3) On Tuesday USA Today reported that China’s main stock index “plunged more than 6% . . . and other Asian markets also declined as investors appeared to show a delayed reaction to news that China’s market regulator would allow market forces to play a greater role in determining stock prices.The mainland China stock benchmark’s 6.2% drop to 3,748.16 was its biggest decline in three weeks. The index fell 8.5% in late July as worries about China’s ability to maintain high economic growth levels undermined investor confidence.” China’s stock market crash now mirrors the Crash of 1929.
This blog first discussed this “perfect storm” of financial threats on December 12, 2014 and again on December 14, 2014. At that time I bemoaned the lack of any effective mechanism for sound fiscal and monetary stimulus for the global economy. I have made the same point with respect to the Eurozone. I wrote a law review article (a book review of Globalization and its Discontents by Joseph Stiglitz) on this point in 2003, and I adddressed this flaw in global financial architecture in Lawless Capitalism. I have also blogged on pro-growth reforms that would help lift the global economy out of its structural deflationary malaise, such as empowerimg people to move freely to their highest and best use or banking currency reserves.
The other major problem with all these extreme market moves relates to the world’s unregulated and opaque derivatives markets. Here, the question of the day relates to the exposure of the megabanks to the oil patch, the emerging market sector and China. My bet is that the megabanks booked big profits on all that soon-to-be distressed debt and now face the losses from those derivatives deals. If so, this meltdowm in Asia and the energy sector is about to hit home on Wall Street and our dysfunctional financial sector. Think MF Global or the London Whale.
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