The Global Economy in Turbulent Times

CHAPTER 102 Now the Real Pain Begins¹

Since the collapse of Bear Stearns in March 2008 (now part of JPMorgan Chase) culminating in the meltdown and panic on Wall Street in September 2008, and the subsequent series of rescues by the US government and the US Federal Reserve Bank (Fed) on the subprime and related fallout (all told with a price tag of US$7.5 trillion by an estimate), the entire world has panicked. Needless to say, the storm clouds have spread, and Europe is just as hot in the collar. Not to be outdone, its responses have been swift and firm, and intervention definitive, including massive injections of liquidity, coordinated interest rate cuts, and partial nationalization of certain financial institutions. Although policy responses all round have been bold—even unprecedented—the situation is far from stable. The sands of change are still shifting. The global system—if there is still one—clearly lacks a reliable anchor. One fallout has been the serious erosion of trust between buyers and sellers in many markets, adding a new dimension of uncertainty between and among banks, and opening up unexpected exposures to new third-party risks. All this adds on uncertainties to the conduct and cost of doing business. Going forward, this crisis still has a capacity to surprise. The plight of the Big-3 US automakers (they have since been given a brief lifeline) and the recent unfolding of the purported US$50 billion Bernie Madoff fraud case are reminders.

Impact

The transmission ...