Thursday, October 02, 2008

Economic Bailout and Rescue :Lending freeze continues

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Credit remained hard to come by Thursday, even after the revised government bailout plan cleared the Senate, as investors waited to see if the bill can pass through the House. The Senate on Wednesday night passed a financial industry rescue plan that was slightly changed from one rejected by the House just two days earlier. The bill would allow the Treasury to buy up to $700 billion of troubled assets from financial institutions. Those assets, mostly mortgage-related, have caused the credit markets to seize up. With loads of troubled assets on their balance sheets, banks are hesitant to take on more loans if the risk of default is high. Furthermore, when banks need to write down those assets, they have less cash on hand to issue loans. That stops the financial system's gears from turning, in turn hurting customers who need a loan to finance a home, a car or tuition. Frozen cash flows also affects companies' ability to make payroll, which can result in layoffs. The major aim of the government's bailout plan is to free up banks to start lending again once their balance sheets are cleared of toxic holdings. But as the legislation faces a tough second vote Friday by the House, credit remains tight.

Market gauges: One indicator of how willing banks were to lend to other banks, called the "TED spread," showed high prices of loans between banks. The TED spread measures the difference between 3-month Libor and the 3-month Treasury borrowing rates and is a key indicator of risk. The higher the spread, the bigger the aversion to risk. On Thursday, the spread retreated slightly to 3.28% from 3.35% on Wednesday. On Tuesday, the measure surged as high as 3.53%, its highest level in more than 25 years. On Sept. 5, the TED spread was only 1.04%. Furthermore, the difference between the decade-old 3-month Libor and the Overnight Index Swaps rose to an all-time record 2.55%, up from 2.44% Wednesday, according to data reported by It's the fifth-straight record for the measure, showing that banks are hoarding cash rather than lending to one another. The Libor-OIS "spread" measures how much cash is available for lending between banks, and is used by banks to determine lending rates. The bigger the spread, the less cash is available for lending. .

Many on Wall Street and the rest of us are still digesting the momentous events of the last 10 days. Between one and three trillion dollars worth of financial assets have evaporated. Wall Street has been effectively nationalized. The Federal Reserve and the Treasury Department are making all the major strategic decisions in the financial sector and, with the rescue of the American International Group (AIG), the U.S. government now runs the world's biggest insurance company. At $700 billion, the biggest bailout since the Great Depression is being desperately cobbled together to save the global financial system.

Mortgage Bailout Plan / Subprime Rate Freeze — Manhattan Real Estate ...
Macro economic discussions and investment strategy for ... from interpreting this Bush sponsored subprime rate freeze ... majority of borrowers out of eligibility for this bail out ...
more ...
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Economics Roundtable
... Mark Gongloff report that in the wake of the failure to pass the bailout bill, overnight lending ... A day after the $700 billion economic rescue package was defeated on Capitol Hill ...
more ...
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Feb 21, 2008 Gold & Whirlwind of Crisis Jim Willie CB 321gold ...
... fear, that enacting a full blown rescue of the banking & bond & economic ... The Teaser Freezer stands as the most ... Eventually the USGovt must bail out the ...
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Cached Patriot-News Know@Noon Newsletter
... make a statement about the economic bailout ... And if our nation continues on this course, the economic damage ... the House rejected the rescue package. The key bank-to-bank lending ...
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Economic, profit concerns shatter market confidence - Sep. 30, 2002
Tuesday's spotlight economic report is the ... More on MARKETS • Stocks pop on bailout bets • Lending deep-freeze ... TODAY'S TOP STORIES • Accord on rescue plan • ...
more ...
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House ready to try again after Senate approves bailout
... some version of the bailout measure to start loans flowing and stave off a potential national economic disaster. But critics on the right and left assailed the rescue plan ... Demands Safeguards in any Economic Bailout ... Ritter did the hiring freeze for ...
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Source: Rocky Mountain News
NewsDateTime: 1 hour ago

From Sydney to Wall Street: 24 hours of the Global Economy - live
Now, as President Bush's US bailout plan comes under the spotlight again, our ... Gold continues to see buying on the same rationale. Asian trading in US stock ... 0219GMT: The economic rescue plan bill passes in US senate, overcoming its first major ...
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Source: Times Online
NewsDateTime: 6 hours ago

The Bailout Bill Fails (Update #3)
Now when credit markets freeze up and we begin a depression we ... hurt on subprime companies which practiced Pulsen Pen lending ... marked increase in the early 1930s when major supposed "rescue" measures by FDR actually deepened and lengthened the economic ...
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Source: BusinessWeek
NewsDateTime: 9/30/2008

Wall Street rally hinders attempts to save bailout
... to resurrect the White House’s stricken $700 billion financial rescue package ... The Times has learnt that one alternative bailout would involve using taxpayer ... Weather the bail out happens or not, it does not change the fact, that debt continues ...
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Source: Times Online
NewsDateTime: 10/1/2008

Analysis: Congress repeats 1930s errors with bailout vote
... into the system to try to free up the immobilised markets, lending ... John McCain's chief Economic advisory currently has a $160,000 year part ... So now they need a rescue package for the bailout package?? You couldn't make it up.
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Source: Times Online
NewsDateTime: 9/30/2008

