For those of you who have been following things, you know we have had three panics since the credit crisis began. The first was in August 2007. The 2nd after Bear Stearns collapsed and the third was creeping up after IndyMac and the GSE nationalization, but hit high gear after Lehman collapsed.
In my estimation, this third panic is now over, thank goodness. However, given the continued acute levels of distress, you have to think that a fourth panic is not out of the question.
It reminds me of a passage in Manias, Panics and Crashes, the best book to read on the anatomy of a crisis and the need for an international lender of last resort. Kindleberger says there near the end of Chapter 10:
“I believe…that the 1929 open-market operations were woefully inadequate in the weeks from mid-October to the end of November 1929. They enabled the New York banking system to take over the call loans of out-of-town banks, as [Milton] Friedman and [Anna Jacobson] Schwartz explain, but only at the cost of cutting back credit extended on commodities and current purchases, which drove down prices not only of stocks but also of commodities, houses, and land, thereby unleashing the depression. Admittedly, it would not have gone as far as it did if there had been an international lender of last resort to halt the unraveling of European (and U.S.) credit in the Spring of 1931.”
–Manias, Panics and Crashes, Charles P. Kindleberger
Three thoughts:
- The Fed and other central banks were slow to act in August 2007 and again in March 2008 in my estimation. To my mind, this parallels the failures in October and November of 1929 that Kindleberger writes about.
- And as we all know, there still is no international lender of last resort.
- It wasn’t until 1931 in the Spring that we saw a true unraveling. This is much later than most people realize when they think about the Great Depression. 1929 and 1930 were much better and 1931 and 1932 much worse.
Can we sound the “all clear”? I believe the answer is no. We still have much work to do and that begins with liquidating zombie, bankrupt financial institutions. Wachovia’s earnings report yesterday should be a wake-up call to monetary authorities around the world that there is still significant overcapacity in financial services and there are plenty of losses lurking.
We are well-advised to find those losses and liquidate or merge the insolvent institutions as soon as possible. Monetary authorities are resting on previous actions during the past phase of panic.