The Economist magazine has the cover of the week on the credit crisis:

While Time magazine has a somewhat over-the-top cover on the current issue, the underlying article by economist Niall Ferguson is worth reading, even if a little heavy on history and light on prescriptions.

What's more, this is no longer an exclusively American crisis. European banks are going under as well. Growth rates in the euro zone and Japan have fallen further than in the U.S. Emerging markets too are suffering. With the exception of Brazil, stock markets in the BRIC economies (Brazil, Russia, India and China) are now down about 40% or more on the year.

The notion that Asia has somehow "decoupled" itself from the U.S. now seems fanciful. China and America have come so close to merging financially that we can almost speak of "Chimerica." When Fannie and Freddie were on the brink of collapse, many were surprised to learn that fully a fifth of China's currency reserves was composed of their bonds. Small wonder. Having spent much of the past decade intervening on currency markets to prevent the appreciation of its renminbi, China has accumulated a huge hoard of dollar-denominated bonds. No foreign nation stands to lose more from a U.S. financial collapse.

Here is a sneak peek at some links from my weekly Weekend Reading column over at TheStreet.com.

• Settlement day approaches for Fannie/Freddie credit default swaps on Monday (FT)
• The hottest banks for PE are those that offer vanilla checking, CD, and lending services  (IDD)
• Credit Crunch Takes Bite Out of McDonald's (Advertising Age)
• James Grant thinks the Paulson bailout is more of the same bad medicine (Washington Post)
• Market Turmoil Takes Costly Toll on Video Games (SiliconValley)
• This has to be a joke: GSEs Still A Good Thing, Lew Ranieri Says (IDD)
• IMF World Economic Outlook: Financial Stress, Downturns, and Recoveries (IMF)

Nice, useful figure from The Deal on how modern finance worked to create the subprime mess, or at least how it worked up until there stop being a functioning capital market.

More here.

With Germany and Ireland now having more or less made explicit 100% guarantees for all deposits, many people are wondering who's next in the face of the current credit crisis. Will it be the U.S., which only has about 64% of deposits insured, even at the new $250,000 limits? (Note that some of this is high net-worth sorts, but much of it is interbank lines between foreign institutions and U.S. banks. In other words, if it decided to move, much of it could move in a hurry, neatly making the U.S. banks insolvent.)

My friend Nouriel Roubini argues that the U.S. needs to temporarily extend deposit insurance to all money on deposit with U.S. banks, thus negating the likelihood of a so-called silent bank run. Others point out that Japan tried precisely this during its banking crisis, and it had no impact -- the bank runs happened anyway as uninsured deposits from foreign counterparties scooted. I'm torn on this one, and I understand the argument, but without the some commitment to triage -- picking winners and losers among the banks -- this could quickly become a mess. And I am just not convinced that the FDIC and Treasury have reached the point where it wants to make that part of the eventual nationalization explicit yet. The latter will happen, and 't were better it happened sooner than later, but Paulson/Bernanke still seem to be fighting from the rear on this.

More reading here:

Deposit Insurance and Crisis Management

Gillian Garcia
GGH Garcia Associates

March 2000

IMF Working Paper No. 00/57

Abstract:    
A well-designed deposit insurance system (DIS) will provide incentives for citizens to keep the financial system sound. However, a poorly designed DIS can foster a financial crisis. This paper, therefore, makes recommendations for creating and running a limited, incentive-compatible, DIS. The paper also examines factors in the decision to grant, temporarily, a comprehensive guarantee, and the design of that guarantee, should a systemic financial crisis nevertheless occur. It concludes with guidance on the removal of that guarantee.