Financial markets worldwide getting shaky

I was emailing a friend recently about the stock market. He thinks the markets are “totally divorced from the reality of the time” and in many ways he’s right. They exist in a bizarre other universe, seemingly not affecting the rest of us much.

Except when they do, as witness the subprime debacle that has now morphed into a worldwide credit crisis.

  • Former Sec. of Labor Robert Reich: “The economy is failing” and Congress needs to pass a massive stimulus package now, deficit spending be damned.
  • Former Sec. of the Treasury Lawrence Summers: “In the months ahead there is the real possibility that significant financial institutions will encounter not just liquidity but solvency problems
  • Mish says forced sales of bank assets are coming soon as banks desperately try to raise money. WaMu is toast and Citigroup will be broken into pieces.
  • Barclays Capital is warning clients that a major financial storm is coming and blames the Fed for not moving against inflation.
  • The Royal Bank of Scotland advises all the chickens will be coming home to roost after the current excesses and that the contagion will be worldwide.

Banks will fail. Companies that rely on revolving lines of credit will find them more expensive or not available at all. Mortgages will continue to be harder to get. Businesses that rely on consumer spending will face slowdowns. Pensions fund will have serious losses. And so on.

The toxic waste spawned by subprime and its esoteric cousins, the CDOs and SIVs, has now spread to the financial system in general. And that means to all of us too.

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