A Reality Fix

Two gloomy columns on the economy to read today.

•Paul Krugman:

Needless to say, the existing troubles in the banking system, plus the new troubles at hedge funds and in emerging markets, are all mutually reinforcing. Bad news begets bad news, and the circle of pain just keeps getting wider.

Meanwhile, U.S. policy makers are still balking when it comes to doing what’s necessary to contain the crisis.

[snip]

What’s happening, I suspect, is that the Bush administration’s anti-government ideology still stands in the way of effective action. Events have forced Mr. Paulson into a partial nationalization of the financial system — but he refuses to use the power that comes with ownership.

Whatever the reasons for the continuing weakness of policy, the situation is manifestly not coming under control. Things continue to fall apart.

Roger Cohen:

I was talking to a banker friend, and he told me the “unraveling” could go on for ages. I thought he meant the unwinding of all the leverage that had inflated everything from the price of stocks to the price of homes.

But, just to be sure, I asked him: “Unraveling of what?”

He paused, before saying, “Almost our way of life.”

A friend of his, he went on, has a horse farm north of New York City. “I told him, for heaven’s sake, you have to get rid of your horses. Shoot them if necessary.”

Oh my.

Update: The LA Times has a sobering survey of stock markets around the world:

Here’s a sampling (not meant to be all-inclusive):

Markets down more than 70%: Vietnam (-70.5%), Peru (-73.2%), Ireland (-73.4%), Russia (-73.9%), Iceland (-88.7%).

Markets down between 60% and 70%: Hong Kong (-60.1%), Poland (-62.6%), China (-69.8%).

Markets down between 50% and 60%: South Korea (-54.5%), Italy (-55.2%), Egypt (-56.9%), Brazil (-57.2%), Japan (-58.1%), Singapore (-58.2%), Turkey (-58.5%), India (-58.3%).

Markets down between 40% and 50%: Great Britain (-42.3%), Australia (-43.3%), U.S.-S&P 500 (-44.0%), Spain (-46.4%), Germany (-47.0%), Mexico (-48.3%).

Note that, for U.S. investors who own foreign stocks, the losses in many cases are worse because the dollar has rallied against most foreign currencies in recent months. A strong dollar means stocks denominated in foreign currencies have even less value when translated into dollars.

For example, the average European blue chip stock is down 45.6% year-to-date in euros, but down 53% in dollars. The euro today plunged to a two-year low of $1.262 from $1.285 on Thursday.

Oh my.