Too late. It’s not just the NYC that a problem. Markets in Europe and Asia are also falling. As far as the economy goes, we no longer live in a world of nation-states. As far as long term goes, there is going to have to be a discussion about what to do, but I really don’t think that you can disconnect from *any* major nation with the internet around.

This means that we live in one world, and you just can’t laugh at or ignore your fellow human being. I don’t think that this is a bad thing.

Also historically people have tended to underestimate the United States or global capitalism.

Hope gets you out of the bed in the morning trying to do something to fix the problem. If someone says “the problem is truly awful, this is what we can do to make the problem less awful” that’s worth listening to. If all we are going to do is sit around talking about how we are doomed, then what’s the point of the discussion.

Markets have psychologies that are self-fulfiling. When times are good you need to keep from getting swept up in that. The same is true when times are bad. People have a tendency to look at what is around them and go crazy, and so you need to take a deep breath and calm down.

The main thing that needs to happen in markets is to have an orderly wind down. It’s a good thing if housing pricings or stocks go down 5%, 10%, 25%, 50% if people keep trading at the low price. I don’t know what the clearing price is, but as long as there is buying and selling, we’ll find the price and life will do on.

The bad thing that happens is that if the markets get stuck. The price goes down 10%, no one buys, no one sells, it goes down 25%, no one buys, no one sells. At this point the market just disappears and there is no price. That didn’t happen in the stock market yesterday.

marco polo — we should talk more about argentina at a later date. the imf did place some absurd conditions on its loans — they basically were meant to be unacceptable to the argentines while showing exactly how much of a fiscal contraction was needed to maintain the peg. even late in the day, the imf wasn’t willing to say the peg itself was the problem, and that the fiscal policy needed to make the peg work was inconsistent with growth (and as you note democracy) and consistent with deep deflation. I do not think this was the imf’s finest hour. but that is a conversation for another time.

dc — i never thought i would say this, but you supplied some interesting links today. if you just didn’t combine it with the ridiculous $ hegemony arguments.

2fish — absolutely right; the real question is who owns the $138b in unsecured …

Twofish, please think the unthinkable and expand on the consequences. Has “hope” been good for anything at any stage of the crisis so far? No.

If I was vizier to the governments of the world, I would be advising them all (all those outside the USA), just as a matter of contingency planning, to think about how they might entirely route around the United States economically; to suppose that all their American investments, private and public, suddenly became worth nothing, and suppose that they also bought nothing from the US ever again. Obviously for those states heavily invested in American government bonds, such as China and the Gulf states, this implies a formidable political challenge too, but mostly this is an economic thought-experiment. It is an extreme case, an unrealistic worst-possible case, but for that reason it might suggest left-field possibilities which would turn out to be useful in the real world, if and when things turn out much worse than anyone dares to imagine.

In particular, I think that countries outside of America need to be looking to each other at this point, to find a substitute for those services which they were getting, or which they thought they were getting, from the US. Of course, that’s almost the story of this decade already, in everything but finance.

As for the USA itself, the most optimistic yet realistic take on events that I have seen comes from John Carney of dealbreaker.com, who says:

“The best thing we have going for us is that most Americans were not heavily invested in financial stocks, don’t have outrageous mortgages and have largely sat out the latest financial bubble. Provided we don’t make things worse with ill-advised government meddling, this could be a terrific re-evaluation about where wealth should be invested in our country. In short, unwinding the Wall Street boom should make us a healthier, better country.”

And personally I’d suggest that if you all make it to that point of really starting over, green energy might be a good place to make those investments. It would be a suitable foundation on which to begin again.

It worked. But the IMF is now irrelevant.

In some sense the Fed/Treasury response to LEH is similar. The political considerations of extending more govt. financing is more important than the economic. They got away with it with BSC. Any more taxpayer money given to banksters and the whole bunch may hang. The question again is contagion. Immunization now relies on the subterfuge of moving still more assets of questionable value to the Fed.

The outcome is still in question. If they fail the Fed may become irrelevant.

““US dollar hegemony” prevents the exporting nations especially China from spending domestically the dollars they earn from the U.S. trade deficit and forces them to finance the U.S. capital account surplus, thus shipping real economic wealth to the U.S. in exchange for the privilege of financing U.S. debt to further develop the U.S. financial FIRE economy.”

There are two fundamental flaws in this piece of reasoning. To address them, let’s first deal with “the dollars they (exporting nations) earn from the U.S. trade deficit”. Obviously, in order for exporting nations to have trade surpluses and thus foreign currency earnings, it is required that other nations have trade deficits, since the global economy is a closed system in which conservation of matter applies. This holds for whatever foreign currency those earnings are denominated in, so in order to make further discussion simpler let’s assume that gold is the only international trade and reserve currency. No dollar hegemony, no free lunch for anybody, a fair world.

