Running Thomson Reuters provides me a ringside seat on the global economy. A huge proportion of the world’s trading in stocks bonds foreign currencies and other instruments pass through our systems every day. In addition our 2600 journalists provide not only a running account of market movements but also provide the context and analysis behind these developments.
In this blog however I provide my personal perspective. I cannot wholly separate from the person at work and my day job certainly provides a special vantage point but I do not here speak for the company. In addition given the commitment of Thomson Reuters to preserving the independence freedom from bias and impartiality required by the Reuters Trust Principles I avoid political opinions – although I have strong ones personally.
So I think we came very close to the abyss last week. The Sunday night bankruptcy of Lehman Brothers was destined to get the week off to a bad start despite the timely acquisition of Merrill Lynch by Bank of America. The mid-week bailout of AIG avoided another specific set of problems but by Thursday the money markets had totally locked up certain money funds had breached the near sacred $1.00 per share threshold and even well-run investment banks found they could no longer finance their trading operations despite not holding the toxic exposures that brought down Lehman AIG and others.
What was needed was a systemic solution – a solution that was audacious enough and comprehensive enough and yes expensive enough to permit the very interwoven global financial system to begin rebuilding its broken and frayed strands. Although the final shape of the federal bailout plan is still being developed as I write it looks like the penny has dropped in Washington and we have moved away from bank-by-bank band–aids to a comprehensive response. Judging by the stock markets’ reaction on Thursday and Friday there is growing confidence that the crisis phase of the Great Repricing may be receding. I label the period commencing with the failure of the Bear Stearns funds in Summer 2007 and probably extending for at least another 12 months from today as the "Great Repricing" because we are witnessing an unprecedented repricing of risk and a deleveraging of most portfolios
One of the attractions of writing history rather than blogging is that you can generally wait to see what happens before writing. That is always the safer choice and usually yields the best analysis but in these posts I take up the challenge of writing instant history. So here goes. I think was came close to the edge last week; I think the proposed federal bailout fund is a sensible policy response to an unprecedented set of risks; I think it will work; and I think we will all be paying the price for years to come.
While I am focused on historians they often observe that great empires (think Roman or British) ultimately fail not as a result of a decisive military loss but because their powerful economies eventually become over-extended. If this is true the US economy will need to be re-invented to avoid a similar fate for the last super-power. I hope our next President is up to the task.