Rendez-vous with History (Hysteresis 2)

Regarding the Credit Crunch, I first though : "Well, this should be sorted out by next March-June'08, once the Audited Accounts of the Banks will be released, everybody will see that Banks are sound and Safe and that all this fear was not grounded." How naïve was I! Months after months, Banks were announcing huge levels of write-downs and unrest was never calmed down.

Instead of the calm down I expected by March 08, we heard about the collapse and rescue of Bear Stearn, a major actor in the investment bankin system. More unrest. Things were worsening somehow. We heard about Sovereign founds from emergent countries (China, Emirates) that were willing to or merely capable of hailing the Western financial system with the huge amounts of liquidity they had at their disposal. There were many talks about the Chinese Sovereign fund taking a 10% share of one of Blackstone' funds. Americans fearing to see the jewells of their economy swollen by foreign and powerful foreign investors. However, little by little the financial crisis no longer made the headlines, although experts were pointing out a risk of contamination of the so-called "real economy". Subjects such as the Spanish elections, the US' presidential elections, Sarkozy's first year in power, the narcotrafic in Mexico, the liberation of Ingrid Betancourt or Microsoft'entry in Facebook's share capital, the war between Georgia and Russia were more and more apparent in the news while people were becoming to think that the crisis was about to be overcome. Until Sep'08 and its lot of banks' collapses and nationalizations: Fanny Mae and Freddy Mac, Lehman Brothers, Merryl Lynch, Dexia, Fortis, HBOS, RBS, the Icelandic banks, the insurer AIG and so on. Surprises after surprises, we saw the Western governments taking unprecedented measures one month later. In the US, a $700bn pool was voted, the Paulson plan to save the financial system and buy toxic assets. In Europe, following Gordon Brown's (Bristish Prime Minister) or Angela Merkel's (German Chancellor) plan, Governments guaranteed people's deposits and banks' credit lines.

What will happen next? Will these solutions be effective? It seems that nobody really knows when these rescue plans will be effective nor what will be the consequences. What is for sure, is that, the market effervescence following the announcement of these rescue plans did not last more than one day. Apparently, Stock-exchanges accross the West but also Asia, Latin America and Russia are in turmoil and have experienced the worst fall in their existence. Billions of $ have vanished with the shrinkening of companies' market capitalisation. Somebody said that last Friday, Volkswagen, the car company, was by itself worth more than the IBEX 35, the 35 most important companies in the Spanish Stock Exchange!! Recession has touched the UK, the States and the UK. Spain is certainly next. Everywhere around me, people talk about how they are affected by the crisis. Real economy is already contaminated. Can it be cured quickly?

Well, once again, I can only give another rendez-vous with History. I'd say that in Sep'10 we will have a better idea on whether we are near to see the light of the tunnel. Between Sep'07- Sep'08, experts have scrutinized the Financial Statements of Banks. Now, I'd say Sep'08-Sep'09, it is the turn of industry & service companies to be examined in depth. Corrective measures will certainly be implemented by both industries and banks during 2009 with certainly many job cuts and more or less success. The outcome of these drastic policies will be monitored althrough 2009 but they will be more obvious during the year 2010 and by Sep'10, new conclusions will be made. If people deeply believe that politics have appropriately handled the crisis, that the measures undertaken were becoming to be effective, well, it might be the moment when trust will come back and consumption will boost again the economy. I hardly know how the unemployment issue will actually hamper the recovery of the economy and it will certainly have an adverse effect that will slowdown the recovery process. We'll see. Some said that the Japanese economy did take a decade to recover the Asian financial crisis. Will we follow the same scenario? The 1929 crisis, the Argentinian Crisis, the Asian crisis so many subjects, is there a common denominator? Have we learnt of these crisis?... Rendez-vous in Sep'10.

Hysteresis

Nov'08, we have seen the effect of the subprime crisis on banks collapses and now on the so-called real economy, and now, we are trying to undertake correcting measures (governmental of which we do not know the final effect, in the meanwhile, the systems seems to go on, as irregular as before... If we see the financial system and the economy as an eco-system, I suppose we can say that there is hysteresis in the system.

Hysteresis is a technical term that I discovered in my electronic classes at High School or maybe during my first years of university. Hysteresis describes an electronic system for which the output signal does not follow in a continuous function the input signal.

Basically, unless you know the inner mechanics of the system, you cannot contemplate in advance what will be the effect of a variation of the input signal. One can also consider that there is a delay between a cause (input signal) and the effect (output signal).

When I first heard about the Subprimes, it was in March 07. I was having lunch with a colleague, Alex, on a spare sunny day in a small square nearby St Paul church in London. Alex was following the economic & financial news thoroughly and he had heard about what was happening in the States. The burst of the real estate bubble, the beginning of some kind of crisis there, accross the Atlantic. I was there, having my slice of pizza, listening to him, both amazed by his awareness and ashamed of my lack of outlook and background. I was working in the financial sector, specifically in the Oil & Gas sector. I was beginning to get grips on the geopolitics underlying the mechanics of the oil prices and new oil projects but I was unaware of the rest of the financial system. Like a prophet, Alex told me: "You'll see, what is happening in the States now, will arrive in Europe in 6-months' time...".

In fact, it arrived even earlier. The first news about the Credit Crunch, liquidity crisis and the stock-exchange fall were announced during the summer 07. End of July- early August, the UK was rocked by the Northern Rock demise and the ultraliberal moto of Great America began to be shaken with the nationalization of Indymac, an institution specialised in real estate mortgage in the USA. Observers and experts then said that investors no longer trusted each other as they could not know who held toxic assets or not. Liquidity was scarced and banks no longer lended to each other. In an effort to pour liquidity in the system, Central banks cut interest rates on a regular basis... So,when will all of this end and everything be right again...?