No Snickering at the IMF's Latest Report

What a difference a year makes.

When I was warning of a looming Financial Armageddon in the spring of 2007, it wasn't hard to miss the sarcastic comments and the dismissive smirks of the so-called experts -- the clueless Wall Street strategists, the economists with their heads up in the clouds (or somewhere else), the policymakers who thought they had it all figured out, and the pinheaded bloggers and pundits who accused me and other thoughtful analysts of charlatanism and fear-mongering.

Nowadays, of course, the arrogance and smugness are gone, replaced by fear and panic as a great many of these individuals have likely been forced to endure the pain and suffering of a cascading, all-encompassing meltdown of the financial system and the economy. All of a sudden, they find themselves engulfed in uncertainty about how the crash of 2008 will affect their jobs, their businesses, and their investments.

Under the circumstances, I'm pretty sure the majority of these fools won't be snickering at today's report from Reuters, "IMF Warns of Financial Meltdown":

The IMF warned on Saturday that the global financial system was on the brink of meltdown, while France and Germany pushed ahead with a pan-European crisis response to try to prevent the worst global downturn in decades.

At a joint news conference, French President Nicolas Sarkozy and German Chancellor Angela Merkel said they had "prepared a certain number of decisions" to present at a Sunday meeting of European leaders as they work feverishly to restore blocked credit markets to working order.

The United States appealed for patience, but the International Monetary Fund stressed that time was running short after leading industrialized nations failed to agree on concrete measures to end the crisis at a meeting on Friday.

"Intensifying solvency concerns about a number of the largest U.S.-based and European financial institutions have pushed the global financial system to the brink of systemic meltdown," IMF chief Dominique Strauss-Kahn said.

President George W. Bush huddled with Group of Seven economic chiefs and officials from the IMF and World Bank, and said top industrial nations grasped the gravity of the crisis and would work together to solve it.

"I'm confident that the world's major economies can overcome the challenges we face," Bush said, adding that Washington was working as fast as possible to implement a $700 billion financial bailout package approved a week ago.

"The benefits will not be realized overnight, but as these actions take effect, they will help restore stability to our markets and confidence to our financial institutions."

Confidence has been in short supply and panic has swept through global markets, driving stocks to a five-year low on Friday and prompting banks to hoard cash. That has choked off lending to businesses and households, threatening to turn a global economic slowdown into a dangerously deep recession.

U.S. Treasury Secretary Henry Paulson said risks to the global economy were "the most serious and challenging in recent memory."

EUROPEAN UNITY

An emergency meeting of euro zone leaders on Sunday will discuss a bank rescue package, taking a British initiative to guarantee lending between banks as a reference point, a source close to the French presidency said.

France's Sarkozy said euro zone countries were working on a joint solution, but declined to provide specifics. He planned to meet with British Prime Minister Gordon Brown shortly before Sunday's euro zone gathering.

Britain's rescue plan, launched last week, makes available 50 billion pounds ($86 billion) of taxpayers' money for injection into its banks and, crucially, calls for underwriting interbank lending, which has all but frozen around the globe.

Germany was also considering injecting capital into its banks, Merkel said on Saturday.

The world's rich nations vowed on Friday to take all necessary steps to unfreeze credit markets and ensure banks can raise money but they offered no specifics on a collective course of action to avert the recession threat.

In a surprisingly brief statement after a 3-1/2 hour meeting, the G7 -- the United States, Britain, Canada, France, Germany, Italy and Japan -- stopped short of backing the British interbank lending guarantee, something many on Wall Street saw as vital to end growing market panic.

Kenneth Rogoff, a Harvard University professor and former IMF chief economist, said the G7 would have been better served adopting some version of the British plan so that banks would feel confident enough to loosen their grip on lending.

"Saying that they'll take all steps necessary leaves hanging the question of whether they know what is best and necessary," he told Reuters. "It was a signature moment for the G7. I think markets are going to be very disappointed."

