Fisher Investments Editorial Staff
Globalization, Market Risks

Study Abroad

By, 10/01/2008

Story Highlights:

  • US stocks rallied Tuesday to the tune of 5%—mitigating some of Monday's drop and capping one of the most erratic quarters in stock market history.
  • Though media focus is mostly US-centric, different countries are responding to Financials' woes in different ways.
  • Given today's unprecedented events, different approaches add up to something like a global laboratory experiment, and only time will tell what will and won't work.

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The uncertainty surrounding the US financial rescue plan continued Tuesday, but US stocks still rallied to the tune of 5%—mitigating some of Monday's drop and capping one of the most erratic quarters in stock market history. We still don't know what Congress will ultimately decide, but whatever your view of government intervention, the fact is we're seeing a lot of it right now—in the US and everywhere. Media focus is mostly US-centric, but different countries are responding to Financials' woes in different ways. So with Congress taking a breather on Tuesday, let's turn our gaze abroad and see what tactics other countries are taking.

Some are nationalizing failed banks, with the UK taking over Bradford & Bingley and Iceland seizing Glitnir, while others opt for partial nationalization and capital injections. Belgium, Luxembourg, and the Netherlands partially nationalized Fortis; France, Belgium, and Luxembourg took a similar approach with Dexia; and German lender Hypo Real Estate received $50 billion from the state and private banks. The central banks got involved too, as the European Central Bank and Bank of England extended their overnight liquidity schemes. Meanwhile, other countries are appealing directly to constituents: Ireland guaranteed all deposits at the country's six largest banks to shore up confidence and China cut some taxes on stock trading to increase investment activity.

We're also seeing a spate of nascent policy initiatives. Early Tuesday, France's Sarkozy met with finance ministers, the Bank of France governor, and bank heads to begin "organizing a coordinated response" to troubles in France and across Europe. The French-language media offered further details and suggested new financial arrangements, including presidential authority to force banks to prioritize lending, would be announced by week's end. Across the Channel, the British parliament returns from summer break next week, and the government and opposition already appear united on a bill granting the Bank of England power to rescue struggling banks. And in Japan, new Prime Minister Aso laid out his own economic plans in his first address to the Diet.

Regulatory changes are brewing too, as the EU's internal markets commissioner is proposing a sweeping overhaul. Features include increasing capital requirements and creating a new regulatory body to oversee banks with cross-border operations. All changes are aimed at limiting the possibility of a bank in one country contaminating the entire Continent, though the potential effects and consequences are far from certain.

Another looming uncertainty is the politicization of potential rescue plans. Germany's Merkel and Britain's Brown, faced with mounting unpopularity, may soon present their own Paulson-style rescue plans. Brown has already received a poll boost from his response to Britain's financial woes, so political motivation may rear its head in initiatives by both the government and opposition as they battle for ground. A similar situation is forming in Japan, where Aso and the unpopular Liberal Democratic Party are using the crisis to rally support ahead of a possible snap election. In all instances, pandering to public opinion could yield policies that aren't necessarily in the financial system's best interests.

With such different approaches everywhere, there is a bit of a laboratory experiment as to what type of approach will yield the best result. This also gives us plenty of comparisons to measure US policy approach against through time. But time is the key—though uncertainty reigns, there are still too many moving parts for investors to reach any firm conclusions. This isn't the time for hasty decisions. Instead, it's a time for education and constant vigilance.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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