Friday’s selloff was triggered by two misconceptions and the prospect of a long weekend, not just here with President’s day, but also in China where the New Year (of the Tiger) begins Sunday.
These misconceptions hurt the indexes but every now and again a wiser head prevails and stocks stop falling. The Dow Jones Industrial Average, which Rupert Murdoch sold yesterday to the Chicago options board, is holding at 10 0000 and change. It will probably be a down day but not a Black Friday. One silly idea causing havoc is that the Euro bloc will have to get money from Germany to “bail out” Greece.
In fact, the European Central Bank has enough cash on hand to offer a guarantee to Athens for any likely bond issue. All it has to do is say that the guarantee is there for the market to calm down.
So why is ECB Governor Jean-Claude Trichet hesitating? Because of moral hazard. Keeping pressure on Greece will reinforce its government’s determination to resist domestic opposition, with strikes, and protests, against necessary measures to slash the deficit. The oldest democracy has to cut spending and raise (or maybe just collect) taxes. Blaming foreign bankers, which is what the Greek unions are doing, is good politics for them but bad for the country.
The second misconception is that The People’s Bank of China’s China’s half-percentage boost in the reserve requirements imposed on its banks will kill the recovery worldwide. The reserve ratios bank need to freeze, which cuts their ability to lend money, are now 16.5% for smaller banks and 18.5% for mastodon banks. This steady increase in how many renminbi banks have to keep in their vaults adds to their solvency and reduces the money supply.
This is actually a less grim way to keep a bubble from forming than just increasing interest rates, which the Beijing government has resisted.
Reader JW asked me what Joseph Stiglitz thinks of the present crisis. He publicly pointed out the hypocrisy of the developed countries’ willingness to slash interest rates and provide cheap funding and quantitative easing to help our banks. This was exactly opposite the tough love austerity measures imposed on the developing countries in the past, not just in Asia but also in other parts of the world. They had to raise interest rates, reduce govt deficits, and pay their debts even if this hurt their economic growth.
As for the scandals of the last couple of years, Stiglitz wrote that they “involved virtually all of our accounting firms, most of our major banks, many of our mutual funds, and a large proportion of our major corporations.” He concluded: “markets do not lead to efficient outcomes, let alone outcomes that comport with social justice.”
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