U.S. financial panic goes global

Lower rates, especially when coordinated among central banks around the world, have historically had a powerful impact on the markets. But the current downturn is being driven by a force not seen on this scale in 75 years — full-blown panic.

To calm jittery investors and savers, the Federal Deposit Insurance Corp. has raised limits on insured accounts. FDIC Chairwoman Shelia Bair told a group of economists in Washington Monday that the agency's board would consider a measure this week to raise insurance premiums on banks to boost its $45 billion cash reserve. The measure has two goals, Bair said.

“It seems only fair that we shift a greater burden of any increase onto riskier institutions," she told the National Association of Business Economists. "And higher-risk institutions can reduce their premiums by changing their risk profiles.”

But some banks may not be able to change their risk “profiles” fast enough to head off insolvency — especially if they’re strapped for cash just when they’re being asked to pay higher FDIC premiums. That may also help contribute to one of the sources of the widespread uncertainty and anxiety in the markets: No one is really sure which banks are sound and which ones are close to the edge.

That problem is especially pronounced in Europe, where bankers were slower to own up to bad debts because rules are less stringent about “marking to market,” according to Diane Swonk, chief economist at Mesirow Financial. "That means that bad loans may have lingered on the books of Europe banks longer than they did in the U.S."

European bank regulators face an even bigger challenge, she says.

“Unlike the U.S., they have no FDIC, so they're facing this crisis of having to have all these individual countries working together — which have failed to do because they don't want each other's problems," she said. Compounding the problem is that some of the banks are huge.

For a time, economists debated whether the U.S., European and Asian economies had “de-coupled” and were somewhat insulated from regional economic downturns. But like a lot of other assumptions, the global financial panic has laid that idea to rest.

As American policymakers scramble to put out the fire, governments in other regions, including Europe, are finding they’re not as well prepared.

"They’re now realizing they probably need us more than we need them," said Swonk. "They really need us to succeed. Without us succeeding they don’t have the tools. We have a bigger toolbox, and we’re inventing new ones every day."

For months, economists have been debating just how the ongoing downturn will play out — often referring to various alphabet shapes to describe the economy’s trajectory — a “V” shape for a quick turn down and rapid recovery, a “W” shape for a recovery that slides back down again; and “L” for a slump that lasts for some time.

Some economists suggest that if financial panic can be contained and the collateral damage minimized the recovery could come sooner than the current turmoil might indicate.

"My belief is this will be an intense period of contraction, people pulling back," said Brian Wesbury, of First Trust Advisers. "But then we should come through this on the other side by early next year and really come out of this quickly."

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