European Central Bank President Jean-Claude Trichet said markets needed time to digest a series of dramatic steps taken by world central banks in recent days, including pouring billions of dollars into financial markets and lowering interest rates in the broadest coordinated cut on record.

WORKING AROUND THE CLOCK

U.S. Treasury's Paulson said it was "naive" to think that the G7 would endorse a one-size-fits-all approach to ending the credit crisis because there were major differences between the countries and their financial systems.

He said the Bush administration was scrambling to put together a plan to buy direct stakes in American banks to shore up balance sheets riddled with heavy credit losses from the 14-month crisis that began with failing U.S. mortgage loans.

"We're going to do it as we can do it in a proper way that will be effective. Trust me, we're not wasting time, we're working around the clock," Paulson said late on Friday after the G7 meeting broke up.

But even as Paulson and his fellow finance ministers insisted that they were working as fast as possible, there were signs the economy was credit-starved and deteriorating fast.

The U.S. auto sector has been particularly hard-hit. General Motors has had talks with smaller rival Chrysler LLC about a merger that would combine the No. 1 and No. 3 American automakers at a time when both are struggling to cut costs and shore up cash, according to a source briefed on the matter.

Financial weekly Barron's reported that GM was preparing to approach the U.S. Federal Reserve about borrowing money directly from the central bank because the logjam in credit markets had shut it out of other kinds of borrowing.

Comments

[DiverCity]

So what should be the lumpencitizen's response to all of this? I'm not talking about fear or panic or even buying gold. I'm inquiring with respect to the citizenry's possible coordinated response to the systematic meltdown in personal freedoms and free markets through the machinations of the ruling elites. Peter Schiff has suggested that mortgagors with good credit and the ability to pay monthly payments nonetheless quit making them. I've come to the point where I want this charade to fail in the hope that something better will take its place. Thoughts?

[Tom K]

You know, the IMF is the latest one needing the same insults dispensed to all those foolish 'experts.

Let me correct the IMF: There in NO, repeat NO global financial crisis!!

There is a much-deserved self-inflicted deep wound in the US financial sector, which is resulting in an economic recession. There are, to a much lessor extent, banking problems in the EU, again all of it self-inflicted. The EU economy is chucking along OK.

But the rest of the world: east and south Asia, Russia, Arab, Middle East, Japan, S. America, and even Canada are doing just fine. In fact there is an over-supply of capital in the Gulf states. So far the only hits are in the volatile stock markets. But the stock market is not the economy, and these days they are more like an outlet for irrational emotions.

The world is in fine shape. Only the US is experiencing serious trouble. And the Bush people is trying to export it - to share the pain and get some foreign bailouts. Only fools will respond to that.

[Bruce]

Tom,

I totally disagree. Canada is going down FAST. Ontario is heading for a recession, if not already in one. Canadians are indebted to the tune of over $1.1 trillion. Sub-primes are here too. They keep building and building huge houses, but nobody's buying. Calgary, Vancouver, Toronto, just to name a few, are all slipping in sales. I'm Canadian sir, and I can tell you that things are *NOT* pretty here at all. 200,000 jobs have left Ontario alone in the past two years... You don't call this a "crisis"?

You're as deluded as the rest of them.

[Bruce]

Tom,

I totally disagree. Canada is going down FAST. Ontario is heading for a recession, if not already in one. Canadians are indebted to the tune of over $1.1 trillion. Sub-primes are here too. They keep building and building huge houses, but nobody's buying. Calgary, Vancouver, Toronto, just to name a few, are all slipping in sales. I'm Canadian sir, and I can tell you that things are *NOT* pretty here at all. 200,000 jobs have left Ontario alone in the past two years... You don't call this a "crisis"?

You're as deluded as the rest of them.

[Omitted Kingdom]

Let the banks collapse. Let the people who work at the banks find real jobs, in the "labor specialization" area of health sciences as suggested by Alan Greenspan and dimwit US Labor Secretary Elaine Chao. Someone on television last night in North Carolina defined what it takes to create an investment bank: a building, some computers, some chairs. Puts the current crisis into perspective. Let the banks fail.

