Lehman Brothers and Sisters

You may have noticed that there are major crises on Wall Street: in what I think may be the first time in its history, The Wall Street Journal even published a banner front-page story about the shake-up that is remaking the financial world of Wall Street. Essentially, what's happening is stage three or four of the mortgage and general economic meltdown that was triggered a year or two ago when the bottom fell out of the housing market. I wrote in the summer of 2005 that I expected a major financial crisis within five years; here it is. But watch what happens. Global markets are down, on average, something like four percent, which is, admittedly a lot. However, it isn't catastrophic yet. Consortiums of banks and government agencies around the world are now working to shore up any other financial institutions that may be suspect, and I predict that, while the market will drop now, it won't collapse. Paul Krugman feels similarly, though he's "by no means certain".

Here's what I think will happen: the market will drop, and then it will bounce back by week's end. It won't come all the way back, but it will recover a bit. Over the next few weeks it will remain jittery and continue a slow downward trend. After that, another shoe will drop, and at some point in October we'll hit a cycle in which it will be very very difficult to slow the fall. By November, I now think there's about a 70% chance that the market will have collapsed. Admittedly, it might not, but that's my prediction.

Intrade prediction markets seem to favor the slump in 2009, rather than 2008, based on the value of shares there, but I'm not so sure. It may be possible to ride out the current turmoil, but at some point in the next few years, probably--I would still say--by 2010, a full correction is coming.