As Wall Street tumbles, the world quakes
Markets from London to Tokyo fell on the news of Lehman Brothers' bankruptcy.
from the September 17, 2008 edition
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Pat Murphy talks with
Monitor correspondent Mark Rice-Oxley about Europe's reaction to the Lehman Brothers bankruptcy and the overall financial downturn in the US.
The problem remains that no one really knows who is contaminated. One commentator likened it to trying to overcome a computer virus that has been e-mailed all around the global financial system. "My fear is that nobody knows what anybody's exposure is, which is why banks remain fearful about dealing with each other," says Mr. Batstone-Carr.
That essentially is why lending markets have dried up, generating a liquidity crisis that is threatening banks with perfectly good balance sheets: if they can't borrow, they can't lend and the primary purpose of banking is undermined.
In Britain, the home mortgage market has almost dried up and personal loans are difficult to get for anyone without impeccable credit ratings and large deposits. The housing market, long the driver of a decade of uninterrupted growth, has seized up with no money to lubricate it.
Central banks have tried to flush cash through the system. On Tuesday, the Federal Reserve, Bank of England, European Central Bank, and Bank of Japan pumped more than $200 billion into money markets. But everyone needs cash. Late Tuesday, the talk turned to the need for further interest rate cuts.
This market-based frenzy might seem rather theoretical for most people were it not for the wider implications for a global economy edging closer to recession. That impact could easily be seen in London on Monday as 2,500 Lehman Brothers staff packed up their possessions and started pondering their chances of finding a new job.
And the Lehman experience sends another clear message: central bankers are not necessarily prepared to bail out poor performing firms. Le Monde analyst Gaetan de Capele praised the move by US Treasury Secretary Henry Paulson: "The message for the future sent by Washington [by not] privatizing the profits and nationalizing the losses" is a good first step.
In short, expect more bankruptcies, more job losses, and a steady diminution in spending – the hallmarks of economic downturn.
"We expected job losses in any case because this is not a normal slowdown. But now there's far greater fear," says Mr. Urquhart Stewart, noting that London's financial sector is an important component of a British economy that is already forecast to tip into recession this year.
"In a best-case scenario," says Mr. Jessop, "the fallout could be limited to a couple of thousand bankers being unemployed for a few months; but when the underlying economy is weakened, you're getting a further blow to consumer and business confidence."
Market volatility is likely to discourage investment and dampen demand for goods, analysts say. But they also note that economies have continued to grow, albeit slowly, over the past year despite the exigencies of the credit crunch.
• Staff writer Robert Marquand contributed from Paris.1 | Page 2
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