The NIKKEI closed down 10%, and the FTSE is down 8%. The US and UK governments are working on a massive new bailout plan that might include:
- Temporary guarantee of all bank deposits
- Guarantee of all interbank lending
- Capital injections into banks.
The first move, guaranteeing bank deposits, will calm frantic runs on banks. The second, guaranteeing interbank lending, will enable banks to risklessly lend to each other again (this has all but stopped). The third, injecting capital, will tackle the heart of the banking problem, which is that most banks are now grossly undercapitalized (the IMF estimates that western banks need $675 billion of new equity).
These are huge, positive steps that might begin to ease the credit markets. In Nouriel Roubini’s opinion, however, they will help reduce the chances of a global economic catastrophe. They may also put western governments and taxpayers in serious financial trouble. They are not likely to head off a severe, prolonged recession.
In other news, our leader will speak to us this morning and tell us to remain calm.