The several stages of the crisis (1)
This crisis has emerged not suddenly, but in several stages, each stage not only unexpected but also at the same time more serious and more damaging than the stage before. At first things did not seem so bad. In August 2008 one of the best informed policymakers in the world expressed his surprise that the crisis has been so long-lasting and deepseated. Charles Bean, deputy governor of the Bank of England, said in a radio interview from the Jackson Hole central bank governor’s conference,
Last year most of us thought this was a financial crisis that with a bit of luck would be over as we got the other side of Christmas, but it has dragged on for a year and looks like as if it will drag on for some considerable time further yet. There are periods when markets look as if they are getting rather better, and then another grenade explodes, another bout of fear of sustainability, fear of problems in some financial institution, maybe of intervention by the authorities. So it is very much ebb and flow, the mood here is of considerable caution, there is still the recognition that there is still some considerable way to go yet.
His surprise was shared by many others. In early autumn 2007 most experts believed that once mortgage losses were fully acknowledged, credit and financial markets could return to normal, and steady economic growth would resume. This was certainly the belief of stock market investors. Stock prices remained very strong, despite evident financial strains in the markets for buying and selling of credit exposures and in the ‘money markets’ where banks raise short-term funding. The widely quoted Dow Jones industrial average achieved an all-time record closing high of 14,165 on 9 October 2007, well after the financial crisis began.
But, as Charles Bean acknowledged, hopes that the credit crisis would be short-lived were dashed. The losses reported by many major banks, for example UBS, Merrill Lynch and Citigroup, mounted far higher than anyone had expected. The strains in credit and money markets were persistent and on occasion got sharply worse, resulting, for example, in the failure of the US investment bank Bear Sterns in late March 2008. At the same time the Chinese economy continued to grow and suck in raw materials, and an increasing shortage of commodities led to sharp increases in oil, commodity and food prices (for example, the price per barrel of light sweet crude oil on the Nymex exchange doubled between September 2007 and July 2008, from around $70 to over $140).