Friday, September 2, 2011

Systemic Risk Returns: Is the Current Crisis Worse Than the Lehman Collapse?

John H. Makin

I suggested that the extra fiscal stimulus from the federal tax cuts late in 2010 could, along with the Federal Reserve's second round of quantitative easing (QE2), produce 4 percent growth during the first half of 2011. I added, however, that if the stimulus measures enacted in 2010 failed to generate sustained growth, the US economy could face a cold shower in 2012. The stimulus measures did fail during the first half of 2011, stock markets have dropped sharply, and we do indeed have a severely cold shower already in the summer of 2011. The risks to global economic health from this possible financial collapse are as bad as or perhaps worse than those that emerged in September 2008 with the Lehman Brothers crisis because policymakers have few tools left to combat a new crisis.

Most of its stimulus options, however, like paying interest on the reserves that banks hold or lengthening the maturity of Treasury securities purchased, are not particularly promising, especially in the presence of fears that the real economy is slowing rapidly. The toxic combination of a sudden economic slowdown, potential interconnectedness between the slowdown and the financial risk, and an absence of obvious solutions to these problems constitutes an alarming signal of systemic risk. There is no grand solution to the long list of self-reinforcing problems in the financial sector and the real economy that have intensified very rapidly during August, especially in Europe and the United States.



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  2. no grand solution? it's already taking shape and being implemented faster now. keep your eyes on europe. germany passed the efsf fund, parliament wants some say in oversight but eu leaders say no, as the mechanism will need to be able to "move quickly" even overnight and any nations parliaments would slow the process. the key isn't the efsf fund, if not an efsf fund then they'll do something else, the key is the ceding fiscal/monetary/political/labor/business/taxing and more authority over to a panel or body of decisions makers. a gutting of lesser elected officials decision making power and say. and it won't stop at eurozone, we got super committee's now, what's next, and all leaders acknowledge the globes "interconnectedness" and multinational business and banking would do well with all tied into one rule making body. the grand solution is a grand centralization. never waste a good crises and with more crises coming, more ceding and centralization. if the US isn't tied to eu, china..all the globe, why we bailing out eu banks, why make trade agreements that result in industry moving oversea's? globalization. headline statements from leaders say much lately, how can they be ignored? it's proving true, debt brings slavery, see it in nations being forced to hand over national policy decisions to receive bailouts and those not indebted handing over policy because they hold an ideal, and profits and power are to be had. this change over will involve more wars and crises for sure and we end with another alexander or caesar rising to take the helm, the idea of world empire never died.


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