Posted on 07/18/2002 11:01:35 PM PDT by Uncle Bill
Reuters
By Eric Burroughs
August 4, 2002
NEW YORK (Reuters) - Severe stress in global markets has nerve-wracked investors fearful that one big shock could jam the gears of the financial system -- much like the crisis days of 1998.
"People feel like gasoline has been dumped on the floor and it wouldn't take much to ignite it," said James Glassman, senior U.S. economist at J.P. Morgan Chase.
Plunging stocks and multibillion dollar bankruptcies the past month have investors assessing the widespread damage to banks and insurers. If more scandals or failures come to light further straining capital markets, it could force central banks to jump to the rescue, pumping money into the system through lower interest rates.
Fear is starting to hurt economies as well. The financial market squeeze in both the United States and Europe is depriving businesses of crucial capital and sharply increasing their cost of borrowing at a time when global growth, led by the $10 trillion U.S. economy, appears to be losing steam.
"The Fed has to get concerned about the capital markets effectively tightening for the Fed at a time when it wants policy to remain accommodative," said Brad Stone, chief U.S. market strategist at Barclays Capital.
"The Fed may need to lean against that. Some weeks ago that looked like a very low risk. Now it's definitely a real risk," he added.
MONEY HARD TO GET
Interest rates charged on high-quality corporate debt right now stand at near-record levels -- 2.2 percentage points above risk-free Treasuries, up more than half a percentage point since early June.
Investors, scared they cannot trust corporate balance sheets, have proven reluctant to lend money. Corporate bond issuance by investment grade companies sank in July to $22 billion, down 63 percent from its January to June average. Last week investment grade debt suffered its worst week since at least 1997, and junk bonds are set for their worst year ever.
Funding through the short-term commercial paper market also has become very difficult, with total outstanding issuance for nonfinancial and financial firms falling a hefty $93 billion this year. Banks have turned skittish about lending. Initial public offerings have dried up.
"The way the events are unfolding right now for the near term, dealing with these many financial constraints is going to impinge and impinge and impinge on economic activity," said prominent Wall Street economist Henry Kauffman, who has argued the Fed should cut interest rates.
Swap spreads -- a measure of banking sector risk that signaled the systemic distress in 1998 -- popped out last week on the credit anxiety about J.P. Morgan before stabilizing. Investors are even raising risk premiums on assets usually considered very safe like mortgage-backed securities.
With markets so stretched, harried traders are looking anxiously for the one trigger that could set off an explosion.
"The markets continue to scan for a 'smoking gun' to justify some emergency policy response," said Michael Wallace, an economist at Standard & Poor's MMS.
Rattled markets showed their heightened state of anxiety on Friday when rumors of an emergency central bank meeting in Europe to help a failing bank or insurance company swept through trading desks, sparking selling of stocks and powering gains in safe-haven short-term Treasuries.
Banking trouble fears hit a fever pitch on July 24 when rumors spread of liquidity problems at J.P. Morgan Chase -- the largest U.S. bank-- and Citigroup after congressional revelations of their dealings with failed energy trader Enron Corp. The impact across credit markets was harsh and swift.
Later that day ratings agency Standard & Poor's said such talk was unfounded and reaffirmed the ratings of both banks, but investors remain shaken and the damage to market conditions has not improved much.
Europe has also seen its fair share of worries about the quality of its banks and insurance companies on the asset losses, providing fodder for the rumor mill.
On July 25 Germany's second largest bank, HVB Group , posted a second-quarter loss and described business conditions as among the worst since World War II.
'98 REDUX?
Economists are quick to point to the differences between this episode and the late summer of 1998, when Russia's debt default sent investors rushing out of risky assets globally and nearly brought the financial system to its knees when the hedge fund Long-Term Capital Management almost collapsed.
Conditions were so bad then that even the massive U.S. government bond market -- considered the most liquid in the world and a refuge from turmoil -- nearly froze as dealers demanded higher and higher premiums to execute trades.
Eventually the Fed cut rates to restore investor confidence, even though the economy was in good shape.
The current pain in capital markets has yet to reach those extreme levels of distress, said J.P. Morgan's Glassman. But he said the market sees conditions as deteriorating to the point where a crisis could happen "at any moment."
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"On the Dow, financial services giants J.P. Morgan Chase and Citigroup led the decline, falling 6.3 percent to $22.34 and 7.2 percent to $28.65, respectively."
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You're working on it (affectionately, It is almost too late).
