The Week Ahead

Last week I speculated about the possible market reaction to the promise of a massive government injection through the Paulson Plan. So far, that reaction has been something akin to a spoiled child who, having been promised a treat, throws a tantrum when it doesn't arrive now now now!

There are two sentences that I will be keeping in mind as I continue to watch these events unfold over the course of the next couple of weeks. The first comes from J. K. Galbraith, who wrote in The Affluent Society that "In areas of large economic affairs, the march of events... has again left the conventional wisdom sadly obsolete." Although Galbraith penned this line in the late 1950s and was referring to something completely different, I think it's fair to say that the march of events continues uninterrupted, dislodging a lot of comfortably-held beliefs along the way.

Over the weekend, presumably exhausted negotiators reached a tentative agreement to buy up $700 billion in "troubled assets." The plan - which ballooned from 3 pages to 110 - also includes possible restrictions on pay for CEOs of firms who make use of the plan, as well as warrants (convertible into non-voting stock) for the government. The notion that the government could place restrictions on the pay of Wall St. executives is antithetical to the entire spirit of American capitalism, and represents a pretty enormous shift away from the conventional wisdom.

Meanwhile, over in the UK, Bradford & Bingley - a troubled mortgage lender - has been nationalized by the government. Whereas the nationalization of Northern Rock last fall made a big splash, it's unlikely that this B&B deal will dominate headlines for long.

That being said, not everyone has given up faith in the markets. If nothing else, this article in the Washington Post is a refreshing change from the usual headlines. It points out that small banks in America are weathering the storm quite nicely - in fact, their lending has actually increased. Alex Tabarrok, who references the above WaPo article, also makes a couple of other points worth reading (I consider Alex's own plan below).

The second sentence that caught my eye this week came from Barry Eichengreen, a Berkely economic historian and prolific writer. Adjusted somewhat, Barry points out that "Watchers tend to internalize the views of the watched." I thought that was interesting, because there's no doubt that the "watched" right now include first and foremost Henry Paulson and Ben Bernanke. Those two spent their week warning of impending financial meltdown. This, in turn, has been the story carried all week by the media. Because of the authority these two gentlemen command, I think it's fair to say that us "watchers" have mostly been convinced that the conventional wisdom is no longer viable. Whether this is actually true or not remains to be seen.

Moving on. Other upcoming events this week:

• Speaking of the behaviour of spoiled children, North Korea continues to move towards reinstating its nuclear processing plant in Yongbyon.
• Despite the power-sharing deal signed on September 15, Zimbabwe's leaders will continue to struggle this week to resolve the crisis of government.
• The Economist is reporting that "Russian warships set off to Latin America to take part in joint manoeuvres with Venezuela, for the first time since the cold war." (no link)
• Market gloominess will continue to impact the economy in various ways: oil drops below $103; East Asian markets are unimpressed.
  
• Arsenal is looking to rebound after a poor showing over the weekend: they play Porto in the Champions League on Tuesday.
  

Enjoy your week!