“We have had a bad banking situation. Some of our bankers had shown themselves either incompetent or dishonest in their handling of the people’s funds. They had used the money entrusted to them in speculations and unwise loans. This was, of course, not true in the vast majority of our banks, but it was true in enough of them to shock the people of the United States, for a time, into a sense of insecurity and to put them into a frame of mind where they did not differentiate, but seemed to assume that the acts of a comparative few had tainted them all. And so it became the Government’s job to straighten out this situation and do it as quickly as possible. And that job is being performed.” An extremely good description of the events of last week. This of course was part of the first fireside chat, termed the “The Banking Crisis” delivered on March 12, 1933 by President Franklin Delano Roosevelt which signaled the end of the Depression. We all face the crisis of inaction because of fear, without rational thinking. If the banks stop lending, and we follow suit by not investing, spending and working hard to develop and grow our economy, the financial losses that we fear will become a self fulfilling prophesy. We should all read and implement President Roosevelt’s final words in his fireside chat: “After all, there is an element in the readjustment of our financial system more important than currency, more important than gold, and that is the confidence of the people themselves. Confidence and courage are the essentials of success in carrying out our plan. You people must have faith; you must not be stampeded by rumors or guesses. Let us unite in banishing fear. We have provided the machinery to restore our financial system, and it is up to you to support and make it work. It is your problem, my friends, your problem no less than it is mine. Together we cannot fail.”

EASY credit, some say, was one problem. It was amplified by newfangled, flighty financial techniques, notably buying assets with borrowed money and watching leverage work its arithmetical magic. And underneath it all was a breezy, unthinking optimism, that prices could only ever go up. This was a perfect recipe for a runaway boom—and for a ruinous bust. Substitute “houses” for “assets” in the paragraph above, and you might be reading a rough description of the blowing-up and bursting of America’s property bubble. Insert “shares”, and you might be back in the late 1920s. Whereas the fancy financial ideas of the 2000s comprised securitisation, credit-default swaps, collateralised-debt obligations and all their weird cousins, the innovation of choice before the crash of 1929 was the investment trust, a company whose purpose was to speculate in other companies’ shares, using the wonders of leverage to multiply the returns (and, in the end, the losses). But the map of the Depression provides only an incomplete guide to how the American economy got to where it is now. The parallels between the speculative mania that ended in October 1929 and the housing bubble are seductive but misleading. Today’s banking and credit-market crisis, and all the damage it may do to the real economy, can be traced to the property boom and subprime bust. Where study of the Depression is more helpful, though, is in steering clear of deeper trouble. In the early 1930s deficit finance was a heresy: in 1931, as bank runs were wrecking America’s financial system, President Hoover wanted to balance the federal budget, which in those pre-New Deal days was small beer anyway. (He failed.) Monetary policy was also too tight—the main reason, argued Milton Friedman and Anna Schwartz in a brick of a book 45 years ago, why downturn became Depression. It is no bad thing, then, that as an academic Ben Bernanke studied the Depression in earnest—looking in particular at how an impaired banking system had made the slump longer and deeper. Is 2008 a repeat of 1929 or 1930? Look not at the road ahead but the immediate surroundings, and the question seems absurd. America’s economy may be just entering recession; between 1929 and 1933 it shrank by more than a quarter. Some economists fear that unemployment, now a touch over 6%, might reach 10%; in 1933 it was about 25%, and many of those in work were on short time and short pay. Americans are not banging at the doors of banks demanding their money, nor queuing around the block for soup and bread. America is not yet a land of Hoovervilles—or Bushvilles—inhabited by those turfed out of jobs and homes. Nor should it be allowed to become one.

