Very Tricky
We're writing on Saturday morning. This weekend might be the first one since Labor Day when there doesn't have to be a major financial market rescue in the works or when Washington officials had to pull all-nighters to put together some patch before Asian markets open Sunday evening, East Coast time. Whew! Does this "weekend off" mean the worst is past?
Well . . . .
We've known for a long time that our debt society posed a danger, but we've still been amazed these last weeks at the speeds and magnitudes of the losses in these recent events. In just the four extra days it took Congress to pass the bailout legislation, from the House defeat Monday to the House passage Friday, the following developments occurred:
1. The Federal Reserve loaned $368 billion through its discount window to banks, money funds and bond dealers during the Fed's statement week ended Wednesday. The previous week was half as much, $188 billion, and before these credit problems really broke out in March, the largest amount ever had been $12 billion in the aftermath of 9/11.
2. Rates for overnight lending in the international money markets leaped to 6.8% on Tuesday, compared to the Federal Reserve's target 2% rate in the U.S. The day was the quarter-end, September 30, often a time when such lending is tight, but in recent years, borrowers have learned to smooth their daily cash needs to limit this spurt. Not so now. That rate came down somewhat later in the week, but very short-term interest rates for private sector borrowers remain generally elevated; cash investors continue to favor "risk-free" U.S. Treasury bills, which Friday were earning a mere 0.47%.
3. Two short-term investment funds widely used by college endowment managers suspended or limited withdrawals. The Wall Street Journal reported that no school's operations were immediately impacted but it's still a very precarious position.
4. The State of California announced that it may soon need to get a federal loan of $7 billion to meet its short-term cash needs.
Some of these situations might have emerged anyway during the week, but certainly there was added risk with Monday's failure of the main plan that was on the table, and all these developments reflect that.
By yesterday, in addition to the final passage of the bill, there was also talk that the Federal Reserve would lower its target for the base "federal funds rate". That has remained at 2% since April even as the Fed has added enormous amounts of short-term funds to the credit markets. Now, we're getting more concrete evidence that the credit tribulations are affecting the economy itself. Most notably, the Labor Department reported that the number of jobs in September fell by 159,000, spread across a wide range of industries. Consumer spending, already hurt by high gas prices, was also weak in its latest report, covering August, with declines in several widely diverse segments. Industrial output and manufacturers' orders have also weakened. So what began in the housing markets has spread now across the economy. These events in the U.S. are also mirrored in other countries, especially in Europe.
The right things are happening, though. The legislation did pass. The Fed may well lower its base rate, which will hopefully lead to reductions in other interest rates. The weakest banks and securities firms are being absorbed into stronger ones. It will take some weeks for Treasury officials to begin the newly authorized purchase program for mortgage securities, but they are one group probably not taking off this weekend as they get that effort organized. All this will help.
And you? Along the lines of what Mother Crafton wrote in yesterday's eMo, seize responsibility for your own financial condition. Make sure your bill-paying is up-to-date. Invest money cautiously. We've said it before, but we'll repeat: don't invest in anything you don't understand. This is one time when it isn't a joke to put some money under the mattress. The new law greatly increases FDIC insurance for bank deposits. Take advantage of that, possibly at your own local neighborhood bank. Be careful. It's still very tricky out there.
Well . . . .
We've known for a long time that our debt society posed a danger, but we've still been amazed these last weeks at the speeds and magnitudes of the losses in these recent events. In just the four extra days it took Congress to pass the bailout legislation, from the House defeat Monday to the House passage Friday, the following developments occurred:
1. The Federal Reserve loaned $368 billion through its discount window to banks, money funds and bond dealers during the Fed's statement week ended Wednesday. The previous week was half as much, $188 billion, and before these credit problems really broke out in March, the largest amount ever had been $12 billion in the aftermath of 9/11.
2. Rates for overnight lending in the international money markets leaped to 6.8% on Tuesday, compared to the Federal Reserve's target 2% rate in the U.S. The day was the quarter-end, September 30, often a time when such lending is tight, but in recent years, borrowers have learned to smooth their daily cash needs to limit this spurt. Not so now. That rate came down somewhat later in the week, but very short-term interest rates for private sector borrowers remain generally elevated; cash investors continue to favor "risk-free" U.S. Treasury bills, which Friday were earning a mere 0.47%.
3. Two short-term investment funds widely used by college endowment managers suspended or limited withdrawals. The Wall Street Journal reported that no school's operations were immediately impacted but it's still a very precarious position.
4. The State of California announced that it may soon need to get a federal loan of $7 billion to meet its short-term cash needs.
Some of these situations might have emerged anyway during the week, but certainly there was added risk with Monday's failure of the main plan that was on the table, and all these developments reflect that.
By yesterday, in addition to the final passage of the bill, there was also talk that the Federal Reserve would lower its target for the base "federal funds rate". That has remained at 2% since April even as the Fed has added enormous amounts of short-term funds to the credit markets. Now, we're getting more concrete evidence that the credit tribulations are affecting the economy itself. Most notably, the Labor Department reported that the number of jobs in September fell by 159,000, spread across a wide range of industries. Consumer spending, already hurt by high gas prices, was also weak in its latest report, covering August, with declines in several widely diverse segments. Industrial output and manufacturers' orders have also weakened. So what began in the housing markets has spread now across the economy. These events in the U.S. are also mirrored in other countries, especially in Europe.
The right things are happening, though. The legislation did pass. The Fed may well lower its base rate, which will hopefully lead to reductions in other interest rates. The weakest banks and securities firms are being absorbed into stronger ones. It will take some weeks for Treasury officials to begin the newly authorized purchase program for mortgage securities, but they are one group probably not taking off this weekend as they get that effort organized. All this will help.
And you? Along the lines of what Mother Crafton wrote in yesterday's eMo, seize responsibility for your own financial condition. Make sure your bill-paying is up-to-date. Invest money cautiously. We've said it before, but we'll repeat: don't invest in anything you don't understand. This is one time when it isn't a joke to put some money under the mattress. The new law greatly increases FDIC insurance for bank deposits. Take advantage of that, possibly at your own local neighborhood bank. Be careful. It's still very tricky out there.
posted by Carol S. | 10/04/2008 02:20:00 PM
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