The scale of the global economic problem: 6 versus 1574

Sunday, March 1st, 2009 - economics, Employment, sunday thoughts


2009 Employment Prospects

Are we sure yet if the worst of the global economic crisis is behind us, let alone its effects on global employment? I saw a tweet on Sunday night from Jason Calacanis, the co-founder of Weblogs inc and CEO of human SEO Mahalo:

Chance of the stock market crashing tomorrow/Tuesday when this AIG madness hits?

My guess is we close below 7k two or three days out of five

Interesting – I thought we were past the worse of this stabilisation period, but according to Jason – possibly not. An article in the Telegraph also looked at the same problem from a different angle, that the S&P500 chart point of around 700 points could brake either upwards or downwards – the experts just don’t know.

So, I did some research, and what is obvious is that this stabilisation period has longer to go, and hence the stock market and the economy I conclude has much further to go down. And the crux of the problem? The number of banks in the USA versus the number of banks in the rest of the world.

How many major banks are there in the UK? six. And in France? three. In Switzerland, a banking hub – three control 80% of the economy, you can make that 90% if you go to 10. And I bet most business people in those economies could name one of those major banks in each of those major economises

And how many in the USA? Depends on what you mean by major banks – could be city, state, Atlantic/Pacific based or even national. Each has to register and insure their deposits at the Federal Deposit Insurance Corporation, who guarantee everyone’s money will be there even if their bank no longer exists.

Lets just say national banks, and ignore the rest which control over 30% of the USA’s banking activity. Well, that will be 1574 then! At state level there are an additional 877, and non-members who insure with FDIC adds another 4731

If Gordon Brown in the UK, or Nicolas Sarkozy in France or Corina Casanova in Switzerland needed to find out how bad the banking crisis was in their countries, and how much money was needed to stabilise the system, they would need to make around 10 phone calls. Meanwhile, Barack Obama and his Treasury Secretary Tim Geitner need to make at least 50 phone calls to cover just under 60% of their banking system.

Now, here comes the AIG problem. AIG insured risks against S&P’s rating system failures – if the securitised debt bond on those USA mortgages failed to be worth the X you put in, or pay back the Y% of interest, all these USA banks and many of the major global banks had an insurance agreement with AIG to pay some of the difference. This insurance can be thought of as the free market pre-crash version of the post crash toxic debt bucket that Brown/Darling have set up on behalf of finally refinancing the UK banks – not just stabilising, fully refinancing and even a bit of quantitative easing (ie: printing money).

Lets say your are Kevin T. Kabat. What, you never heard of him? Mr Kabat is the President and CEO of Fifth Third bank. OK, you never heard of them? Never been to Michigan or the Mid-West then: it’s the USA’s 25th largest bank according to FDIC, with 1300 branches, and for 4.5million customers holding $37Bn on deposit – about half a percent of the total sum insured by FDIC. Do you see the scale of the problem now? The 25th biggest bank holds less than half a percent of the total deposits insured. No wonder Tim Geitner expects the whole process of assessing the strengthening of the banks – not completing it – will take at least two months.

Hence, AIG’s results are going to be a wet finger in the air, created by some cautious just in place new bankers – its going to be negative, its going to be bad, its going to hit a market reeling from a whole series of negative data. Below 7000? It could hit 6000 before it finds a level according to some chartists.

However, don’t see this as wholly negative – it could be bad short term with more job losses, but it isn’t terminal. Much as though the UK and rest of the world with less than 10 numbers and a big dose of debt can stabilise their banking systems, the US needs to both stabilise and get their people spending. This will only happen once that big 800Bn package voted through recently starts acting – and most of that is construction, and much as though it brings jobs, it will take a lot of time in planning.

In summary, its going to take time, and time to feed through to the economy means – there is still cash flow in the system, and hence there is more downward pressure in the markets (caution of banks/when) over upwards (effects of that package). There is another problem here as well. Much as though we can not yet see the depth of the bottom, or how steep it will be getting there, or how much longer, there is one fair conclusion: however we go down, we get to the same position on the far side. Hence, if we go smoothly, the bottom will be long and smoother in recovery; if its hard and fast, the the inflationary boom on the far side as a result of the governments and central banks over stimulus will be like applying Tabasco to your toothless Granny’s meal

I think there is a need to do something quickly to stimulate the economy to define that bottom sooner – over stimulation with huge post depth inflation is as bad as the idiotic banking crisis which got us here in the first place. Much as though Gordon found the way to stabilise the way down, Angela Merkel in Germany has found the way to achieve quick stimulation in a green manner: give both tax credits and guaranteed loans to owners of old cars to buy new cars. It’s quick in feeding through cash flow, it’s green in reducing carbon emissions, and it’s jobs supportive – probably even jobs creative. Germany’s experiment is showing results in less than 2months – the USA solution will take at least six months to start flowing – that’s a lot more down before the upwards pressure starts to apply, and economies turns like big oil tankers.

The next stage and depth of this economic crisis could be answered by the question of when your new car arrives on your drive – it won’t be answered presently by Obama, the first part of who’s Airfix kit of a package won’t arrive until the Autumn: or was that Fall?

Good Luck!

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