The Crisis Goes Global

Europe's woes are clearly the key driver for the big slump in global stock markets today: the credit crunch has moved decisively across the Atlantic, and has engulfed the other great home of leverage. But the biggest losers of all are the BRICs: Brazil's down 15% today, Russia's off 19%. This is what a global crisis looks like: no one has decoupled, nowhere is safe.

We're long past the point at which a global coordinated rate cut -- the dropping of vast amounts of money from helicopters -- will help things. Central bank liquidity injections are powerless in the face of serious worries about the solvency of the global financial system. In order to restore trust, what's needed is massive bank recapitalizations.

The TARP can, in theory, do that, if it pays much more than market rates for toxic securities. The problem is that the mechanism is far from transparent -- and also that the TARP might not be big enough. Let's say that Treasury pays 50% over the odds for distressed debt: that means that the effective recapitalization from the TARP would come to only one third of the fund, or about $230 billion. That's less than the write-downs banks have already taken; it's not the overwhelming force that the markets want to see.

Given the pain involved in getting TARP through Congress, I can't imagine that anybody has any appetite for yet another massive bailout bill, even if such a thing is desperately needed. At the very least, we're going to have to wait for the arrival of a new administration, in January. Which means the next three months could be extremely gruesome indeed. If there's any hope at all, I think it might come from the European Central Bank. There hasn't been a lot of leadership up until now out of Frankfurt and Brussels; maybe it's time for the Eurocrats to step up.