For the entire article from THE ECONOMIST click here:

Americans are getting a crash course as a once obscure acronym weighs on the economy. In interviews across the country, oil workers, ministers, bank managers and politicians said they were baffled by the London Interbank Offered Rate (LIBOR) or fearful of its surge this week. They agreed Libor was important, even if they couldn't put their finger on why. Libor, set every morning in London, is what banks pay to borrow money from each other. That in turn determines prices for financial contracts valued at $393 trillion as of Dec. 31, 2007, or $60,000 for every person in the world, and helps set consumer interest rates on everything from home loans to credit cards. In the past week, as governments in Europe rescued five banks and the U.S. debated a bailout, the cost of one-month bank loans in euros and overnight dollar loans soared to records. In practice, that means banks are hoarding cash, raising borrowing costs and slowing economies worldwide. Today's three-month Libor for loans in dollars jumped to 4.33 percent. Libor is actually a set of rates, calculated for several currencies on periods ranging from overnight to 12 months. The British Bankers' Association compiles the dollar rate every day from data submitted by 16 banks, including Deutsche Bank AG and Royal Bank of Scotland Group Plc. There are also rates for the euro, Japanese yen, British pound, Swiss franc, and Australian and Canadian dollars. Michigan Mayor ``I confess I've never heard banks charge interest to each other,'' said James Fouts, the mayor of Warren, Michigan, a Detroit suburb of 130,000 that is home to several General Motors Corp. and Chrysler LLC plants. ``I'm frightened by the financial situation. Wall Street is exacerbating and accelerating a doomsday scenario.''

For the entire article from BLOOMBERG NEWS click here:

The Standard & Poor's/Case-Shiller 20-city housing index fell a record 16.3 percent in July from the year-ago month, the largest drop since its inception in 2000. The 10-city index plunged 17.5 percent, its biggest decline in its 21-year history. Prices in the 20-city index have plummeted nearly 20 percent since peaking in July 2006. The 10-city index has fallen more than 21 percent since its peak in June 2006. However, the pace of monthly declines is slowing, a possible silver lining. Between May and July, for example, home prices fell at a cumulative rate of 2.2 percent — less than half the cumulative rate experienced between February and April.

For the entire article from MSNBC click here:

Like a patient who has just swallowed some bitter medicine, markets will have to wait awhile longer before their ills go away. That was the main theme of Friday's session on Wall Street, as an early stock rally evaporated, leaving major stock indexes down for the day despite the House of Representatives' highly anticipated passage of a landmark $700 billion bailout of financial firms saddled with bad credit bets. Investors bid up stocks early in the session in anticipation of a "yes" vote but then quickly sold after approval was in hand. The Dow Jones Industrial Average, which was up 313 points at its intraday high shortly before the House 's afternoon vote, slumped to finish down 157.47 points, off 1.5%, at 10325.38. For the week, which was one of the most tumultuous in the history of Wall Street, the Dow was off 7.3%, its biggest weekly decline in more than six years. Questions continued to swirl about how and when the bailout plan will be implemented and how much the broader economy will continue to suffer even in a best-case outcome afterward. A series of data releases this week, including a glum jobs report out Friday morning, have underscored how deep the broader U.S. economy's weakness has run lately. The bailout legislation, however, does not spell out key details of how the Treasury will execute its purchases, including a timetable and procedures for making offers and accepting bids whenever it wants to re-sell the troubled securities. Those matters are paramount to traders and executives who have watched bank lending tighten precipitously in recent days in the absence of relief from the Treasury. Other stock measures ended lower Friday. S&P 500 shed 1.4% to end at 1099.23. All its sectors fell, led by a 4% drop in financials. The S&P was off 9.4% for the week. The technology-oriented Nasdaq Composite Index fell 1.5% to 1947.39, off 10.8% for the week. The small-stock Russell 2000 slipped 2.9% to 619.40, off 12.1% for the week. The Dow Jones Transportation Average, which traders traditionally view as an indicator of where the Dow Industrials are headed, ended down 1% at 4134.55, down 13% for the week. The indicator has been hammered by expectations that the U.S. will suffer a much deeper recession than previously expected, curbing the need to move goods throughout the country. DOW JONES INDUSTRIAL AVERAGE:

For the entire article from THE WALL STREET JOURNAL click here:

