I don’t think even the most alarmist of doomsayers could have anticipated the pace of events in financial markets over the past couple of weeks. In that time, the casualties (bankrupt, nationalised or firesale) include Fannie and Freddie, Merrill Lynch and Lehman, AIG and HBOS and probably others I’ve missed. And the new names on the list are even more startling: Goldman Sachs, Morgan Stanley, Macquarie Bank, GE, even the Federal Deposit Insurance Corporation.
As late as last week, columnists were asking (and answering in the negative) the question “Should I take my money out of the stock market and put it in a money market fund”. Now the question is “If I pull out of the money market funds before they shut down redemptions, what’s the safest alternative: a bank account, T-notes or gold?”.
No doubt, this too will pass. But it’s just about impossible to see things returning to the status quo ante. A severe recession now seems inevitable. And when it ends, we’ll be looking at a greatly contracted financial sector, with governments deeply enmeshed in both ownership and regulation. Among the likely consequences, a huge decline in the economic importance of New York City, as the firms that defined Wall Street disappear. London may gain relative to New York, but is still likely to suffer badly, as will Switzerland. And that will have implications for the national economies that depend heavily on playing a central role in the financial systems.
Politically, even allowing for the incredible triviality of US election campaigns, it’s hard to see McCain surviving once the implications of this sink in. From the Keating Five to deregulation in the 90s, he’s been in the pockets of the financial sector throughout his career.
No doubt there’s lots more I’ve missed. Jump in and comment.