A Row of Piñatas

Posted February 12, 2009

The UK pound responded negatively to the US Treasury bank bailout proposal as did much of the rest of the world and in response the worrisome news the recession continues to deepen. The Mexican peso has weakened by 30% in value and the government is intervening in the market. The yen is fluctuating depending on the current financial news being announced.


Just imagine a row of piñatas and a band of grim partygoers batting away to see what is held inside.  That is how it looked on Capital Hill in Washington D.C. as congress questioned the top executives of the 8 largest banks in the country all of which sold the bad mortgage-backed securities around the world.   Having precipitated the worst economic crisis since the Great Depression of 1929, the bankers looked contrite but that did little to mitigate investor pessimism.

Being sorry is not enough it seems when millions of people around the world are losing their jobs.  In the UK alone almost 2 million people have lost their jobs already and it is predicted this number will grow to over 3 million within the year.  There had been hope the US Treasury Department would provide global leadership and present a new banking bailout plan that would actually work, but the lack of details in the presentation Tuesday has led to a market ripple effect which is still running.

Between the “no new news” speech given by US Treasury Secretary Geithner and the bad news by the Bank of England that growth forecasts have been revised downward, the UK pound could not hold its value.  The pound took a sharp dive and weakened against all of its major currency pairs.  In fact, the pound fell to $1.4481 against the dollar which represented 350 pips. 

The volatility in the UK economy is not boding well for sterling.  The pound weakened to 89.49 pence against the euro and to 130.16 yen per pound.  The Bank of England is discussing ways to increase the money supply through quantitative easing policies.

One of the major differences between this recession and the recession which occurred 80 years ago is the global aspect of the financial system today.  It will take global banking system improvement in order to create individual banking strength.  For example, the UK GDP is predicted to continue to contract by as much as 4% the first quarter of 2009 and beyond.  It will not expand until global banks are ready to lend again, and that leads right back to US banking bailout proposal that was not greeting with any market enthusiasm.

If the banks won’t lend and the consumers can’t spend, there will be no recovery (excuse the triple negative).  For every day the US Treasury Department delays producing details of the bailout package, the US dollar will strengthen and equity values will decline.

The Banco de Mexico has drained its currency reserve account buying pesos in the open currency market.  The peso weakened against the US dollar to 14.523 pesos per dollar.  The peso has lost 30% of its value over the last 6 months.  The government has said it will not manipulate the currency but it is intervening in the market trying to prevent a banking collapse.

Naturally, the economic condition of Mexico is of great concern to the US because the two countries share a border.  Some analysts are predicting that Mexico will see a financial system collapse unless the recession begins to turn around quickly and that is not going to happen.

The yen saw ups and downs yesterday depending on the news coming out of various governments around the world.  But it rose against the dollar in response to investor concerns the US banking bailout just proposed is not going to work.   It sounds like a broken record at this point, but it’s just the reality of the situation.

The yen strengthened to 90.01 yen per US dollar.  It also gained against the euro to 116.06 yen per euro.

Other currencies were quiet.  The Australian dollar held at US$.6550.  Australia got some good economic news because the January unemployment rate was better than predicted at 4.8%.

The Russian government has not issued any news concerning the problem faced with the need for debt renegotiation. 

The bankers at the Congressional hearing admitted the financial industry had let the consumer down through risky investments.  Congress prodded and poked these 8 piñatas, and out came admissions of greed and bad decision making leading to this crisis.  If you were forced to describe the lesson learned from the crisis in one sentence it would probably be as simple as this: You should not loan to people who cannot afford to repay the debt.