[Steve]

It is funny, now that there is "crisis" (which almost no one foresaw) everyone on every TV, radio or internet program has all these lame-brain ideas about what caused it and/or how to react. As Mr. Panzer suggests, most of them are clueless. I do not like to see hard working people suffer, but it makes a huge difference to be at least somewhat prepared for this "crisis".

I think it points out the wisdom of my grandparents: when times are good prepare for the times when things will not be so good. If our government was spending less then it was taking in this last 8 years (in effect preparing for worse times during the "so called strong economic times") we would be prepared to help distressed industries and pay Social Security and Medicare benefits coming due. But how can a bankrupt nation bail out anyone? Who will bail us out?

[Tom G.]

A return to sound money is needed. This would, as outlined by many Austrian economists, require putting an end to government's monopoly over monetary affairs. The power for determining the quantity and quality of money must be returned to free-market forces. Money in the hands of the government and its central bank would sooner or later become the ruin of the free societal order.

[Tom G.]

The next coming will be the socialism that USA hated so much but right now there is no other exit. Or, maybe a working class revolution that will wipe out all the rich people and banks...
That is why the army is preparing heavily somewhere in Iraq because they will have to fight onto the streets in Washington.
Will that make for a nice real movie for the whole world to watch ?

"That is why the army is preparing heavily somewhere in Iraq because they will have to fight onto the streets in Washington."

They're already here, according to some:
"Active Military on United States Soil"
"The 3rd Infantry Division’s 1st Brigade Combat Team has spent 35 of the last 60 months in Iraq patrolling in full battle rattle, helping restore essential services and escorting supply convoys.

"Now they’re training for the same mission — with a twist — at home.

"Beginning Oct. 1 for 12 months, the 1st BCT will be under the day-to-day control of U.S. Army North, the Army service component of Northern Command, as an on-call federal response force for natural or manmade emergencies and disasters, including terrorist attacks."

More at http://thisbinaryuniverse.wordpress.com/2008/10/12/active-military-on-united-states-soil/

[roger]

Delusion-mass delusion is alive and doing A OK.The ability to black
out the disturbing to vilify the bearer of bad news,to create a make
believe world,we humans excel at that. Master creator of illusions
the likes of Greenspan (his legacy Derivatives) now there was a man
who could spit volumes of incomprehensible nonsense yet he was regarded elevated to the statute of a financial god ,so was Thatcher,Reagan,
Milton Friedman and a host other free market Gurus they all are part of Mass delusion
witch equals weapons of mass self destruction

[gina]

I don't find it strange that the common citizen are thought of as terrorists by the politicians or the uberwealthy after all a equitable society would reduce them to being just well to do nothing wrong with being well to do if that is the result of their own efforts NOT the result of being clever thieves and manipulators. but in a political/economic system that rewards clever thieves and manipulators it is time to tear the infested house down and rebuild something better.

[Oz Man]

This all links in with the kondratieff cycle quite nicely, a period of great deflation and contraction in wealth. DOW could easily fall to 1000 and recovery could take years if not a decade or more. The credit induced boom was larger than any so far in history, so it will take a long time to rectify. The whole world is going to feel the pinch. The current financial system will melt down, it's only a matter of time.

[Tom K]

Responding to Bruce:

"Canada is going down FAST. Ontario is heading for a recession, if not already in one."

Ontario is the only province to get hit and growth has slowed substantially. But it is NOT in a recession and don't expect to. US-brands auto makers was hit hardest but Japanese-brands makers have actually ADDed jobs so that the net is OK. But Ontario slowing does not mean "Canada is going down fast." Canada is a hell of a lot bigger and robust than Ontario. All other provinces are in fine shape. Don't get carried away by all the media spins - get real.

"Canadians are indebted to the tune of over $1.1 trillion."

