Ruins

From Indexed via Barry Ritholtz at The Big Picture:

What a day! What next??

The craziness continues. The New York Stock Exchange went into free-fall this afternoon but then bounced back. In that short time the DOW fell 1000 points, its largest ever point drop and biggest percentage drop since 1987. At the close the DOW was off 348 pts or 3 percent.

In Europe, the Greek parliament approved the proposed austerity measures needed to qualify for the international bailout, while outside demonstrators again clashed with police. The conviction is growing, however, that this is too little, too late—and not just for Greece.

Meanwhile back in the US, government and stock exchange officials are working late into the night trying to figure out just what the hell happened today. NASDAQ has already said it will cancel some trades it believes were erroneous. How they are determining this is not clear and there is already talk of law suits. Many “retail” traders found themselves locked out of the market during the plunge as servers and broker websites crashed all around the country. Financial web sites and blogs had similar outages.

Regardless of possible mistaken orders or technical glitches, today’s market roller coaster was primarily about growing anxiety around the world that the economic recovery may be going off the rails, if it hasn’t been a mirage all along. Since the financial meltdown in 2008, the world’s economic problems have come down to one four-letter word: DEBT. In the US it was the sub-prime mortgage collapse that sent the economy over the edge. Now comes the sovereign debt crisis of Greece and who knows how many other European countries. In both cases this debt is held by institutions around the world and so everyone is involved.

We are in an extremely unstable economic situation and perhaps political as well. Today’s fiasco on Wall Street has dealt a severe blow to confidence not only in future economic prospects but in the integrity of the market itself. Events like this combine with revelations like the Goldman Sacks fraud case to raise serious suspicions about whether the whole US financial system isn’t rigged and with some pretty heavy fingers on the scales.

The voices are growing louder and more numerous expressing concerns that we are teetering on the brink of a second major economic downturn. In recent months I’ve read several pieces pointing out that the Depression began with two crashes, the famous one in 1929 and a less well-known but even deeper one in 1932. One of these quoted articles from 1931 expressing confidence in the “recovery” and that the economy was on a rebound. Just today Robert Samuelson voices his concerns along these lines in Newsweek.

There are a lot of worries being expressed these days. Many have noted that the dithering of European leaders is much like that of politicians in the early 1930s. There is concern that US action since the 2008 financial meltdown has been mostly window dressing and that Wall Street’s influence in Washington is so strong that politicians are incapable of anything really substantive. Many say that the debt crisis of developed countries around the world is being avoided because no one—politicians or voters—wants to face the fact that the only solution is a significant reduction in living standards across the board. Coupled with this is the fear and anger that those with political and financial power are manipulating economic developments to insure their living standards are untouched. Suspicion or awareness of this at some level explains the protests and violence in Greece, which many expect to spread elsewhere in coming months.

The coming days and weeks and months will certainly be interesting.

Eurozone tottering (cont.)

Greece descended further into chaos today as demonstrations turned violent and deadly. Masses of protesters chanting, "Thieves! Thieves!" attempted to storm the parliament building and threw Molotov cocktails at police. Unsurprisingly yet tragically the first deaths also occurred as three bank employees died when demonstrators set fire to the bank building where they worked.

These episodes are making evident the one factor ignored in the financial and political calculations for saving Greece and the eurozone: namely, the verdict of the population at large. Greek labor leaders and others have figured out that the proposed “bailout” really only bails out the banks which foolishly gave Greece all the credit rope with which it has hung itself.

The bailout’s goal is to avoid a Greek default on its debt. In addition to billions of euros in new loans, this supposedly will be accomplished by drastic cutbacks in Greek living standards. Greek demonstrators are saying, “Sorry but we want everyone to share the pain.”

A restructuring of Greek debt is becoming increasingly likely, as market reactions are making clear. In other words, Greece’s creditors are going to take a hit. Alone this may not be such a big deal but the precedent it sets has bankers and the markets in a growing panic. The fear is that the rest of the PIIGS will quickly get in line for similar treatment and possibly other countries as well. Now we’re talking real pain for the banks which—despite the rosy claims of having “turned the corner”—are still in a precarious state.

Exposure of US banks to possible European defaults is not insignificant. In addition, such defaults would almost certainly mean a deepening of Europe’s recession and a devaluation of the euro. American exports would take a hit, further slowing or even reversing the US recovery. Despite such dire consequences, financial writer Simon Johnson says in a very pessimistic column that we should “expect nothing” in the way of genuinely constructive help from those in charge:

The Europeans will do nothing this week or for the foreseeable future. They have not planned for these events, they never gamed this scenario, and their decision-making structures are incapable of updating quickly enough. The incompetence at the level of top European institutions is profound and complete; do not let anyone fool you otherwise….

The Europeans will not lift a constructive finger. The leading emerging markets are too busy battening down the hatches (and accumulating ever more massive chests of reserves). And the White House still seems determined to sleep through this crisis. Expect nothing.

Eurozone tottering (cont.)

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