Breaking: Paulson Decisively Creates Uncertainty

Paulson has just finished the press conference announcing the outcome of the G7 meeting following its conclusion.

Earlier today Susie Dow provided us with a commentary on the latest reaction to the financial crisis by Nouriel Roubini, Professor of Economics at the NYU Stern School of Business. She summed it up with this quotation:

This weekend is the last chance to try and divert the crisis.

It provides a useful yardstick against which to measure the effectiveness of what Paulson has said this evening to the world’s press and the degree to which he has had success in restoring some confidence .

He has failed.

He announced what he described as an aggressive five point plan. It is designed to address a situation that has prompted world leaders to use adjectives such as “panic, madness, anarchy“.

What we actually received was a restatement of the areas in which stresses affect our financial institutions. He followed this by stating the broad outline of principles on which there was general agreement. Not a single prescriptive action was described by him as agreed between the seven nations..

Everything was surrounded by the finance speak that has become part of the clichéd everyday vocabulary of the common man and should now be banned on the grounds of being exhausted of any substantial meaning.

Did the finance ministers of the G7 countries need to increase the world’s carbon footprint in order that we might learn from them that the markets are suffering from a lack of much needed liquidity? In what basement has Paulson been ensconced for the last two weeks that makes him believe we will be impressed by his prescience that we are faced with unprecedented and extraordinary challenges and that we need to restore financial stability?

These are the tired phrases with which Paulson sought to gain our confidence in his understanding of the situation so that we would accept as profound the bromides of the remainder of his comments. It was a pathetic display of identifying the problems that we all know with little that made us feel that there was any greater insight than two weeks ago into solutions with a high probability of success.

Watching it on Sky News, it was embarrassing to see the “Breaking News” strap line running beneath the pictures from Washington. Desperate for some key sound bite it simply read “Paulson - There is a deep and unprecedented financial crisis”,

Arguably, Paulson was never going to herd the kittens of the seven nations to agree to a set of initiatives as positive solutions to bring some calm to the frenetic environment.

Had the United States found the influence that has been so badly dissipated over the last few years, then there might have been some hope that joint measures could be announced. In vain one looked for an agreement that all represented governments would guarantee lending between banks, not as a vaguely expressed ambition but as a specific, commonly agreed rule.

Accepting the difficulty that Paulson was always going to have in producing evidence of a detailed set of measures that would be implemented by all seven nations, he should have downplayed expectations. To stand at a heavily flag draped podium and utter words of such little consequence was no more effective than the banalities of what he called his “boss”, George W Bush, earlier in the day.

Again, recognising that he would have difficulties in being able to enunciate a clearly defined common approach, he should have seized the initiative by announcing firm new and comprehensive plans to be taken by the United States in response to the latest situation. He didn’t.

He vaguely referred to the ability under the Congressional Bill to follow the measures taken by the UK government in relation to equity acquisition but with none of the broad measures, surrounding the specific banking problems, that Prime Minister Brown explained to the British public to deal with the wider financial and economic issues.

Asked how quickly measures agreed by Congress two weeks ago would be introduced, Paulson lamely answered that they would take time.

Time is not what we have.

Paulson is a technocrat with experience in one part of the economy. He has not been elected as a leader. His words neither inspire nor convince. It is unfair to expect them do so. He has merely been asked to step in and fill a vacuum left by those appointed by the electorate as the real leaders of the nation.

By failing to give confidence, he has only emphasised the degree to which United States world leadership has waned. This is tragic at a time when the developed nations are in the biggest battle of our lifetime to salvage what remains of our prosperity.

Although I do not fully share Roubini’s apocalyptic view of the importance of the outcome of this particular G7 meeting, simply because I did not have high expectations, I do share his view about magnitude of the consequences of the inability to achieve a clear global consensus on action.

The stock markets are largely an irrelevancy and will in time stabilise themselves because greed is always a motivator. It will take many months to recover the value that has disappeared and there will be many businesses that will go down, together with the job that they provide, during the process.

For this reason, whilst I might use different words, I agree with Roubini - and Susie Dow - that today was a huge and critical challenge. That challenge has not been met.

Comments

This is a side topic but I think it's relevant to your post because of what Paulson didn't say and what the G-7 didn't do. (I hope that makes sense)

A quick look at Iceland which should have made an easy case study for the G-7. That it didn't actually worries me.

Iceland doesn't want to deal with the IMF but may have no choice. Meanwhile, Japan continued to recommend that the G-7 start its meeting by addressing the problems in Iceland which are also impacting other countries, notably the UK where $4 billion is on deposit in Iceland's banks.

Bias aside, I actually think addressing Iceland's problems makes sense. If the G-7 can't handle the relatively small scale problems in Iceland - still in the billions not trillions, then there's a bigger problem. If they do help the small country, it could go a long way towards very quickly restoring confidence in the markets - first stop in London.

Not to mention, all eyes are on Iceland with every major news outlet camped out in Rekjavik. It's a marketing dream come true... but one the G-7 looks ready to blow. But I digress...

The problem of course is at what price does help from the G-7 and IMF come?

I'm going to guess that Iceland is worried about losing its fishing rights. Fishing makes up 70% of its GDP (approx $7.9 of $11.36 billion est 2006) which is why the country continues to refuse to join the EU. Its economic problems are bad but from what I understand the debt per capita they are believed to have now - including the $4 billion from UK deposits - is on par with the per capita debt of Belgium.

The Japanese want the International Monetary Fund to start in Iceland at Ice News

it's doomed. Neo-liberal economic policies will be forced on Iceland in exchange for any loans. It will insist on privatizing everything.

Communique anxiety

Excerpt:

My initial take: it’s written in code — and that’s a bad thing. For example, that phrase about “Ensure that our banks and other major financial intermediaries, as needed, can raise capital from public as well as private sources” sounds to me as if there was some tense negotiation over language that two warring parties could live with — one (presumably the Brits) wanting a British-type recapitalization, the other (Paulson?) still hoping that the Warren Buffetts and Saudi princes of the world will come in and save the day. That’s not at all a good sign — and anyway, will investors be able to crack the code, or will they just see that the G7 statement was vague, and panic further?

I think the finance ministers just failed a test, or at best got a C minus.

Update update: Paulson says he’ll move ahead on recapitalization, but also seek private capital. So the communique represents the United States arguing with itself, as well as with others.

Listening to Paulson: Where are the guarantees? It’s only a half-Gordon: not the whole British plan.

And while I generally despise body language/tone of voice stuff, I have to say that Paulson sounds terrified.

Sometime back, I wrote about the biggest loss of old age can be judgement. When I write here in instant reaction to an event, I do so wondering if my perspective lacks measured and cool assessment. Is it just the "grumpy old man" syndrome which I like to think I indulge in but suspect is now a more natural and less controllable thing!

Well Krugman is younger than me, so if he has reacted the same way that I feel, it has the awful effect of encouraging me more! :)