Terry Connelly is dean of the Ageno School of Business at Golden Gate University and is frequently quoted on business, financial, and economic issues by Bay Area local, as well as national, news media.
If you want to understand why the meltdown of the credit securitization market is so central to everything that is going on with the economy in the US today, imagine this: All the cellphone towers in the world simultaneously go off. Sure, many of us could get by reverting to landlines and payphones (if there are any left on a corner or two). But those on the fringes who connect with the rest of the world only by their mobile phones would be totally left out. And the pace of commerce generally would be radically curtailed.
Interest rate cuts and stimulus packages are well and good for building a fire break against recession, although the timing is a bit “last minute”. This economy now just needs a pacemaker, but if one doesn’t get implanted soon enough, it will need the paddles! But even more central is a restoration of market trust in the securitization process.
And restoration of trust cannot come until bond insurer financial footings are stabilized to the point where we do not have a ratings downgrade that sets in motion a chain reaction spreading through the municipal bond market and all the investment classes and state and local budgets that depend on their stability.
This risk is even more pronounced as the rating agencies themselves seek to regain their lost honor (due to the subprime ratings fiasco). The agencies may be tempted to re-assert their “independence” by ending their forebearance on the bond insurers’ ratings while regulators and financiers struggle to find a formula to fix the elemental problem caused by the insurers themselves investing way too much in the very dicey securities they were supposed to be insuring!
The financial markets will only stabilize and turn upwards when there is clear and convincing evidence that Central Banks across the globe are fundamentally in poliy alignment with respect to the global implications of the credit crisis especially in securitization. (They need not all have the same interest rate policies or levels, of course; they just need to show they recognize how serious the risk is, as Josef Ackerman of Deutche Bank observed just today.)
In addition, markets need a sense that those concerned have their arms around the bond insurance mess and see a way forward independent of what may or may not be the investment decisions of Warren Buffett and Wilbur Ross (not that there’s anything wrong with their investment decisions…it’s just that it’s not their job to save the economy).
Then and only then, slowly but surely, can the capital markets begin to resuscitate, issue by issue, the securitization process that served us all so well for the past three decades since the S & L crisis (a pre-globalization matter, thank goodness) and that only recently were systemically corrupted by rampant greed.
