|World markets have responded poorly to a day of tumultuous financial news [AFP]|
World stock markets have plummeted after Lehman Brothers, the US’ largest investment bank, filed for bankruptcy.
A surprise takeover of Lehman competitor Merrill Lynch and reports of American International Group (AIG) – one of the world’s largest insurance companies – seeking a $40bn bridging loan, have only added to what’s being called an “economic avalanche”.
Al Jazeera spoke to a number of financial analysts to find out what it all means.
Max Keiser, prediction markets analyst in Paris
“There’s a decoupling in the wind, America is essentially finished as a global economic power.
“The US dollar is now finished as the world’s reserve currency and we are going to see now some other country rise up and take its place, most probably China.”
“This is entirely predictable … [in] the neo-liberal model, which means that credit is available for almost free.
“Suddenly last summer, credit was unavailable, and then banks who need credit to live start to tumble.
“So this is gaining pace [and] there’s going to be no credit for banks because you’re talking about $700 trillion worth of debt in the global economy.
“The entire GDP [Gross Domestic Product] of the world is something like $60 trillion, so this has a long way to go as you deflate all of this debt back to something more sustainable.
“It’s not a doomsday scenario if you’re in a developing country and you’ve got stuff like oil in the Middle East or you’ve got huge savings, like they do in China.
“It is only a doomsday scenario for America and Britain that have been living on borrowed money for generations.
“It’s a happy day for people who have savings, who have money, who have cash, who have stuff, who have oil, who have resources.
Allister Heath, editor of London’s City A.M. financial newspaper
“Everybody in the West, [or] at least a lot of people, have pensions and these pensions invest in the stock market, and a lot of the shares are actually the shares of banks.
“And when bank shares get hammered, people’s pensions get hammered, so everybody loses.
“When big banks like Lehman go under, you know the housing market is going to suffer again, house prices are going to fall in American and Britain, in Europe and so on.
“That’s going to again hit millions of ordinary people, and of course you have got thousands of job losses.”
Andrew Critchlow, managing editor for Dow Jones Middle East in Dubai
“I think the impact is going to be quite profound.
“I think this is a defining moment for world economies, it’s a defining moment for the United States, it’s a defining moment for all of us that will remember [this] for the rest of our lives.
“People who were around in the 1920s, at the time of the Great Depression – that experience stuck with them for an awful long time.
“And I think that the economic events that we’re currently seeing in the world at the moment – they can only be described in similar terms.
“Certainly in my career, I’ve seen nothing that compares to this and it’s difficult to quantify at this stage where all of this is going to lead.
“A lot of the bad news we’ve seen is just really referring to banks – a lot of these household names in US banking that are now technically going out of business.
“I think the worrying thing is when this hits the real economy, when this hits people on the streets who are going to have less money in their pockets, who are going to be put out of work, who potentially are going to be put out of their homes.
A ‘falling knife’
“It’s difficult to see how financial markets can stabilise at this point. I think that from an investor’s view, you don’t want to be caught catching a falling knife.
“Certainly talking to trader in the Gulf, Gulf markets have been very badly affected today.
“The sentiment is, we’re not at the bottom of the market here, and as they say, this hasn’t hit real economies yet – it hasn’t hit the retail sector fully yet, it hasn’t hit the spending power of the man on the street yet.
“There are lots of scary potential problems that could come out of the woodwork yet to haunt us here.”
James Galbraith, economist and professor at the University of Texas at Austin
“There is a threat – it lies in these vast markets for credit derivates, credit defaults, swaps, mortgage backed securities and derivitives from them, which are not liquid at the moment, which are impossible to value and which result from the breakdown of prudent regulation and prudent financial practice over the past 30 years, but particularly in the last decade.
“The risk is one of a disorderly market, basically.
“It is very easy to destroy the trust on which a liquid financial market depends, rather hard to rebuild that trust afterwards.
“But I do think this was a revolution which has now run its course. It’s a revolution which is now eating its children and a very big change in mindset has to be underway.
“I would much prefer to believe that we will see a change in US policy that will tend to restore the central role of a reliable, liquid and relatively stable US financial market in the world system.
“Whether we can achieve that from the current starting point, given the damage that’s already been done, is very much an open question, but that will have to be the policy challenge going forward.”