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NOT a Slow News Day

This posting is from D&S collective member and frequent blogger Larry Peterson. To see more of his posts, click here.

Assuming we’re all becoming inured to the idea that greater-than-five-percent losses on US and global stock markets are becoming an everyday occurrence, a couple of things happened today that simply demand our attention if we’re going to maintain a handle on this crisis. First, Wachovia. Wachovia announced today that it lost $24 BILLION–that’s billion–in a single quarter. This is simply staggering. Added to the second quarter, the company has lost the equivalent of the GDP of Guatemala, as Reuters noted today. And Wells Fargo and Citibank were fighting over it….

Back to the point, though, that announcement was merely the beginning of a slew of poor third-quarter earnings reports that came out today. These indicate weakness spread broadly across the economy, which has reinforced the fears of recession that have been dragging down stocks despite improvements in money and commercial-paper markets, which have been force-fed staggering amounts of money by the Federal Reserve.

But the problems don’t end there. Regarding the improvements in interbank and commercial-paper markets, Yves Smith, in a post that should be required reading, indicates that the market for credit-default insurance continues to deteriorate, and there is reason to believe that it will do so at an accelerating pace. Seeing that this market, in tandem with the other two troubled ones, has been at the center of the unprecedented freeze-up in credit since the fall of Lehman Brothers, problems here could well reverse what improvement we’ve seen in the other markets (not to mention having further adverse effects on equity markets, etc.). And if that happens, the game is up, at least until the the free-marketeers at the Treasury and so on decide to socialize more–a lot more–bailout costs.

And there’s more, much more, afoot on this score, as well. Emerging market currencies are posting huge losses (some have been forced back into the arms of the IMF), even in places like Brazil, which had been considered strong enough to withstand the crisis (in another fantastic post, Smith points us towards the plight of Brazilian and other emerging-market exporters, who hedged their local-currency exposure with currency derivatives, only to see their supposed hedge turn into a problem of vastly larger proportions; and, on this score, Brad Setser’s Tuesday post–“The End of Bretton Woods 2”–is also absolutely essential reading) only weeks, or even days ago. And that brings me to my final point.

A conference has slated for the 15th of November in Washington, in which the so-called G-20 (which, unlike most similar international groupings, includes important developing countries) group of major economies are to discuss the international aspects of the crisis. Many will probably consider the proceedings a joke, presided over as it will be by one of the most unpopular US governments ever, and one set to leave office within two months. But I wonder: it seems virtually certain that Bush will go down as the worst president in US history unless he can pull some rabbit out of the hat in his mercifully few weeks left. The administration has, after all, been making major overtures to North Korea (taking it off the list of sponsors of terrorism–making Cuba, by implication, more of a threat to the US than North Korea). Now, especially with this administration, will can by no means be confused with ability or competence. Still, I can see a faint possibility of a major initiative being taken at the conference, especially if events (like a reverse spike in interbank rates, or a currency crash in a major emerging market) intervene; in fact, the conference (not to mention the US elections) may turn out too late to prevent something of this sort from happening. And, it’s hard to see how any initiative could even be taken up by Congress before it recesses and is replaced by the next (almost certainly overwhelmingly Democratic) Congress in January. But any initiatives will probably center on somehow extending to the developing world some means to attain dollar support which they are lacking now (and which prevents them from flooding their markets with a cash defense, as the developing countries have been able to do).

So we’ve been through quite a day. Be ready for tomorrow.

A quick note: barring a “major event” I’m not planning to blog for a few days: I hope to post a longer piece on the D&S website (not the blog!) early next week on the historic events of the last few weeks.

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