Dollars & Sense: Perdition Postponed

[marmar]

Monday, October 06, 2008


Perdition Postponed
by Dollars & Sense

Stocks worldwide suffered huge losses again Monday, after the worst week for US shares since September of 2001. The Dow fell below the psychologically-significant level of 10,000 (as did the Nikkei in Japan), but the final number was a vast improvement on the 700 odd point loss the index showed earlier in the day, with the index closing a mere 389 points down. And it was probably only the prospect that the Fed would be forced to cut interest rates perhaps by half a percentage point in an emergency (i.e. before the scheduled meeting of the Federal Reserve Board of Governors late in the month) that prevented the slide from eclipsing a record slide--which it did only last week. In addition, oil dropped to about $85 a barrel, a level unseen for a year. Clearly the markets are not impressed by the passage of the Treasury plan, passed on Friday, to buy the toxic assets on the books of the banks: instead, they fear worldwide recession, one thing (amongst many) the Treasury plan is singularly ill-equipped to deal with.

Meanwhile, bond yields are falling, but, as cash continues to be hoarded by banks, borrowing costs continue their relentless upward advance. It is clear that markets are no longer anywhere near as concerned about the toxic assets on the books of the banks as they are about the possibility--which increases by the day, so long as the crisis remains in its seemingly terminal phase--that bank and even shadow-bank counterparties may go bust before they can meet their short-term obligations. The banks, faced with rapidly increasing costs of capital (and insurance against default), shareholder flight, and paying off agreed emergency credit lines of firms who can't access funds on the wholesale market (due to the jamming up of the commercial paper market), are looking more and more desperately to governments to guarantee deposits beyond the levels they already do.

This, of course, was one of the central points of the Troubled Asset Relief Program, which increased deposit insurance in the US from $100,000 to $250,000, and of regulations in the US which guaranteed money market funds, which, though considered risk-free, bore no government guarantee. In Europe, however, Ireland's move to guarantee the deposits of all depositors of its six largest banks has given rise to a kind of race to the bottom, with the initially reluctant Germans now providing a like guarantee, and the positively mortified British poised to do the same at any moment. In the end, though, it seems clearer and clearer that, only a blanket public guarantee of all financial liabilities, even those held by hedge funds and their ilk, can stop the downward spiral. But it's hard to imagine, after the drama of last week, that such an outcome will be politically feasible.


http://www.dollarsandsense.org/blog/2008/10/perdition-postponed.html