One by one, the props on which financial market participants rely are being kicked from under them. The ratings agencies are utterly discredited; bank chief executives are being forced out; their boards of directors have failed in their duties of oversight; rogue-trader risk is back; bond insurers can no longer be depended on. And now, central banks appear intent on destroying their own credibility.
On January 22 the US Federal Reserve, apparently reacting to the two-day rout in global stock markets, cut interest rates by 75 basis points, its biggest emergency cut since 1982.
It leaves its reputation, if not destroyed, then seriously damaged.
A stock market sell-off has been overdue for months and is an understandable response to the growing signs of impending economic slowdown and falling earnings. The stock markets were not irrationally pricing in catastrophe: they were admitting reality.
Stock markets have been in denial, while the credit markets have sensed at first hand the likely economic and market consequences from tighter lending standards, reduced risk appetite for investment and wholesale de-leveraging by the financial players that had previously inflated asset prices. Stock markets might need to fall further, given the economic uncertainties now that the asset-backed securities market, provider of one-third of all credit to US corporations in 2006, remains shut.