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2011-08-09 08:08:44
Aug 8th 2011, 21:51 by R.A. | WASHINGTON
MARKETS were a sea of red today. Pessimism grew as the day wore on. Asian markets dropped just over 2%. Markets in Spain and Italy fell over 2%, as well, while Britain's FTSE was off 3.4%, and Germany's DAX dropped 5%. In America, the Dow dropped 5.55%, and the S&P tumbled a stunning 6.66%. Brazil's exchange was down just over 8%. Commodities sank. West Texas Intermediate oil fell 7% while copper was off 4.5%. Gold rose over 4%, however, topping $1,721 an ounce. Within bond markets, anything resembling a safe haven saw rising prices and falling yields. Yields on British and German debt tumbled, while yields on American government debt plummeted, downgrade or no. The 5-year Treasury yields 1.08%. The 10-year yields 2.31%. That's the lowest level since January of 2009; the summer swoon that prompted QE2 never produced a yield that low. Bank stocks were hammered today. Bank of America's stock dropped 20% close to levels that prompted a major bail-out in early 2009. Citigroup shares were off over 16%; no big
bank was spared heavy losses.
Big bank losses could be related to concerns about the impact of S&P downgrades, or margin calls at big hedge funds. The global sell-off indicates serious worries about global growth. And why wouldn't there be serious worries? A number of large advanced economies are stumbling along at or near a return to recession. Fiscal and monetary policy are tightening around the globe. Crises, real and invented, are rattling investors and inducing a recovery-undermining flight to safety. And governments seem powerless to help. The European Central Bank prevented an immediate euro meltdown with its purchases of Spanish and Italian debt, but there's little to indicate that government leaders have the inclination or the stomach to use the time they've been handed to strengthen the currency union. In America, the discussion remains firmly focused on fiscal issues, even as Treasury yields drop. Even the bare minimum of fiscal support extending last year's payroll tax cut extension to limit the extent of this year's fiscal
contraction is encountering Republican opposition. For all the attention on deficits, there's little sign that either party has softened its negotiating position since the debt-ceiling deal was struck.
With Congress likely to remain hopeless, President Obama gave a speech today in which he...recycled talking points from the past fortnight and quietly asked stubborn legislators to come together in compromise. It was one of the least impressive performances of his career, seemingly calculated to express governmental impotence. And now is no time for governments to look impotent; if you want to scare yourself, imagine the TARP vote coming up in the current Congress.
Tomorrow, the Fed will weigh in. As of Friday, intervention didn't seem to be the most likely outcome of the August meeting, but today's developments may well change that. I continue to think that aggressive new easing is justified, but amid a clear panic, the Fed's language may be its most powerful tool. The institutions with the ability to salvage the recovery seem all too willing to let things fall apart around them. Simply by making it clear that the Fed will not stand for a return to recession in America and will not be content with current forecasts for practically no material improvement in labour markets over the next year, Ben Bernanke could have a substantial impact on market psychology. I'm concerned, however, that overly cautious Fed officials will content themselves to look at inflation numbers that badly lag behind events.
I've been thinking, today, of the investors and entrepreneurs who bought the talk about sustained recovery and put money on the line during the eight quarters since the recession's official end. They will be punished for their daring if the economy falls back into recession, and the firms that built up ever larger cash piles will be vindicated. It will be harder than ever to pry firms and households away from a deflationary mindset. That's an extremely troubling thought. Risks are pointing overwhelmingly to the downside here, and if major central banks fail to react, the carnage will only grow.