The economic crisis may be hard for some to understand, but newspapers today are showing how the problems are hitting home. After all the reasons from Americans as to why they felt it unwise to act with a package of assistance to financial institutions, comes the harsh facts of what a perfect financial storm looks like. This is pretty basic stuff but as I read and listen to more and more Americans I am aware that there is a steep learning curve to be dealt with on this crisis.
On Monday, as the credit crunch claimed a fresh list of major financial institutions on both sides of the Atlantic, the U.S. Federal Reserve pumped $630 billion into the global financial system, hoping to loosen up short-term credit markets.Wachovia Corp. “If banks aren’t lending, cars don’t get sold, equipment doesn’t get bought, and people don’t get hired.”Treasury Secretary Henry Paulson has argued that by purchasing toxic mortgage securities, his plan would give banks that capital. But some critics worry that this method would be too slow, complicated and indirect.
But rates barely budged, said Kevin Giddis, head of fixed income for Morgan Keegan & Co. in Memphis, and by the end of the day the spread between the federal funds rate and the interbank rate had moved back to historic levels, indicating lenders are frozen in place.
“Nobody trusts each other,” he explained.
That freeze is what worries economists the most, since it is a sure sign that the problems on Wall Street threaten the broader economy.
“What people don’t seem to understand is that Wall Street and Main Street are entirely linked,” said John Silvia, chief economist at
The ultimate solution is that banks need more capital to replace losses from the housing crisis. Otherwise, they simply won’t resume lending.
For many observers, however, Monday’s market convulsion proves global markets badly want a sign that the U.S. government is serious about providing some sort of bailout. Restoring confidence, they say, may be a crucial first step to stabilizing the markets. If the Paulson plan isn’t working, it can be adjusted or abandoned for a better solution.
“This is a taste of what might be in store if we don’t get some government intervention,” said Wells Fargo economist Scott Anderson. “It’s pretty close to a panic situation, especially in the bond markets.”
In an example of how fragile credit markets have become, the state of Massachusetts yesterday tried to borrow $400 million to make its routine quarterly local aid payments to cities and towns. State treasury officials said the credit markets abruptly froze midday, leaving them $170 million short. The state will have to use its own funds to complete the local aid payments, draining the state’s balance to extremely low levels.
“I don’t think any treasurer alive could say they’ve ever seen anything like this,” said Timothy P. Cahill, the state’s treasurer. “There have always been cash shortages, but you could always go to the market and get more. This is the first time we haven’t been able to do that.”
Cahill said he believes the credit market will in effect remain shuttered today as the nation’s largest lenders hold on to their cash amid uncertainty over plans for a federal bailout. In short, the House’s rejection of a $700 billion Wall Street bailout plan takes Massachusetts and the rest of the US economy into territory that few policy makers and analysts wanted to explore.
EU Commission spokesman Johannes Laitenberger said that the “United States must take its responsibility in this situation, must show statesmanship for the sake of their own country, and for the sake of the world.”
“The turmoil that we are facing has originated in the United States,” he added. “It has become a global problem. The United States has a special responsibility in this situation.”
Belgium’s Dexia bank became the country’s second to get a government-assisted bailout in as many days, while Ireland boosted bank stocks by guaranteeing all domestic bank deposits. Central banks continued to pump short-term credit into banks in an effort to unfreeze interbank lending.