Aug. 26, 2011, 12:01 a.m. EDT
Debt will haunt the market for years to come
Commentary: Conditions won’t allow quick resolution to crisis
By Howard Gold
NEW YORK (MarketWatch) — Call it the summer of debt.
Since late July, global markets have been through a big sell-off that at one point took the Standard & Poor’s 500 index down nearly 20% from its late April-early May highs.
Debt was the big theme, from the spectacle of the debt-ceiling battle in the U.S. to new fears about debt problems spreading in Europe.
And even now, as markets have stabilized and come back a bit, nervous investors are waiting for the next shoe to drop.
The U.S. and European economies are showing signs of weakness even as investors hope for a miracle from the Federal Reserve, which already has said it would keep short-term rates at essentially zero for the next two years.
And political leaders on both sides of the Atlantic seem unable to get a grip on the problems — or tell voters how intractable they really are.
How intractable? Recessions that follow financial crises tend to be deeper, and the debt problems that caused those crises shift from the private sector to the public sector. Subpar economic growth makes it harder for governments to solve their debt problems. So, the dark debt cloud may hang over the U.S., Japan and many European countries for years.
To get some perspective, I spoke to Raghuram Rajan, a professor at the University of Chicago Booth School of Business and former director of research of the International Monetary Fund.
Rajan gained notoriety by speaking truth to power at Federal Reserve chairman Alan Greenspan’s final Fed retreat at Jackson Hole, Wyo., in 2005. In the paper he presented, Rajan warned that banks and Wall Street firms were taking on too much risk and that changes in the financial markets “may also create a greater (albeit still small) probability of a catastrophic meltdown. “
“…I felt like an early Christian who had wandered into a convention of half-starved lions,” he wrote later, especially since some of the other papers “focused on whether Alan Greenspan was the best central banker in history, or only among the best.” Let’s just say Rajan wasn’t the most popular figure at the cocktail parties.
But he did go on to write an excellent big-picture analysis of the crisis, “Fault Lines,” which won the Financial Times and Goldman Sachs 2010 Business Book of the Year award.
Full story: http://www.marketwatch.com/story/debt-will-haunt-the-market-for-years-to-come-2011-08-26
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