Who Trusts Governments?

The European Central Bank rode to the rescue today. But there was a limit to how much it could do.

FLOYD NORRIS

Notions on high and low finance.

European stock markets opened lower today at 3 a.m. (all times New York, to avoid confusion) and were down, although not by huge amounts. But within 20 minutes word spread that the central bank was buying Italian and Spanish bonds, as it had said it would do. Within minutes, the stock markets were in positive territory.

Notions on high and low finance.

Futures contracts for the S.&P. 500 rallied more than 30 points within minutes, and it looked like this could be a relatively uneventful day.

Never mind. Markets resumed falling by 4 a.m.

The distinguishing fact about the summer plunge of 2011 is the lack of confidence in governments. It is not that people fear they will do the wrong things. It is fear that governments cannot, or perhaps will not, do much of anything.

On Sunday night the G-7 finance ministers and central bankers, representing the world’s major economies, tried to reassure the world that they would “take all necessary measures to support financial stability and growth in a spirit of close cooperation and confidence.” This morning the G-20, which also includes large emerging markets, chimed in.

If there were any reason to believe there will be “close cooperation” within the American government, this might be a better day. The Sunday talk shows provided an opportunity to send that signal, one that was not taken.

As it is, there is no sign that Republicans are willing to cooperate with Democrats on anything. President Obama’s willingness to give in has made him appear weak and encouraged those who would slash government whatever the economic impact. And it has moved the government in a direction — of cutting the fire hoses while the economy burns — that is risky, to say the least.

Nouriel Roubini, an economist who gained fame for warning of the financial collapse, wrote in The Financial Times today:

So can we avoid another severe recession? It might simply be mission impossible. The best bet is for those countries that have not lost market access – the U.S., U.K., Japan, and Germany – to introduce new short-term fiscal stimulus while committing to medium-term fiscal austerity. The U.S. downgrade will hasten demands for fiscal reduction, but America in particular should commit to look for significant cuts in the medium term, not an immediate fiscal drag that will worsen growth and deficits.

As the American stock market prepares to open, S.&P. futures are down about 30 points, and Dow futures are off about 250 points.

Of course, money must go somewhere. It is going to gold, and it is going to Treasury bonds. Notwithstanding the rating cut, Treasuries are still deemed safe. The yield on 10-year Treasuries is now about 2.46 percent.