Run for cover?

Rudyard Kipling wrote a poem entitled "If", which is always worth recalling, though I usually only remember the opening and closing lines:

If you can keep your head when all about you 
Are losing theirs and blaming it on you; 
If you can trust yourself when all men doubt you, 
But make allowance for their doubting too; 
If you can wait and not be tired by waiting, 
Or, being lied about, don't deal in lies, 
Or, being hated, don't give way to hating, 
And yet don't look too good, nor talk too wise; 

If you can dream - and not make dreams your master; 
If you can think - and not make thoughts your aim; 
If you can meet with triumph and disaster 
And treat those two imposters just the same; 
If you can bear to hear the truth you've spoken 
Twisted by knaves to make a trap for fools, 
Or watch the things you gave your life to broken, 
And stoop and build 'em up with wornout tools; 

If you can make one heap of all your winnings 
And risk it on one turn of pitch-and-toss, 
And lose, and start again at your beginnings 
And never breath a word about your loss; 
If you can force your heart and nerve and sinew 
To serve your turn long after they are gone, 
And so hold on when there is nothing in you 
Except the Will which says to them: "Hold on"; 

If you can talk with crowds and keep your virtue, 
Or walk with kings - nor lose the common touch; 
If neither foes nor loving friends can hurt you; 
If all men count with you, but none too much; 
If you can fill the unforgiving minute 
With sixty seconds' worth of distance run - 
Yours is the Earth and everything that's in it, 
And - which is more - you'll be a Man my son! 

For many people, myself included, the week's events have been eclipsed by a sense of Armageddon facing financial markets in the US. It's been a week of extreme volatility, fear, despair, unprecedented events, and more.

I have read that we are safe in Barbados, meaning I think, that there is little direct impact that may come from all of this, and like with the hurricanes that bypass the island while devastating much of the rest of the Caribbean region, most people here will read, try to digest and probably feel that all is far from lost. We have enough problems here, thanks, and I know that public schools closed early yesterday because of a heavy downpour of rain.

Since last Friday we have heard of the bankruptcy of a Wall Street icon, Lehman Brothers. We heard within hours of that news that another icon, Merrill Lynch, had been bought out by the appropriately named Bank of America. We heard that a major insurer was within a day of failure, and the Governor of New York gave the institution freedom to borrow from its subsidiaries, hoping this would stave off that failure. Help. Fire!

But whatever was going on, the financial system was quickly siezing up. Those institutions who had cash did not want to let it go to others, so money borrowing rates skyrocketed. Central banks in the North America, UK, Europe and Japan agreed to pump unprecedented amounts of liquidity (US$180 billion) into global financial markets, an effort to ensure banks have access to enough cash and to jumpstart a system that had virtually ground to a halt.

This week we saw the largest intra-day move in the gold market in approximately 30 years; if in doubt grab some gold. We saw the US stock market drop 7.5% in 3 days. We saw 10 year US interest rates pushed to 5 years lows, we saw people ready to pay the US government more money for its debt than they could get back. Simply amazing.

Safe investments seemed suddenly unsafe as one money market fund reported that its value had fallen below a dollar. People looked to withdraw funds, and that put other money market funds at risk.

Public confidence is always important, especially in financial institutions, and panic reactions can often precipitate the crisis that everyone fears. Financial institutions should understand what they are doing, but often are found to be asleep at the wheel, or too reliant and trusting of certain opinions so follow like lemmings. They often jump in and then they jump out. Ordinary citizens rarely understand all that is going on but their concerns can be critical. The general fear of risky assets has meant that people and institutions pulled their money out of stock markets and sought safe havens like gold, government debt, and straight old cash. In the financial world there is an index of panic called the Volatility Index (VIX), and yesterday, when it seemed that the stock markets had plumbed into a deep hole, this index went over 40 (an indication of extreme panic), not seen since the stock market hit the bottom of the bear market in 2002. In a kind of cruel irony, you can actually trade the VIX.

The immediate call in many quarters of a country that prides itself on being the bastion of capitalism, ironically enough, was not to let the markets work it out but for government intervention. No one wants to lose their jobs, their money, their shirts, or their homes. A lot of people, directly or indirectly involved in the financial sector have lost one or more of these things in recent months.

People who watch financial markets have been waiting for shoes to drop in the sector and the sound of a whole wardrobe of shoes has been defeaning this week. I asked myself last week how the necessary shrinking of the sector would happen, and within days the answers came. Failure for some. Marriages of convenience for others--some with suitors of their own kind, from the private sector, some with cross-cultural relations as private sector became folded into the public sector. A lot of people will be having new looks to their lives in coming months.

Some will find it unbelievable that a US Republican administration could move in a way that looks like socialism by effectively nationalising or taking onto the public books a range of financial institutions in order to save them from going under--first Bear Stearns (investment bank), then Fannie Mae and Freddie Mac (mortgage institutions), then American International Group (insurance for all sectors, especially financial institutions). But, you have to be creative if you are entrusted with control. People ask what will be next. The latest news is that the government will take the problem debts off the books of the financial institutions--the toxic, illiquid items that no one really wants right now, thanks. A new Resolution Trust Corporation? Trust the government's resolve? New rules have been put in place to ban "short selling", taking bets on prices falling. Some will see that as the only way to deal with a normal market behaviour that, if stoked by unfounded rumours, can mean targeting downward the prices of otherwise healthy institutions. Others will say that this is the government trying to determine what prices should be.

The root of the current crisis is the bursting of a bubble related to the housing market--lots of lending to allow people to buy and own homes, based on a belief that house prices would continue their decades-long rise, and so anyone and everyone could buy a house whether or not they could really afford it. An important part of resolving the problem is to clean up the financial mess that comes from the bursting of that bubble, but there is a harder philosophical reckoning to come for Americans in terms of accepting that not everyone can and should own their homes.

It's always easy to see the bottom from above. Many indicators suggest that a recent bottom in financial markets was hit this week. Maybe. Markets have a way of correcting themselves, so it could be a true bottom or it could be a breather--relief rally--before another leg lower. Today is full of euphoria as the financial markets in the US and all the talk is of reversal, and it will need a huge rally today just to get the markets back to where they were last week. If you look day by day, which many do, then all may seem well today.

Is it safe to come out yet?