24 september 2011, rabbits, headlights, action

Two things have created the precipice of economic meltdown we find ourselves overlooking. One is powder keg, the other is sparks. The keg is the huge global imbalances that built up in our years of plenty, when china and the emerging world were very happy to lend us an endless amount of money to buy their goods, as anyway they had little faith in their own governance to manage it. The first spark was three years ago, with the implosion of the american sub-prime market, which took every fiscal policy lever we had to stabilise. The second was greece, which became the whole euro area, as inept leadership allowed the problem to fester and grow enormously. It is clear to everyone that there is deep global uncertainty about what to do, with fundamental misgivings somewhere over any particular strong course of action, making for total stalemate as to be effective any policy at this point needs everyone to be strongly rowing the same boat. We stand like rabbits, frozen in the headlights of the oncoming recessionary juggernaut. The markets are intensely volatile, as they struggle to read the runes of every move and statement, and desperately cut their losses when things momentarily subside. Though the bigger eu rescue package agreed before the summer will surely now finally come into being, it already looks too little, too late; though expect some rabbit out the hat tricks to make the number much bigger. The ecb too must surely both chip in and also find some way, at least temporarily, of underwriting the big european banks, where, just as in 2008, the fear that they are sitting on massive potential bad debts (this time sovereign) is utterly undermining confidence. These are the sorts of measures that will need to be in place to create the ring of steel within which greek debt can finally be restructured properly, something the markets have long since priced in (although that need not at all mean leaving the euro, see no way out, 16 january 2010, nor should they want to, as they're not the uk in 1992. The hope must be that default by another name will finally lance the boil, amongst other things allowing the eu's monetary and fiscal sides, which have been fundamentally at odds over the issue throughout the crisis, to lace together their actions better, hopefully beginning to restore confidence. All this is unlikely to be enough to stop the slide into recession, nor will it alter the movement of tectonic plates between east and west that is really driving the crisis. However, it may at least mark the end of a particularly chaotic phase and enable some stability of sorts to be once again established, on which the foundations for moving forward can then be built.