IN ONE stomach-churning second last night, the United States and the world were brought to a moment of truth on the deepening credit crisis: it's winning, we're not.
No sooner had the news broken that Congress had voted down the $700 billion bail-out plan than the Dow Jones index plunged 777.68 points – the biggest intraday points drop ever. In Canada, shares slumped 6 per cent. In Brazil, 10 per cent.
Like an
unfolding scene from a financial disaster movie, investors dumped bank shares and mutual funds and charged into short-dated Treasury bills.
No matter how low the yield or poor the return, here was a stampede to grab anything, hide anywhere, run where you could to get out of the breaking storm. In more than 35 years of financial journalism, I cannot recall a day more miserable, and its climax more chilling, than the events in the US last night.
The long bear market of 1972-75 was a drizzle, the crash of 1987 a flash in the pan, the dot.com bust a passing storm compared with events of yesterday.
The nationalisation of another UK lender; the nationalisation of Belgo-Dutch bank giant Fortis; ominous reports of other bank failures across Europe; the rescue intervention of Citigroup for Wachovia, a huge US retail savings bank; huge slides in bank shares here… then a maniacal coup de grâce that sent the world's biggest market into a tailspin.
The metaphors that journalists fall back on, "tottering on the precipice", "close to the brink", are not just turns of phrase this morning. Today they are real. They are absolutely true. And if fear ran cold last night, consider how much more chilling it will be today – when millions discover their retirement savings have been hit, the homes they live in are sliding more steeply in value, the companies they work for are desperately scrambling to save cash and their jobs are in jeopardy, amid the biggest credit seizure the modern world has known.
THE US banking crisis has been likened to a heart attack. Last night saw a convulsion that will be felt by everyone round the world. Recession is no longer a threat. It is a fact. And the drama in markets yesterday point to it being as deep, as painful and as prolonged as anyone can remember.
Look at what happened to the oil price on news of the Congress vote: it dropped $10 in an instant. We will not be needing "peak oil" for quite a time. Industrial metals plummeted, with three-month copper plunging $335 at $6,440 per tonne, falling even lower after hours. This vote by Congress is a stunning, reckless gamble with the world's biggest economy and the livelihoods of millions. But it reflects, too, the disgust even the most free-market-sympathetic democracy in the world has come to feel at the greed and incompetence of Wall Street's investment banks and the salaries and bonuses creamed off by those at the top.
NEVER mind for a moment that it is a stunning blow to the authority of the president, or that this was a vote of main-street America against toxic debt being dumped in the taxpayers' lap. It was a vote that treated the US economy as little more than a giant gambling chip.
Even if another package is put in place, what is left of US confidence in its financial system and economy has been dealt a terrible blow.
Stock markets in the Far East, Europe and the UK had been falling all day yesterday.
Any lingering hope that the nationalisation of Bradford & Bingley would mark a catharsis here was quickly dispelled as bank shares tumbled again.
RBS fell 18 per cent at one point, before rallying – if that is the word. And the 18 per cent plunge in HBOS speaks darkly to growing doubts as to whether the emergency rescue by Lloyds TSB will go through.
In Europe, banks look particularly vulnerable, as there is no readily available institutional mechanism to put a US-style rescue bail-out in place – even if there was a political will for it. Many of the separate member countries, such as Greece, Spain, Italy, Ireland and the UK, are already borrowed to the hilt. In the US, the Dow Jones Index closed down 777.68 points, or 6.98 per cent, at 10,474.56.
That will be carried into London this morning as markets brace themselves for a selling onslaught. Ben Bernanke, the US Federal Reserve chairman, must use every ounce of authority to pull the world out of financial nose-dive. The entire financial system is choking up. Everything critically depends on early, sustained action by central banks to pump in massive amounts of liquidity and to cut interest rates – quickly and decisively.
Interbank lending rates have soared to record levels. So official rates must come down. If there is no such early prospect, then yesterday's day from hell may be just be a warm-up.
