Friday, February 13, 2009

Risk Part Two: The Mess

The financial crisis of the last ten months is so severe that banks around the world are collapsing, propped up only by unheard-of bailouts by their governments. Many banks have been fully nationalized, either completely or effectively. These include Icelandic banks; Northern Rock in Britain; the biggest Irish banks (Allied Irish Banks, Bank of Ireland and Anglo Irish Bank); and Fortis in Belgium. The British government now owns 70% of the Royal Bank of Scotland. I have lost track of the billions (trillions?) the US government has put in its financial sector. And that's just a partial list, and only as of today. We can foresee that many more banks are going to be in big trouble in the future, especially as the countries on the periphery of Europe implode and we await the next round of mortgage defaults in the US.

The crisis is so severe that currently governments are doing little more than buying time before there are more defaults and more bankruptcies. Despite the massive payments, the credit crunch is not easing. Consequently, the whole economic system is folding in on itself, and a vicious cycle is in full swing of layoffs, reduction in demand, and corporate collapse. Already it is estimated that 20% of the wealth of American citizens has been wiped out. Layoffs are announced daily. All of this will have tremendous negative impact down the road. Just one example: a massive reduction in municipal tax revenues.

To me, the scariest part of the whole mess is the complete inability of anyone to predict what's going to happen next or to agree on what to do about it. Just a few weeks ago our government and most Canadian economists were saying we might escape unscathed. Then the statistics came out (after a frustratingly long delay) and it was apparent that things are much worse than the worst prediction.

At President Obama's press conference about the financial crisis last week, the first question was about the language he used in describing the crisis: the reporter implied that he was fear-mongering and asked him to justify his extreme language when saying what could happen if we didn't enact effective stimulus immediately. It was a profoundly stupid question. In reality, we already have fallen into the abyss.


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