees Bruggemans, First National Bank, August 10, 2010.

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