It will be one of the world’s largest asset management firms with an impressive $700 billion war chest. Nothing short of the global economy depends on its success. And the Treasury Department has barely a month to get it up and running. The bailout bill that President Bush quickly signed into law on Friday must do what financial experts have been unable to do for the last year — put a dollar value on mortgage-related assets that no one wants, move them off the books of ailing banks and unlock the frozen credit markets. Even after working feverishly over the last two weeks, the Treasury will not buy its first distressed asset from a bank for roughly six weeks, and almost certainly not until after the Nov. 4 elections. Treasury officials do not plan to manage the mortgage assets on their own. Instead, they will outsource nearly all of the work to professionals, who will oversee huge portfolios of bonds and other securities for a management fee. The Treasury is expected to name a senior official to supervise the program. For now, various working groups creating the program are reporting directly to Henry M. Paulson Jr., the Treasury secretary. Mr. Paulson has recruited several former colleagues from Goldman Sachs to advise him, though administration officials took pains to say that they were not dominating the process, pointing to other Treasury employees who were playing major roles. “We will move rapidly to implement the new authorities, but we will also move methodically,” Mr. Paulson said in a statement after the House passed the bill on Friday. The government will hire only a bare-bones internal staff of about two dozen people with expertise in asset management, accounting and legal issues, according to administration officials, and will outsource the bulk of the program to 5 to 10 asset management firms. Administration officials said they had not yet selected the list of firms to run auctions or manage the assets. During the last few weeks, the Treasury has informally consulted major firms — including BlackRock, the Pacific Investment Management Company and Legg Mason — but none have been given a mandate, they said. The selected asset management firms will receive a chunk of the $250 billion that Congress is allowing the Treasury to spend in the first phase of the bailout. Those firms will receive fees that are likely to be lower than the industry standard of 1 percent of assets, or $1 for every $100 under management. Administration officials said they would try to drive down fees with a competitive bidding process. But with $700 billion to disburse, the plan could still generate tens of billions of dollars in fees if the firms negotiate anywhere close to their standard fees. The main mechanism for buying these assets will be reverse auctions, using the same principles that govern auctions of electricity or the wireless spectrum. In this case, the government will issue an offer to buy a class of assets — for example, subprime mortgage-backed securities — with the final price being determined by how many banks are willing to sell. Using outside contractors on such an extensive scale raises a host of thorny questions, outside experts said. Among the most pressing is: How will the Treasury avoid conflicts of interest that fund managers will encounter as they work both for their own clients’ interests — which could pay higher fees — and the interests of taxpayers? “With anyone short of the stature and honesty of a Paul Volcker running it, you need to worry a lot about conflicts of interest,” said Alan S. Blinder, a former vice chairman of the Federal Reserve, referring to its former head. “Unfortunately, there just aren’t many people with the expertise you need but without any possible conflicts.” The Treasury officials said they were still writing a policy on conflicts of interest as well as guidelines on compensation. As if the mechanics were not daunting enough, Treasury officials need to make wrenching decisions that will determine the bailout’s winners and losers. With so much money on the line, lobbyists for interest groups are already besieging the government to decide in their favor.

For the entire article from THE NEW YORK TIMES click here:

The financial crisis is now claiming victims in the “real” economy. Manufacturers around the world are in trouble. Purchasing managers’ surveys have shown slowdowns for manufacturers in Japan, the UK, the eurozone and the US. Companies are suffering as the credit crisis hits them, and their customers. As growth weakens across the world, the Bank of England and the European Central Bank must start loosening. But the US Federal Reserve should hold steady for now. With the economic situation deteriorating, companies across the world had already reduced their discretionary spending. Construction spending and residential and business investment all fell in the UK, eurozone and US in the second quarter of this year. A few months ago, stagflation seemed a serious threat. This weakening demand has, however, finally allowed commodity prices to slip back. The recent fall in oil prices has, in particular, given central banks the space to cut policy rates. Although inflation is well over target in both the UK and the eurozone, weakening demand means interest rates now look too high. The European Central Bank decided on Thursday to keep eurozone interest rates at 4.25 per cent, but it sent a dovish message on future cuts. The Bank of England should be bolder and cut next week – the real question is by how much. Although rate cuts should be decided only on the basis of economic fundamentals, a cut would also have the helpful side-effect of steepening the yield curve and increasing the profitability of the beleaguered banking sector. The problem for the US Federal Reserve is different. Real interest rates are already much lower in the US than in the UK or eurozone – indeed, they are heavily negative. Having done less to reassure markets of its inflation-busting credentials than its European counterparts, and struggling with a more impaired bank system, the Fed should keep some rate-cutting ammunition in reserve.

For the entire article from THE FINANCIAL TIMES click here:

After climbing a great hill, one only finds that there are many more hills to climb. Nelson Mandela after his release from 27 years in prison.

 

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