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The US markets today reacted with scepticism as President Obama’s latest efforts to resucitate the banking system were released by new Treasury Secretary Timothy Geithner. The Dow jones fell nearly 5%, indicating a lack of confidence that proposed measures would de-clog the financial system, increase lending and stop the housing market free fall. Not suprisingly European and Asian indices followed suit and fell into the red.

Although some elements of the plan remain unclear, what is clear is that to significantly increase lending the critical step is kick-starting activity in “shadow banknig system”; a network of hedge funds, investment banks, SIVs and private equity houses which have grown to gargantuan proportions in recent years. In fact as William Patalon of MoneyMorning points out, assets in this shadow system oustripped those of actual banks as early as 2007 and by 2006 the volume of lending from securitisation was double that of traditional deposit based lending.  

The irony is that this is the same dergulated system which many have blamed for the current financial crisis and the measures which are being proposed to rectify the problems are the very same things which caused the current situation; asset-backed securities and leverage. It is therefore unsuprising that the markets have reacted with a certain degree of scepticism.

What the US faces is a decision between addiction and cold turkey. The country has grown dependent on complex credit markets which spread risk and led to financial contamination. Now the markets are not functioning, the country is suffering a withdrawl so policy makers face a decision; kick start the system which brought them to the edge of ruin, or go through a once in a generation period of hardship as the economy adjusts to a massive reduction in the availability of credit.

Which option is better in the long term is probably irrelevant as key decision makers have only 4-5 years of job security and cannot afford any economic hardship. Therefore for all the talk of “change” it looks like it’s actually going to be more of the same, because however short termist the bankers have been, politicians are by there nature equally so.

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This entry was posted on Wednesday, February 11th, 2009 at 2:16 am and is filed under Economy, International, Market updates. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.