This week’s turmoil in the world’s stock markets has investors in a panic. On the surface it appears as if we are in the midst of a financial meltdown. In less than a week the financial landscape of America has changed more than it has in years.
Pillars of finance like Lehman Brothers (LEH), Merrill Lynch (MER), AIG Insurance (AIG), and Morgan Stanley (MS) have gone bankrupt, been acquired or bailed out and the week is not over. Yet, nothing I’ve seen thus far indicates to me that we are in anything more than the last stages of a global stock market correction. “But this time it’s different,” protested a client on her cell phone yesterday, “even money markets are going under.”
In the thirty-plus corrections I have seen in my career, each one has been different. Yet time and again investors caught up in the frenzy of the moment declare that this one is “the Big One” meaning a crash with the proportions of the 1929 sell-off which ushered in the Great Depression.
Unfortunately I hate to disappoint the doomsayers. This is not the crash you are looking for. The federal government has done more in 2008 to avoid and prevent a crash than was done in the entire four-year period of the Great Depression. The safety net they have spread under this current three-ring circus of calamity is vast and wide. Both the thinking about, as well as the role of, government has changed dramatically since the 1930s.
That’s not to say the markets won’t go lower. If you have been reading my @theMarket columns you know I expect new lows in the stock markets. We are in what I call the capitulation stage of the markets. That’s when investors begin to discount the hard facts that they have been denying up until now. It was precipitated by the government’s refusal to bail out Lehman Brothers.
Although the government may still bail out some firms that are deemed to be too big to fail like AIG Insurance, regulators are putting the financial community on notice that they need to sort out their own problems.This message precipitated immediate action among the financial community, thus the sudden whirlwind of change among the players.
Without the government to back-stop them, banks and brokers finally have to get serious about addressing their balance sheets. If they can’t figure a way out on their own then in free market economies you go broke or find someone in the private sector to bail you out.
Naturally this will frighten -- even panic -- investors but the point to remember is that this has happened before and is a necessary part of the economic cycle. In the 1990s Japan faced similar problems as their real estate and stock market bubble burst. Like our own government, the Japanese government provided a safety net to prevent a systemic collapse of the economy and markets.
Unfortunately, they never drew a line in the sand when it came time to allowing companies in real trouble to die or be taken over. Instead, the government continued to fund them and their debts creating an economy that struggles to this day to regain momentum.
Ben Bernanke, the Chairman of the Federal Reserve Bank, understands this intimately well. He established his economic credentials by writing papers on how not to end up like Japan, as well as on the topics of the Great Depression and inflation.
I am convinced that our government will be there to insure that a financial meltdown will not occur. Your money market accounts are safe. Your FDIC bank deposits are safe. However that does not give you or me a free pass in the stock, bond and commodities markets. What you make or lose is up to you.