It’s the twenty second anniversary of Black Monday today. In October 1987 markets round the world crashed, sparking fears of a depression. Gerard Lyons , chief economist at Standard Chartered says it was just a watered down version of the current crisis.
Wolfgang Munchau argues that we could now be in for an extreme period of price instability as central banks lose control. In mid-September, the US stock market was already 35-40 per cent overvalued, he suggests. He says we should look to Hyman Minsky, the economist whose analysis of the effects of how a large financial sector leads to instability has become a key text of the crisis. “Minsky is about all we have,” he says.
After the Australia and Israel have led the way in raising interest rates, growing calls are emerging for central banks to tighten monetary policy. Barron’s says “C’mon, Ben!”.
But it is still far from clear that the world economy has turned back from the gates of financial hell. In the US restocking may give the third quarter a nice boost, but what happens after that? The fall in the US dollar has led some to argue that a dollar crisis may be imminent. Krishna Guha judges that so far the dollar’s decline has been “remarkably orderly”. “What currency are they going to go into?” asks one former senior IMF staffer. Yet Ken Rogoff makes the point that the crisis has brought forward the day when the dollar is no longer dominant.
In the UK, an FT survey of manufacturers reveals that less than a third think a recovery is even under way. Thankfully, the fall in sterling, which started again after the Bank of England opted to extend quantitative easing in August, should offer some support, particularly to exporters and manufacturers. But if it overshoots there is a risk it could trigger a run on gilts.
Amid all of this, the major banks appear to be doing rather well this year. In the UK the sight of gleeful bankers raking in the cash has encouraged the Tories to consider a windfall tax on profits, like what Geoffrey Howe did in 1981. The Treasury says that a windfall tax is a last resort if banks fail to provide guarantees that they will abandon tax avoidance.
Sweeping new regulations on mortgages from the FSA will make it harder for banks to support the risky lending that had been so profitable before it nearly helped collapse the banking system.
On non-financial matters, Steven Levitt and Stephen Dubner’s new book Superfreakonomics has developed over the weekend into a matter for, ahem, heated debate in the econoblogosphere. In particular, they have been accused of “peddling global cooling myths” and delivering an “error-riddled” assessment of global warming – a charge they deny. Brad Delong has a massive go at them and then Paul Krugman gives them a good kick too.
Meanwhile, Nicholas Stern says that the global temperature could be at its highest in 30m years by the end of the century if there is no global cutback in carbon emissions.