Today is the perfect day to start a global economy blog. This could be the very first truly global crisis. So far all previous economic and financial crises were limited geographically or in sectoral width. Most emerging markets had been closed, and the relationship network among mature economies was too loose for a crisis to really impact all. Even the 1929-1933 meltdown or the two oil shocks of the 1970’s were reaching only part of the globe. This is not the case any more.
Will the entire banking sector get affected? Just look at the list of the banks that are dead worried now. They are not only ALL the large international banks, but also - of course - ALL the medium sized regional banks, as well. There is no large region or country with a financial sector of any sophistication in the world that would have been left insulated by today’s shock.
Will it spread to the rest of the economy? It already has. Liquidity is the staple for the entire economy (well, at least the monetised bit). But, maybe more importantly the risk appetite is gone. Funny how we have been laughing at the ridiculous levels of love of risk in the past years, and now there is NONE left.
I bet the biggest problem now is that the information systems of the ‘investment banking community’ (if there ever was anything community like about investment banks…) are not good enough and fast enough to reveal the extent of the damage that the folding of Lehman brings, as well as the danger lying in WaMu, AIG, and the host of others everyone is talking about. A lot of running around this week.