The global credit crisis appears to have intensified on Oct. 6, with equity indexes around the world suffering heavy losses and credit markets still frozen. The market difficulties have caused Wall Street strategists to downgrade their outlooks for the U.S. economy and the stock market.
What's the latest expert thinking on the crisis? Here's a sampling of insights from Wall Street economists and strategists on Oct. 6, as compiled by BusinessWeek and Standard & Poor's MarketScope.
Meyrick Chapman, UBS Investment Research (UBS)
European governments proved unable or unwilling to act together on the banking crisis and so will act apart, therefore potentially exacerbating existing tensions. Germany restarted the route to independent salvation with a unilateral unlimited guarantee of retail deposits over the weekend—after criticizing Irish unilateralism last week. The next stage now looks clear: government recapitalization of banks, each in their own way. But as we await this move, an intervening stage may be necessary to stabilize all patients—both those savable and those not savable.
Before governments finalize who is to survive and under what terms, central banks may have a role. We do not mean monetary easing—though that may occur as well—but a move to guide interbank money markets directly, on-demand and at a central rate. Term funding is a pressing requirement for the entire banking system, and maturing term funding is making the provision of term funding more pressing by the day. If banks will not do it themselves, it is incumbent upon central banks to do it for them with much more frequent term facilities—possibly provided on-demand.
Jan Hatzius, Goldman Sachs (GS)
With the boost from fiscal stimulus gone and the impact of tighter credit conditions working its way into the real economy, U.S. economic activity has decelerated sharply in recent weeks. The intense distress in financial markets—which seems unlikely to dissipate quickly—further darkens the outlook. As a result, we are marking down our forecasts for growth and interest rates substantially. The recession that we have been forecasting now looks likely to be deeper and longer, taking the unemployment rate to 8% by late 2009 and pushing the Fed to cut interest rates to 1% or lower.
The Treasury's Troubled Asset Relief Program (TARP), which was passed by the House of Representatives on Friday and signed into law, will have $700 billion in capacity to purchase and guarantee illiquid and distressed assets. The program should free up capacity on bank balance sheets and encourage the recognition of losses. However, the program does less to recapitalize banks directly, leaving a gap in the policy response. An important question is whether the government will formulate a recapitalization strategy as well, or whether it will pursue an informal approach led by the FDIC. Several questions remain. The most important is the pricing of the assets the program purchases. This will have a significant impact on the participation of the program, as well as the cost to the government. Details regarding the purchase mechanism and the range of assets to be purchased also remain undetermined.
Larry Hatheway, UBS Investment Research
Today, UBS economists published revised forecasts for 2009. The conclusion is clear: The world is entering a recession. The fundamental challenge is to earnings and cash flows. But perhaps the most important determinant of the investment call is what multiple investors are willing to assign to those earnings. Prevailing valuations—adjusted for likely earnings weakness—appear fair, but in the current uncertain environment, valuations alone are unlikely to be the catalyst for market recovery. Policy change could make a material difference.