We can fix this. If nothing else, that’s the message I hope readers take away from this column. Of course, the “this” is the run on the world banking system. Stock markets have plunged globally, gold prices have shot up, and U.S. Treasury-bill rates have plummeted to 10 basis points, the lowest since the 1950s.
We’re witnessing a desperate flight to safety by investors. Folks are running away from financial assets and financial institutions simply because confidence has disappeared.
This week, Treasury secretary Hank Paulson said “no” to a government bailout of Lehman. Paulson and Ben Bernanke then took over AIG with an $85 billion bailout, with the Treasury issuing roughly $100 billion in new T-bills so the Fed has the cash to resuscitate AIG.
All this was necessary. A collapse of AIG would have been unfathomable -- it is simply too interconnected globally. But it turns out this rescue mission only elevated investor fears. Shareholders are asking: “Who’s next?”
The bears are now raiding Morgan Stanley and Goldman Sachs, two national treasures. Meanwhile, the Reserve Fund -- an original money-market fund launched by Bruce Bent, a hard-nosed friend of mine who for decades has supported conservative political causes -- has seen its net asset value drop from $1 to $0.97. That’s a shocker. And the reason? The fund’s holdings of Lehman commercial paper were unsupported by letters of credit.
Money-market funds are supposed to be safe havens for mom and pop -- for Mary and Joe in McKeesport, PA. But everybody now wants T-bills and gold.
Well, it’s time for some perspective. The world is not coming to an end. The stock market has tumbled, but it’s still over 10,000. In late 2002 it was 7,500 and in mid-1982 it was 750. Are things really that bad?
With home prices falling, foreclosures and defaults are at the root cause of the run against all manner of mortgage-related bonds held by the banks. But as investment guru Don Luskin points out, foreclosures today are less than 3 percent. During the 1930s they were 50 percent. Or how about the unemployment rate? Today it’s 6.1 percent. Back in 1982 it was near 11 percent and for most of the 1930s it was over 20 percent.
As the oil bubble pops the underlying inflation rate is somewhere between 2 and 3 percent -- quite unlike the double-digit hyperinflation of the 1970s. Home prices themselves have fallen between 10 and 20 percent, but they’re still about 50 percent higher than at the start of the decade.
And there are constructive policy measures that can help fix the market’s problems.