Friday, October 3, 2008
Commentators on the US TARP, the prospect of a smaller EU equivalent, or the Irish unlimited 2 year guarantee of major banks' deposits (and the banks' bondholders), plus the $2trillions approximately that central banks are providing worldwide via their money market operations - these are all measures to buy time - time for what? For however long it takes for markets to "calm down" (G.Brown), become more normal and orderly, less emotional and more technical regarding expectations. But, this is of course a difficult period to measure in months or years given that we are in the concertina squeeze of global recessions US -> UK&I, Can, Aus -> EU -> Japan ->China, India and rest of the world, and therefore banks' delinquency rates are tending up while recovery and size of economic losses to banks depends on how efficient long chains of structured finance liabilities can be netted and unravelled and, most of all, how long it takes for the economic cycle (and credit cycle) to be palpably on the rise again. Judging by all past recessions, the average is about a year from peak to trough and 5-6 years from trough to a level matching the last peak. Bankers are saying little, while regulators, economists and politicians are all avoiding answering the question that mortgage borrowers and others ask, how long until we're back to 'normal'? The US and UK answers could be 2-3 years, but by then the EU will be barely off its cycle floor. A confident answer would be to say 4-5 years, which usefully places it just beyond the reach of current governments' tenures.