What Will Stop the Drop?

What will stop this?

Let’s look at some of the things that have not worked.

The Group of 7 finance ministers promised to act together in a cooperative way.

President Obama assured us that he wanted to cooperate with Republicans.

FLOYD NORRIS

Notions on high and low finance.

It would be wonderful — and most likely would lead to a rebound — if there were evidence that genuine cooperation was going to arrive, and that governments would act together to try to both fix the financial systems and avoid new downturns. But so far there is no indication that any such thing will happen.

Notions on high and low finance.

If that cannot be, some bold leadership from someone — preferably someone with the ability to borrow lots of money — would be welcome. But the president seems unwilling to do anything but issue pleas that fall on deaf ears. Chancellor Angela Merkel has grudgingly moved but is unwilling or unable to try to persuade Germany that it must step up far more than it has.

Picking one cause for the recent slide is not easy. But in retrospect one should not rule out the European bank stress tests, whose results came out on July 20. This time, we were promised, the tests would be credible. But when they arrived, we learned that Europe was still assuming that European sovereign debts were risk-free. The collapse started soon after that.

I am in no position to crow — I was more optimistic about the economy than most were last year, and I was wrong. But it now appears clear that the financial crisis never really ended. The amount of capital wasted in the boom years continues to drag economies down. But there is no real discussion of how to deal with that.

An important lesson that leaders grasped in 2008 and 2009 was that free enterprise was not going to work without a decently functioning financial system. It is a lesson that may need to be learned again.

It was just six months ago today that American financial stocks hit their recent highs. Since then, the collapse has not spared any bank. But the ones hit particularly hard have had some combination of the following:

1. Leftover liabilities from the bad old days of lending without much regard for credit quality, secure in the knowledge that loans could be sold to someone else before they went bad.
2. A lot of European sovereign debt.
3. Doubts about the level, or accuracy, of the bank’s capitalization.
4. Particularly for some regional banks in the United States, commercial real estate loans that should never have been made.

The KBW bank indexes for the United States and Europe contain 24 stocks each. More than a third of them have lost more than a third of their value in six months.

They are:

1. Bank of America, U.S., down 55.4%
2. Commerzbank, Germany, down 55.3%
3. Lloyds Banking, Britain, down 49.5%
4. Société Générale, France, down 45.4%
5. National Bank of Greece, Greece, down 45.2%
6. Regions Financial, U.S., down 43.5%
7. Barclays, Britain, down 43.3%
8. Citigroup, U.S., down 42.8%
9. Suntrust, U.S., down 42.6%.
10. Intesa Sanpaolo, Italy, down 42.2%
11. Crédit Agricole, France, down 40.6%
12. New York Community Bancorp, U.S., down 39.0%
13. Unicredit, Italy, down 38.7%
14. Royal Bank of Scotland, Britain, down 37.8%
15. Bank of New York Mellon, U.S., down 36.1%
16. Fifth Third, U.S., down 35.1%
17. Credit Suisse, Switzerland, down 33.6%.

Figures are based on dollar prices, rather than local currency quotes, and were calculated by Bloomberg.