It may be crisis point in the world of financial markets, banks, Treasuries, Exchequers and Kings’ Counting Houses but, here in the South-West of England, spring has truly sprung.

A carpet of daffodils heralds spring in the northern hemisphere

I’m aware that the weather can be as treacherous as the stock markets, but no-one can doubt that there’s a bullish mood in the bulbous population just below ground.

With flooding and mayhem elsewhere in the country, we at least have a sign of what is to come.

Let us hope it’s a metaphor for the world economy.

As we’ve been saying here in Syntagma for some months, a long, deep worldwide recession now looks more likely than not. Opinions are hardening among key players, principally in America and Britain.

Davos : the great and the good are assembling here amid world crisis

Yesterday, the Wall Street Journal proclaimed : “U.S. warning signs point toward deep recession”.

Most economic analysts regard the stock market as an early indicator of economic conditions in a year or 18 months time. London’s market has lost more than 13 percent of its value in just three weeks. Wall Street was closed yesterday, but will doubtless catch up today.

The current consensus is that 2008 will be bad, but 2009 could be much worse. The second decade of this century may resemble the 1930s in the worst-case scenario.

Problems continue to pile up. Banks have been writing off around 14 percent of the 2006 batch of collaterallized debt obligations (CDOs). This percentage is currently being upgraded to 19 percent, ensuring more pain to come. The total exposure by banks could be as much as $500 billion.

Making matters worse, the insurance companies, or Monolines, that underwrite possible defaults, are also in trouble, with two of the biggest in the U.S. said to be close to Chapter 11 status (a form of bankruptcy protection against creditors).

Moreover, the very banks relied upon to rescue Western institutions, like the Bank of China, are also said to be exposed to the U.S. sub-prime slice and dice fantasy.

Another crushing problem — now endemic in developed countries — is the level of personal debt. A typical person now spends one-seventh of their income on debt repayments, compared to around 10 percent a decade ago. In Britain alone, household debt is running at an unprecedented £1.4 trillion ($2.75 trillion). Add to that the massive levels of public spending in recent years and it’s clear this can’t be sustained for much longer.

The principle of “moral hazard” means that sooner rather than later everyone has to face up to their debts and start paying them off. There are no lenders out there now who will aggregate them at a lower repayment level. The adjustment to lower debt levels is desperately needed.

Unhappily, it will represent very hard times for many, some very poor indeed, and a massive writedown of Western assets, many transferring to Asia. The loss of that income in future decades will materially affect the West’s ability to dominate as it has done in the past.

Many businesses are also going to be in deep shock this year and next. Those that survive will have low levels of debt, and shares in safe hands — not bankers, buyers or lenders who are desperate for cash to rebuild shattered balance sheets.

So, is a recession a good outcome or is it as disastrous as it seems? On one level it’s totally disastrous, especially to those innocently caught up in the credit crash. It’s also bad for the reason that we’re being pulled down by voracious greed. Greed by the banks for giving NINJA morgages (no income, no job, no assets) and then selling them on in bits and pieces. Greed also by the banks that bought them. And greed by consumers in running up such heavy debts in the good times, leaving little to repay them in the bad.

However, this can also be seen as a necessary correction to a self-inflicted train wreck. Moral hazard demands a reckoning. Our Faustian deal with the Devil has a repayment package at its fulfilment. Soon, we will know the worst.

Update : The Fed has just cut American base rates by an unusually large 75 basis points or 0.75 percent, a sign that Bernanke is serious about taking a machete to rates to head off a recession.

The White House has also indicated the President may increase his upcoming fiscal stimulus (tax cut) from the $150billion already announced.

Here’s a question often posed in the business small ads of many newspapers : “Is this the greatest moneymaker of all time?”

Whatever it is, the answer is No.

There are a few organizations, central banks and Treasury departments, which can chop down a tree worth a few thousand dollars, pulp it into paper, print some ink on it and call it a billion dollars.

A lot of that is going on right now.

So money making is the greatest moneymaker of all.

Have a nice day.

Banks are rarely in the news as much as they are now. There are yet more writedowns from the giants of banking in their end of year reports.

Will that be the end of it? Probably not, but at least a fightback is underway by the bulls, while the bears seem to be temporarily in retreat.

With Ben Bernanke last week promising to cut rates with a scythe instead of the usual nail scissors, America will avoid a real slump and the world will move on.

Anatole Kaletsky in his Economic View column in the Times (London) thinks the U.S. may well avoid a serious recession (two quarters of negative growth) and prognosticates as follows for Britain and Europe :

By the second half of 2008, however, the euro will take over from the pound as the pariah of the global currency markets, since the eurozone will ultimately suffer more than Britain from the slowdown in the global economy because the European Central Bank will resist making the inevitable interest-rate cuts. This intransigence by the ECB will cause serious economic and political disruptions in Europe – and could even raise questions about the euro’s survival as a reserve currency in the long term.

The landscape will be changed though. The behaviour of the banks in recent years has been beyond any pale we might wish to contemplate in a nightmare, but then that’s not exactly new. Who said this, for example? :

“I sincerely believe that banking establishments are more dangerous than standing armies, and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a grand scale.”

That was Thomas Jefferson in 1816.

Plus ca change …

Update : Citigroup has just posted a near $20billion writeoff for Q4 2007. These are spectacular numbers which highlight the immense financial transfer from the West to the Far East that’s now underway thanks to the greed and stupidity of our bankers.