"An economic 9/11," warned Terry Connelly, dean of Golden Gate University's Ageno School of Business, of the potential fallout. As the package went down, panicked investors caused the Dow Jones industrials to nosedive nearly 780 points in their largest one-day point drop ever. Markets across Asia fell sharply Tuesday in the wake of the Wall Street downdraft. Lawmakers defeated the legislation by a 228-205 vote, although Democratic and Republicans leaders and Treasury Secretary Henry Paulson all pledged to keep working for a package acceptable to all sides. Vowed Mr. Bush: "This is not the end of the legislative process." In the meantime, the economic wreckage that the administration and Congress have warned about - rising unemployment, shrinking nest eggs and prolonged recession - might not happen immediately, but that doesn't mean it won't happen at all. "This is like the advice you get from the doctor who says you should quit smoking," said Robert Brusca, chief economist at Fact and Opinion Economics in New York. "You know he's right. But if you don't, you're not going to die tomorrow and you're not going to die next week. But at some time, it's probably going to get you." For now, Treasury was expected to work with other government agencies, including the Federal Reserve and the Federal Deposit Insurance Corp., to deal with problems on a case-by-case basis. "Our tool kit is substantial but insufficient" without a bailout, Paulson warned. There are some steps the Federal Reserve can take to cushion damage from the worst credit crisis since the Great Depression. The Fed, which has been providing billions in short-term loans to help banks overcome credit stresses, could keep expanding those loans in an effort to spur financial institutions to lend more freely again. And, it could keep working with other central banks to inject billions into troubled financial markets overseas. Undoubtedly, both businesses and consumers will run for cover. They will clam up. The snowball hitting the economy will pick up speed and gather mass. Ken Mayland economist, ClearView EconomicsAlso, the Fed could make it easier for banks and investment firms to draw emergency loans from the central bank by expanding the type of collateral they pledge to back those loans. And, if the credit crisis were to turn even worse, the Fed also has the power in extreme circumstances to expand emergency lending to other types of companies and even to individuals if they are unable to secure adequate credit from other banking institutions. The Fed also could do an about-face and start cutting its key interest rate again. The Fed in June halted an aggressive rate-cutting campaign and has kept its key rate since at 2 percent. While some Fed officials doubt that another rate reduction would do much to boost confidence and persuade banks to begin lending again, Brian Bethune, economist at Global Insight, insists a deep cut would pack a powerful punch. It would lower the prime lending rate, now at 5 percent, that serves as a benchmark for credit card rates and many other types of loans. Peter Morici, an economics professor at the University of Maryland, suggests Americans should be conservative with their money and focus on paying down debts. However, Morici told CBS' The Early Show that without some sort of government intervention, "everyone's personal finances are going to be worse. This has to be solved." If Congress doesn't act, analysts, who were scrambling to downgrade their economic forecasts, believe the U.S. economy could shrink even further. The unemployment rate - now at a five-year high of 6.1 percent - is expected to hit 7 or 7.5 percent by late 2009, which would be the highest since after the 1990-91 recession. Some economists say the jobless rate could rise even more. "Undoubtedly, both businesses and consumers will run for cover. They will clam up," said economist Ken Mayland, president of ClearView Economics. "The snowball hitting the economy will pick up speed and gather mass." More banks could fail, too. In the second quarter that ended in June, the Federal Deposit Insurance Corp. estimated 117 banks and thrifts were in trouble, the most since 2003. The threat of more banks failing in the U.S. and abroad forced the government to act swiftly. The tanking stock market and falling home values - the single-biggest assets for most Americans - have taken big bites out of people's wealth and their retirement accounts even as high energy and food prices are shrinking paychecks. Consumers are major shapers of the U.S. economy. If they retrench, the country will go into a tailspin. The bailout plan was intended to revive jittery and fragile banks on Wall Street and Main Street by buying billions upon billions of their worst mortgage-related assets so that lending, the oxygen of the American economy, would flow freely again. "People are going to go home and look at their 401(k)'s and not be very happy, and these are not just people from New York, but Iowa and everywhere else. This bill is meant for everyone - not just Wall Street but Main Street," said longtime New York Stock Exchange floor trader Theodore Weisberg. For some perspective on the value of $700 billion, consider this: According to the Wall Street Journal, half the money FDR spent on his New Deal program to lift the country out of the Depression and banking crisis was for public works projects. For $250 billion in today's dollars, the nation got 8,000 parks, 40,000 public buildings and 72,000 schools. On a more mundane level, $700 billion could pay the wages of 22 million average Americans for a year. (According to the Labor Department, the average nonsupervisory, non-agricultural wage was $612 a week in August.) The government could pay off the $550 billion in outstanding student loan debt in the United States, and then some. That's from both government and private lenders. Seven hundred billion dollars is five times what the federal government has devoted to Gulf Coast recovery in emergency funds and tax credits since Hurricane Katrina.
The number of Americans continuing to collect uninsurance claims increased by 48,000 to 3,591,000 for the week ended Sept. 20, the most recent week available. The 4-week moving average jumped 46,750 to 3,528,500 from the preceding week. Economists from expect September job losses to spike to 105,000 and for the unemployment rate to remain steady at 6.1% when the government's monthly report is released Friday. The economy already has lost 605,000 jobs this year

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