We can now see the first basic flaw in DC’s reasoning: even in the context of a most fair international gold-based monetary system, China would still be unable to “spend domestically the gold they earned from the importing nations’ trade deficit”! (Unless the Chinese population turned to wearing massive jewelry like Indians do.) Which shows that the very concept of “spending DOMESTICALLY the (whatever foreign currency) they earn from the (importing nations’) trade deficit” does not make sense: the foreign currency (whatever it be) earned from foreign trade is for spending it ABROAD! (buying foreign goods, services or property.) And if a country is earning more foreign currency (whatever it be) than what it can wisely spend abroad, the wise path for that country is to start earning less foreign currency, meaning to export less and consume more, meaning in the end to have better lives, just as if someone is earning more money than he can spend in his lifetime, the wise path for him is to work less and enjoy life more.

Which brings us to the second basic flaw in DC’s reasoning: “Any country that revalues its currency automatically suffers a massive loss in global competitiveness.” First, that would happen just as well in a gold-based international monetary system, where Central Banks held gold reserves and managed the exchange rates between their national currencies and gold. And secondly, since, as said above, that loss of competitiveness means to export less and consume more, which in the end means to have better lives, it doesn’t look such a bad thing after all.

and we wonder – all this ‘masters of the universe’ and million dollar bonuses and incredibly complex financial instruments . . . . is that all that is left at the end ? boxes of papers ? and sending someone back to turn off the lights and the high tech advertising sign ?

it would not do to be too stuck on the images of the 1929 wall street crash, like generals who go into a new war always fighting the last one . . .

this one could be different. suppose the plunge protection team could freeze the dow jones at 11 000 ? it just might not be about that, this time.

however true a prophet nuriel roubini, there is usually an element of the totally unexpected in a crash, perhaps simply because the chief actors have prepared defences against everything else.

imagine oil at $40 / barrel, the dollar soaring. well ? when everyone bets the same way, the markets do whatever they have to do to prove them all wrong. it does not have to be this – but it might be something like it.

nimble feet and an open mind . . . predict if you can, but do not fall in love with your own prediction.

What do you think China should do about it?

I get very quickly annoyed at people that complain that the world is unfair and that they can’t do anything to change it. Of course the world is unfair. Of course as the world’s dominant economy power the United States is going to arrange the global financial system to meet its national self-interest at the expense of other nations.

The question is what do you plan to do about it other than complain?

Fundamentally, China has to make a decision as to whether or not it is going to acknowledge US financial hegemony or challenge it, and given that 1) China is *far* weaker militarily than the United States and 2) there is simply no domestic desire in China to be a dominant hyperpower, China is not in a position to challenge the United States either militarily or economically.

Since it is suicidal for China to challenge the United States this means that China must cooperate with the United States.

Also, it is rare that you actually have a choice so when you really do have a choice you need to take it. Where to set the RMB is a choice by the Chinese government. The Chinese government can make a choice to have economic policies that are hostile to exports. This will have bad ramifications toward exports, but if you think that the US economy is doomed, then I think it would be a bad idea to have the Chinese economy tied as tightly as it is to a sinking ship.

US Dollar hegemony is the geopolitical phenomenon in which the U.S. dollar, a fiat currency, became the primary reserve currency internationally. After the 1973 Middle East oil crisis, only the US petro-Dollar could be used for the purchase of oil. Since China and everyone else needs Middle East oil, everyone also needs petro-dollars for the purchase of that strategic commodity. US Dollar hegemony is de facto backed by US military projection power in the Middle East region.

“US dollar hegemony” prevents the exporting nations especially China from spending domestically the dollars they earn from the U.S. trade deficit and forces them to finance the U.S. capital account surplus, thus shipping real economic wealth to the U.S. in exchange for the privilege of financing U.S. debt to further develop the U.S. financial FIRE economy. Any country that revalues its currency automatically suffers a massive loss in global competitiveness.

Brad Setser refuses to address the geo-political economic reality that US Dollar hegemony is responsible for the rising global economic imbalances. Ultimately there isn’t a “free lunch” in economics, but Dollar hegemony has permitted US deficit spending without tears for the past 2 decades.

Re Lehman, credit marlets et al: if the Lehnam netting seesion would have resulted in catastrophic losses elsewhere (a necessary condition for a melt down) we would have known by now. Apparently the smart money had departed long ago. hence, no panis, but also no need to feel cherful..