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Global Stock Market Plunge and Minority Banks

According to the Washington Post, "Stock markets around the world plummeted today, as a financial crisis that began in the market for U.S. home mortgages spread to almost all corners of the global economy."

This challenges both theories concerning global equity market independence and equity portfolio risk management techniques that rely on global diversification to control risk. This is particularly troubling: there may be no safe haven for equity investors.

In 2006 and 2007, global economic activity was very strong. This was due, in part, to $458 billion dollars spent by the US, between 2003 and 2007, on the Iraq war. In an earlier age, stimulus of this magnitude would have all but guaranteed that the US would not fall into recession in 2008. To date, several factors have intervened:
  1. The US has outsourced the Quartermaster function. Thus, critically important military support functions, including meal preparation and service, are now handled by foreign nationals. Economic stimulus generated by these expenditures now accrues to the laborer's nation of origin, not to the US.
  2. An extremely small set of US and foreign firms have received the majority of the money spent on the war. Thus, economic benefits from these expenditures have been narrowly allocated, further limiting impact.
  3. A financial market crisis of unprecedented scale, scope and breadth, created by greed and supported by fraud, combined with a partisan, ideology driven approach to fiscal and monetary policy has severely limited the ability of policymakers to respond in a timely and realistic manner.
Important secondary and tertiary impacts are beginning to be felt. According to the Chicago Tribune, "Retail sales unexpectedly dropped in December, capping the weakest year since 2002." For the banking industry, the net result is a growing risk of contagion: even banking institutions not directly involved in subprime lending are starting to fail, as consumer spending slows.

Bottom line: we expect the FDIC to shut down several minority-owned banks over the next three months.

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