Government leaders meeting in London today took too long to recognize the severity of the global financial crisis, but, with few exceptions, they can no longer be blamed for a lack of imagination or energy in their range of responses.
Though their efforts may now blow up for reasons that lie outside their control, there's no arguing with what you might call the audacity of scope.
A fresh look at the breadth and scale of their attacks in the past six months is almost breathtaking when you step back and consider how most governments dragged their feet in the first 12 months of the calamity. And it suggests that while we may be cynical about their motives and exasperated over their tactics, we can no longer doubt that they finally understand the stakes.
Central bankers and policymakers have launched no fewer than 460 major initiatives since the collapse of Lehman Bros. (LEHMQ, news, msgs) shoved them into emergency mode in September, boosting the global money supply and slashing mortgage rates, all in a mad dash to save the developed world from collapse by spending, the emerging world by lending and the future world by regulating.
Economy of the absurd
These steps have given rise to fantastic speculation opportunities that we will be exploring together for years because, while they are well-intentioned, they are also wildly contradictory and create gigantic entryways for speculation and exploitation.Credit analyst Brian Reynolds put the challenge of understanding the underlying structure of what's happening best by observing that governments' response amounts to something like a Zen riddle:
- The global economy's main problem is that there is too much debt . . .
- Yet governments are trying to add more debt in an effort to get credit flowing again . . .
- While at the same time attacking bondholders and bankers, the very people they depend upon to create, sell and buy all that new debt.
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Yes, it's truly absurd. The second point contradicts the first, and the third contradicts the second. No wonder equity and credit markets are jumping all over the place -- up 2% one day, down 2% the next -- as investors try to reconcile long-term portfolios with rules and conditions that change almost daily.
What's so puzzling is that every investor who has read his history knows that whenever overambitious lenders run headlong into overambitious borrowers, the result is a disaster followed by systematic deleveraging as debts are erased in bankruptcy. The process is painful at the time, but countries and companies always emerge from such episodes leaner, smarter, more chastened and aching for new success. (A great example was the savings and loan crisis, which smarted in the late 1980s but led directly to the strong, energetic economy of the 1990s.)
- Video: What's ahead for the G-20
Yet governments meeting today in London don't seem to want to let that happen this time because it would result in too much dislocation, with millions of people thrown out of work, communities unable to pay taxes and mobs storming capitals with pitchforks. Instead, policymakers keep trying to come up with new types of debt and sales mechanisms to re-create the credit bubble -- for example, the new FDIC-backed bank bonds and the Public-Private Investment Program to clear toxic assets -- while at the same time feigning anger at the companies on whom they now depend even more desperately for political success. These relationships are truly enigmas wrapped inside mysteries, the very opposite of the transparency that the Obama administration, at least, had promised to bring to the table.
Liquidity meets publicity
While the world is focused today on the Group of 20's new commitments, take a moment to think about how governments have pulled out the stops already to battle debt deflation. Just last week, analysts at ISI Group note, the U.S. had a new $1 trillion program to clear bad debts from banks' balance sheets, Australia guaranteed all borrowing from the country's banks, the European Central Bank said it would start buying corporate bonds, President Barack Obama promised more auto industry loans (with conditions), South Korea announced a new fiscal stimulus initiative, and interest rates were cut in the European Union, Mexico, Colombia, Egypt, Poland, Israel and Norway.Continued: Greasing the skids for private investment
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