When the inability of a relatively few overstretched homeowners to meet their mortgage obligations results in the firing of the president of Bear Stearns, the forced bailout of a German lender, the suspension of three asset-backed funds by France's largest bank, and the cancellation of several private equity deals, attention must be paid, as Arthur Miller warned about troubled salesman Willie Loman. No one listened, and Loman committed suicide.
Market watchers and traders have not reached that point yet, but market volatility has them biting their fingernails down to stubs. Most worrying, President Bush personally took to the airwaves on August 9 to assure us that "the fundamentals of our economy are strong . . . there is enough liquidity in the system to enable markets to correct, . . . we're headed for a soft landing." Unfortunately, this only prompted memories of similar assurances by Herbert Hoover.
One trader says that until now, all he worried about is what he didn't know. But the discovery of France's BNP Paribas that it could not determine the value of some of its funds came only a few days after its CEO, Baudouin Prot, assured the markets that his bank's exposure to the problems of the subprime market was "absolutely negligible." So traders now worry about what the people who should know in fact don't know. And investors have been reminded that when America sneezes, Europe and Britain catch a cold.
In this atmosphere, almost anything the authorities do
is seen as a sign that the situation might be worse than it seems. The European Central Bank (ECB) injected a whopping 140 billion euros (about $200 billion) of liquidity into the banking system, and the Federal Reserve Board added about $30 billion of liquidity to its usual seasonal injection, and markets--instead of being relieved--worried more than ever. The ECB action, in particular, led lenders to believe that the ECB has only belatedly discovered that the situation is worse than it seems.
Main Street is not as convinced as Wall Street that the world is coming to an end. Karlyn Bowman, Washington's savvy poll analyst, tells me that a majority of Americans say the recent movements in the stock market have had no effect on their views of the nation's economic condition, and that 77 percent say the recent decline in house prices had "no impact either way" on their own financial situation. To which many economists are saying, "Just wait a few weeks."
As they see it, there is more going on than a mere correction of too-loose credit. Companies that were planning to sell high-yield bonds to finance expansion have found that there are no takers, and have withdrawn their planned offerings. In July, only $2.4 billion of these bonds were issued, down 90 percent from $22.4 billion in June. More ominous, high-quality, investment-grade bond offerings of companies with impeccable credit fell from $109 billion in June to $30.4 billion last month. Unable to expand, these companies cannot create the jobs and rising incomes that an expanding economy requires.
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