Now we have clarity, says the FT’s John Authers in Tuesday’s Short View column. Last week’s awful employment data from the US ended all arguments about whether the US is heading for a recession: it is already in one. Now we need only argue about its severity and its duration.
Meanwhile, the equity market has given up its attempt to deny the credit crisis and has lapsed into a bear market, defined as a 20 per cent fall from peak to trough. Europe, Japan and China are already bear markets. The S&P 500 is down only 17 per cent, but this is an illusion of the weak dollar: in euro terms it is down 27 per cent.
Optimists draw parallels with two shallow bear markets: 1990 (which lasted a year, with a fall of 19.9 per cent) and 1998 (a four-month decline of 19.3 per cent). But the 1998 comparison is specious. The US was not in recession. The crisis was concentrated in the LTCM hedge fund. All the interested parties could be gathered into one room. Hope springs eternal, as market rallies in recent months attest, but there is no chance that this crisis can be solved so easily.
The 1990 parallel is more beguiling. Then as now the US was heading into a recession, and the problem centred on irresponsible home lending.
But that bear market included Iraq’s invasion of Kuwait. Most importantly, the financial system has changed, and now relies on credit and money markets that barely existed in 1990. It is ever more apparent that they are not functioning.
On Monday, Wall Street threw in the towel. The morning’s worst fallers are a list of the groups that dominated the world of securitised finance over the last two decades: the mortgage agencies Fannie Mae and Freddie Mac, the bond insurers Ambac and MBIA, and the investment banks most deeply involved in mortgage finance. As with the economy, we have clarity: the credit market model is broken and must be fixed.