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A poisoned chalice

By James Cumes - posted Monday, 7 July 2008


The surge in corporate bankruptcies has not yet been picked up by the usual indicators, which tend to lag the market, lulling investors into a false sense of security. However, the actual and potential losses can be calculated by financial specialists and assessments of the grim realities are spreading.

So far, extraordinary central-bank support, combined with widespread “euphorisation” has managed to sustain the markets - at least so as to avoid panic and total meltdown. However, we are now reaching the point at which the desperate rescue efforts are seen to have failed to maintain credit and other markets. The latter, after stabilising briefly, continue to show marked weakness.

The Plunge Protection Team has almost certainly been active and some soothing intervention in statistical analyses has probably helped to boost confidence or not shake it too rudely; but equity markets have still barely held their nominal value levels and most around the world are sharply down. Last week, the DOW fell to the brink of becoming a formal bear market. One correspondent told me recently: “From every which way I look at the markets, the rally of today is not going to survive the night! The equity markets are set up for a hard down. A real, extreme decline compared with what we are used to since the March lows.”

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These issues were not prominent in the primary campaigns. They were not highlighted in the “Unity” demonstration by Barrack and Hillary recently. One or other of them - together with the Republican nominee John McCain - have issued general assurances that they will create jobs, that they will help homeowners threatened with foreclosure and that they will tackle the problems of “off shoring” jobs and industries overseas.

But discussions of fundamental issues and of how to reform the financial system have been lacking. Almost invisible is the problem of how to handle what must now be seen as the almost inevitable, virtual meltdown of the system. That meltdown is now well on the way and can only intensify in the months to come.

We have seen little acknowledgement that such a collapse was always inherent in the financial system which evolved since the early 1980s and even more robustly in the last decade. The rolling thunder of the gathering financial storm will be even more foreboding from August when the Presidential election campaigns gather full momentum; and the lightning flashes will follow ever more closely on the thunder by the time the elections are held in early November.

By the time the successful candidate moves into the White House next January, financial devastation may already have swept through the American and global economy like a tornado.

What will the occupant of the White House then be able to do?

During Herbert Hoover’s successful campaign for the Presidency in 1928, signs of pending economic collapse were already visible but they were “euphorised” out of sight. He had been in office only nine months when the New York Stock Exchange crashed in October 1929. Hoover was energetic, highly competent and powerfully motivated. His advisers were probably as “expert” as anyone at that time.

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Now we have an economic and financial crisis at least as terrifying as in 1929 and the occupant of the White House will probably again be energetic, competent and well motivated. He will have economic advisers of high repute; but it is likely that, whatever their competence, their imagination and their motivation, they will be unable to resolve the complex problems with which the collapse of the credit markets and the entire speculative financial-services industry has confronted them.

This is all the more the case in that those potential advisers have been the very people who, by and large, have supported the policies and practices which have engineered the collapse and who, in recent months, have tried to engineer a rescue.

When a financial bubble bursts, the only realistic option may be to let it run its course and pick up the pieces as painlessly as we can afterwards.

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About the Author

James Cumes is a former Australian ambassador and author of America's Suicidal Statecraft: The Self-Destruction of a Superpower (2006).

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