The Week Ahead

After passing through one of the worst - and most interesting - weeks of the credit crisis so far, I’m curious to see how the market reacts after having the weekend to mull it over. As the crisis in debt markets has progressed, the US government has responded with measures that have been increasingly drastic. Each time, the market has responded favourably, but for progressively shorter periods of time before the downward trend continues. We’re coming off a big market rebound on Friday following the big announcement from the US Treasury, so let’s watch to see how long that euphoria lasts.

In my view, the more important question is what precedent this sort of action sets for the future. There are a lot of legal, jurisdictional and practical difficulties associated with the proposal, the outline of which was leaked late last week. For instance, is the US Treasury going to buy up the bad debt from non-American firms as well? If they’re systemically important, why not? For that matter, shouldn’t other affected governments be contributing as well? It appears as though firms must have their HQ located in America to qualify, but there’s nothing (I think) stopping an arbitrage situation where American-based firms buy up foreign-based companies and proceed to sell the toxic assets to the US government. I certainly wouldn’t expect Congress to accept bad foreign-firm-owned debt without making some noise.

In fact, this jurisdictional ambiguity is the sort of thing that led to the creation of the Basle Committee on Banking Supervision following a series of bank collapses in the 1970s. The BCBS began initially through bilateral US-UK talks that expanded to include other countries. Since Wall St and the City are once again at the center of the crisis, I wonder if we’re going to see a push for greater international collaboration. Much of that may depend upon who makes up the next US administration.

Anyway, I’m getting ahead of myself - there will be plenty of other interesting developments this week.

• For instance, Japan’s ruling (in coalition) Liberal Democratic Party will be selecting a new leader on Monday. Whoever is chosen will become Japan’s next Prime Minister.
• Britain’s Labour Party Conference began today and will continue until Wednesday. Unlike Japan, this will probably not result in a new Prime Minister, but that hasn’t prevented the media from discussing the possibility at length.
• Tensions between the United States and Pakistan continue over the cross-border raid conducted by US Special Forces that resulted in civilian deaths.
• The NHL hockey preseason has begun. So, I’m happy.

UPDATE: See this list of economists shouting 'no!' to the Treasury's plan.