About right - that's for ALL indebtness in the consumer sector. But do you know that Canadians have a total saving of around $5.5 trillions. That's trillion dollars!! Canadian saving ratio is about the same a Japan - famous for their savings. Canadian cash savings and massive hard asset holding can easily finance the small debt.

"Sub-primes are here too. "

There is no, NO, subprime mortgages in Canada. That's a fact. Second mortgages are strictly regulated and very few people even quality. Long mortgages (more than 30 years) were offered since 2 years ago but have been banned, and any outstanding long mortgages have been reverted back to standard 25 years. Canadian mortgages are in excellent shape. My many friends in the banks told me so as well.

"They keep building and building huge houses, but nobody's buying."

"Nobody" is a big word. You're listening to the TV spins too much. (I know many real estate agents.) Big mansions sales have slowed but that's because their sales have been way too 'bubbly' the past few years. This correction is healthy. What's could be a problem is the large over-building of high-rises in the GTA area. That may pose some challenges to the developers, but hardly any economic problem.

"I'm Canadian sir, and I can tell you that things are *NOT* pretty here at all."

As you may smell, I am Canadian and one who know the country (and a large part of the world) well. I have experienced many so-called 'not-pretty' in the past 35 years and this one is a mild one!

" 200,000 jobs have left Ontario alone in the past two years... You don't call this a "crisis"?"

I call this a problem, a manageable problem, a business cycle. You quoted 200k jobs lost, but do you know how many other jobs have been added at the same time? You won't find that in the media because they live on disaster hype and spin.

"You're as deluded as the rest of them."

Are you sure? I'm 65 and have seen an awful lot. I've got a scientific PhD, worked in 6 countries, and it is very hard to delude me.

[Bruce]

http://www.cbc.ca/money/story/2008/10/06/recession.html

[Bruce]

Well I don't know *what* part of the country you're from, but around here, it's akin to a quasi-depression. And the fact that you've got a fancy piece of paper and have "been around" doesn't mean diddly squat. There's a reason Harper called this election. And I see Ontario becoming a "have not" province by 2010, if not already there. Oh Canada. Our homeless and overtaxed land. Let me guess., you're one of Dion's cronies...

[Louise]

Personally, I pray that things start getting really bad, so the world can start focusing on what the REAL solution is: Jesus Christ... As a Christian, I believe that this crisis was actually foretold in the Bible. I also see things getting worse and worse, and by the year 2010, if not sooner, I predict global chaos. We are living in perilous times, unprecedented from any other event in history...

God Bless you all in these coming weeks/months. Lord know we're going to need it!

[T_A]

Tom K seem to be one of the last people on this (and similar "themed" blogs) that retain any sense of reality. The world is not going to end. Yes, Americans have lived beyond their means, and elected governments in the past that have not worked in the best interest of the poeple. This is their problem, and they will have to re-adjust. Most of the world has been saving for the last few decades, and despite some banks being nationalised due to terrible decison making and greed among its executives, this does not signal the end of the world. Yes, perhaps the end of US hegemony in the world, but then again, you only have yourself to blame for that one. For the rest of the world, people will still buy food, still use their cars, still buy clothes and still buy homes. Yes, we may see a slowing of the broader economic activity for several years, but this is a healthy part of the overall economic cycle. The entire economic foundation and wealth created in the world over the last 400 years have been founded on people with excess cash borrowing to other people in the return of compensation. This will continue. It seems that too many people fall into the trap of "doom and gloom" because they get hyped up in media babble, and/or because it is, for some, more easy to picture the end of the world rather than to accept reality.

[Lady From Middle America]

Tom K. seems to have initiated quite the discussion. There are still parts of the U.S. where people have not felt any fallout from our economic downturn. It doesn't mean that that our financial problems don't exist.

People need to accept that when large numbers of the population see their lives turned upside down, they'll hear lots of loud squawking. It's called a pressure relief valve. Pontificating on the need to count your blessings doesn't seem to soothe the masses. Those who are annoyed by all of this are advised to turn up the volume on their radios to tune out the rabble.