The New Improved Game of Insider Trading
Corporate debt saps nation - Credit stress hits Depression level
"Moody's Investor Research now says the nation is in the worst credit stress since the Great Depression of the 1930s."
Nigeria just defaulted on $33 Billion debt! - Who will pay? You.
Bailouts for everybody. Uh, well, except you. Sorry. Somebody has to pay.
Washington spending going wild
Bush Spending Exceeds Anything Known To Man
George W. - Master of Disguise
In an effort to boost the economy, socialist George W. thinks the "Government ought to have a policy that helps people with a downpayment." This is not a joke, he really stated it.
Socialism: the Forbidden Ideology
HOW CONSERVATIVE IS PRESIDENT BUSH?
GEORGE W. BUSH: CLINTON'S THIRD TERM © - Norman Liebmann
Please, make this all go away
Fiscal conservatives in Congress help keep spending on the rise
"Congress passed the Federal Reserve Act on the 22nd of December 1913, and from that day forward the United States of America ceased to be a republic."
Anne Williamson - THE FED, March 2001, WorldNet, a monthly publication of WorldnetDaily.com.
Central Bankers Meet to Assess Anti-Recession Efforts
The Associated Press
By Joseph Rebello August 29, 2002
Source
JACKSON HOLE, Wyo. (Dow Jones/AP) - The world's best-known economists and central bankers are meeting here this weekend to try to decide a question Wall Street resolved long ago: Who is best equipped to fight recessions - elected government officials or central bankers?
Investors are paying attention anyway, hoping that the predictably academic tone of the annual economic conference of the Federal Reserve Bank of Kansas City will not keep Alan Greenspan from shedding light on a more urgent question: Does the Fed need to do more to fight the current U.S. economic downturn?
The U.S. economy, after all, remains sickly despite the unprecedented dose of stimulus it got last year in the form of tax cuts enacted by Congress and interest-rate cuts executed by the Fed. Consumer confidence is wobbly and business investment is tepid. The Fed hinted two weeks ago that it might cut interest rates again, but more recent comments by some Fed policy makers have puzzled investors.
"Alan Greenspan knows what people are interested in," said James Glassman, an economist with J.P. Morgan in New York. "If he chooses to signal anything, he can do so in a few words at this conference. The markets just want to know what the Fed's frame of mind is - what would it take for the Fed to act again" to boost the economy.
Greenspan, who enjoys superstar status among the central bankers gathering in Jackson Hole, is scheduled to deliver a speech at 10 a.m. EDT Friday that kicks off the two-day meeting. He traditionally confines his remarks to the main topic of the conference. But analysts say the topic this time - "Rethinking Stabilization Policy" - is broad enough to give him an opportunity to clarify Wall Street's doubts about the Fed's intentions.
Those doubts grew last week after three Federal Reserve regional bank presidents suggested the Fed should not cut interest rates again despite the central bank's view that the chief risk facing the economy is of a renewed slowdown. Chicago Fed president Michael Moskow said the Fed "cannot - and should not - try to smooth out every bump" in the economy. Investors' expectations of another rate cut this year receded as a result.
The conference also will provide a platform to central bankers from other leading industrial economies to shed light on the outlook for those economies. The deputy governor of Japan's central bank, Yutaka Yamaguchi, is scheduled to make a presentation on monetary policy and economic conditions in his country. He also is likely to hear from other economists on what the Japanese must do to end the country's decade-long recession.
Ottmar Issing, a member of the European Central Bank's executive board, is set to discuss the ECB's efforts. And Guillermo Ortiz Martinez, governor of Mexico's central bank, is scheduled to describe the Mexican experience.
The central bankers, however, typically spend most of their time listening to presentations by top academic economists. Those economists, according to participants in the meeting, are expected to argue that governments are generally ineffective when they try to fend off recessions by cutting taxes or increasing spending. The job of fighting recessions should be left instead to central banks.
That isn't a novel idea. Many Wall Street economists agree that legislatures typically take too long to organize a fiscal stimulus, which means the economy gets that stimulus when it is no longer needed. Still, those economists also say, the U.S. tax cuts last year show that governments can be effective if they manage to act quickly.
"We ended up with a milder recession than we would have had" if tax cuts had not been enacted, said David Jones, an expert on the Fed. "At least this time the timing was much better."
HOW BIG IS THE GOVERNMENT'S DEBT? - 33.1 Trillion - By Andrew J. Rettenmaier, a NCPA senior fellow and the executive associate director of the Private Enterprise Research Center at Texas A&M University.
The Fall of the Republic
My only question is, will the '90s be called the Clinton Bubble?
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