It’s two years next Sunday, August 9 when the world shuddered to a halt and started tipping over.
The subprime crisis in the US and collapse in credit derivatives started tearing apart banks and sent a freeze coursing through the world’s financial system, drying up liquidity overnight.
Nothing was the same again as banks, regulators, governments and companies were hit by a financial slide that morphed into the first synchronous recession the globe has seen since the Depression.
The so-called ‘Great Moderation" of low interest rates, low inflation and easy credit was exposed as a mirage, a house built on sandy foundations and leveraged up to the hilt, by people who should have known better – bankers, lawyers, rating agencies, private equity investors, brokers, lawyers and every other financial expert known to man.
From then on we had new phrases to contend with: credit crunch, global financial crisis, recession and ‘what the hell happened’.
Bankers became monsters, Kevin Rudd was elected, Barack Obama too and books about The Depression became popular, as did phrases like cocooning and we got MasterChef Australia to comfort us in our stay at home miseries.
Now things have settled, the fault lines are still there, but a bit of blue tac or clag and paper (lots of green US dollar bills), have papered over the black holes, allowing those who caused the crisis in the first place (the bankers and their mates) to forget their sins and crow again as they resume earning the big money they did in the days before the GFC.
Self denial is out, outright denial and amnesia is now the order of battle for the banks.
So a rally has resulted since March, but it’s one built on a rort, officially smiled upon, and horribly necessary.
Something has to be done to rebuild the losses for the financial sector, and the damage done around the world the value of houses, shares and other assets.
De-leveraging is continuing: the Australian property trust is one of the more visible examples of that move with over $15 billion in new capital raised to pay down billions of debt and finance billions of dollars of asset value write-downs, with more to come.
Nearly $90 billion was raised in 2008-09 on the ASX in new capital and another $15 billion was raised in July, according to the Exchange.
Australia is already emerging, it seems, from the slump with 32,000 jobs created last month.
But in the US, Europe, the UK, Japan and other economies, the banks are too wounded to be recapitalised through the markets alone.
They have to generate super profits to boost reserves, confidence in themselves and in their customers, and the only way that can be done is to give them access to cheap money, courtesy of the governments.
Without it, the world would be in a depression, output would be slumping and unemployment lines growing by the day.
It rankles, it’s unfair, but it’s the only thing standing between some sort of sustained recovery and continuing crisis.
For all those commentators-come latelies who now loudly claim ‘crash, what crash’ in Australia, try taking away $42 billion in government stimulus spending, plus the first home buyers scheme and shove interest rates by 1% to 4% and see what happens.
That day is approaching. The Reserve Bank is probably now heading there faster than we think.
The surging markets offshore and here since mid-July have brought the day of a rate rise much closer than we think.
Soon it will be time to start standing on our own feet again, and that will be followed around the world.
That’s when these ‘green shoots’ will be tested to the hilt.
With more expensive money and a lurch down in confidence and demand, watch the bulls pine for the days of Big Government and free money at banking’s soup kitchens, AKA the local Central Bank.
The whole world economy, from China to the US, Iceland, Germany, Japan, the Middle East, the rest of Europe, everywhere is being supported by trillions of dollars of government money, guarantees of all shapes, capital (in the US, UK, Germany and France) and the lowest interest rates on record.
Cheap and easy money is available for banks to borrow at 0.25% from the Fed in the US, or less in the UK from the Bank of England, while the European Central Bank made $US940 billion available to banks in the eurozone to borrow at low rates and lend to businesses large and small and to retail customers.
The ECB left its rate steady at 1% last night, the Bank of England left its key rate at 0.5%, and decided to inject another $A100 billion in fresh money into the UK economy.
Second quarter economic activity in America improved mainly through the government spending.
The Obama stimulus spending added 3%, perhaps a bit more, to second quarter growth. Without it the 1% annual contraction could have been above 3%, possibly 4%.
Without that money tens of thousands of more Americans would have been unemployed. That would have added to the home mortgage pressures, lifted foreclosures and added to losses for banks and other financiers.
But there’s no demand from business or individuals for extra loans, except perhaps in the US where it’s more of a bailout for underwater home mortgages, destroyed commercial property loans, or corporate loans.
So the banks are using this to recapitalise themselves by trading in every market, taking on more risks than at any time in the past year.
So as the recession’s impact eases as it runs out of steam and the government support starts helping to steady sinking econom
