No Time To Sit and Watch

By Steven Pearlstein
Friday, August 17, 2007

You know that something is up when Hollywood studios can't get financing for their next movies.

What we have on our hands here, folks, is a full-blown, global financial crisis comparable to the junk bond collapse of 1987, the S&L crisis of 1990 or the Asian financial crisis of the late '90s.

On major stock exchanges, stock prices have fallen roughly 10 percent in a matter of weeks in volatile, high-volume trading. And in the past days, the sell-off has been extended to developing markets, where the declines have been even steeper.

Commodity prices have begun to tumble in anticipation of a global economic slowdown.

The yen has recorded its biggest jump against the dollar since 1998 as traders unwind a massive "carry trade" that for five years had allowed them to profit by borrowing at 2 percent in Japan and lending at higher rates in places like the United States or Australia. Meanwhile, the Australian dollar recorded the sharpest declines since it started trading freely in 1983, forcing the central bank Friday morning to intervene in markets to stabilize the currency.

And so many investors are flocking to the safety of the U.S. Treasury that the yield on the three-month bill has fallen nearly three-quarters of a percentage point in just two days, the sharpest decline since the October 1987 stock market crash.

In Canada, a group of banks have gotten together to provide short-term credit to business after the freeze-up in the market for commercial paper.

And here at home, Countrywide Financial, the country's largest mortgage lender, was forced to draw down nearly $12 billion from its existing lines of credit to reassure customers, shareholders and bondholders.

KKR, the onetime king of private equity, reported that its real estate unit faced losses of $300 million in trying to unload the $10 billion worth of mortgages and mortgage-backed securities on its book.

It's to the point that, according to the Financial Times, Goldman Sachs and Deutsche Bank have withdrawn their offer to raise $1 billion for MGM studios to finance production of films including "The Hobbit" and the next "Terminator" and James Bond movies.

Against this backdrop, it was curious to hear Bill Poole, the president of the Federal Reserve Bank of St. Louis, tell Bloomberg News that it would only "upset the market" if the Fed were to "change course in any fundamental way" before there was proof that market turmoil was actually having an impact on the real economy.

Dr. Poole is a stridently right-wing academic who hasn't noticed yet that financial markets now drive the real economy every bit as much as economic factors drive financial markets. His prescription -- that policymakers sit on their hands until economic data confirms a drop in business investment or household consumption -- is akin to a doctor telling his patient not to worry about that spot of lung cancer until it begins to affect his breathing.

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