Anyone who thought the Bailout deal was going to be the end of our crisis, had a wake up call this morning. Three big elements of the problem are playing out this week.
- Hedge Fund Redemptions-As I said last week, it’s been a bad year for hedge funds. Starting tomorrow, investors can apply for end of the year redemptions from the funds. If a lot of investors want out, this could force the sale of billions of illiquid securities at firesale prices. If some funds “close the gates”, i.e. stop redemptions, it could trigger a new round of panic.
- Bank Failures-In the last 48 hours four large international banks have failed including Wachovia, Fortis (Netherlands), Bradford and Bingley (UK) and Hypo Real (Germany). The contagion is spreading and Brussels based Dexia is on life support. We are probably lucky there is a holiday celebrating the establishment of Communism in China today or else the Chinese banks might have been more aggressively pulling their funds out of troubled spots.
- Consumer Spending-The consumer has retreated from the mall. Spending in August was negative when accounting for inflation.
Wall Street had expected a 0.2% gain in spending. The flat reading was a disappointment. “This is worse than we had been expecting so we now look for zero GDP growth at best in [the third quarter],” said Ian Shepherdson, an analyst at High Frequency Economics
In the past I have used the term “Interregnum” metaphorically, to mean the period when one set of ruling principles (neoconservatism) has been debunked but a new set of principles is not agreed upon. Now however, I feel that the term interregnum may have more historical meaning. Bush stands up at the lectern in from of the White House, but nobody’s listening. As we saw in 1932, the expanding crisis of bank failures at the exact moment of a presidential power vacuum can have disastrous consequences.