The Economy Guy

Issue: 12/17/07 Monday

The markets have started (please emphasize the word – started) to rationalize the meaning of the historic move the Fed made last week – meaning the move to add lots of liquidity to the US and European markets.

The stock market fell 173 points today after falling 178 points last Friday. Tomorrow is the key day. This crazy zig-zag market doesn’t really like continuing in one direction for 3 days in a row. The 10 year Treasury bond market settled in at its higher interest rate, and Gold stayed near $800/ounce. Oil declined just slightly.

Here is the news that moved the stock market.Today the Fed offered $20 billion in 28-day credit through an auction. The Fed will not release the results until Wednesday, but the aim of the auction is to encourage commercial banks to borrow from the Fed. That, in turn, is designed to boost banks’ lending to businesses and consumers and keep the economy humming. (Please note that if banks do not take the auction offer up, the implication is that the economy will NOT be humming. The bond market wants to know if the auction will work in providing confidence in liquidity in the economy.)

A speech Sunday night by former Fed Chairman Alan Greenspan added to the market’s ill humor. Greenspan said “stagflation” — when inflation accelerates and the economy weakens — is a growing possibility, given last week’s data showing spiking consumer prices. With inflation on the rise, the Fed, which has reduced the target federal funds rate three times since the summer, might feel less inclined to lower rates again. (I think I beat Greenspan to the word Stagflation!!!!)

Here is a heart felt request from the financial community to stabilize the market, and allow liquidity to flow once more.

It is time for the banks to fully disclose their US home-loan losses to prevent fear from making a tough credit crunch worse since the central banks have done about all they can to restore confidence, analysts say. Central banks “can’t do any more” to boost confidence in the financial markets, Commerzbank economist Michael Schubert warned, while Bank of America’s Gilles Moec urged the private sector to state clearly “who lost what and how much.” They pointed to the vital link between information and confidence, with Monday a key test of whether the markets take a more positive view of the central bank rescue operation of last week or instead turn more sceptical still. At stake is the possibility of ever tighter funding for businesses and even a recession in the US economy. “I’ve heard of institutions that won’t lend beyond one week, to anybody, it doesn’t matter who the name is.”

That means banks and other major lenders are hoarding cash, diminishing the flow of credit on which business depends. I am pleased to see that financial leaders are speaking out about creating a sense of trust in our banking system by having banks speak the truth about their true sub-prime loan exposure.

Here is the international liquidity crisis in a nutshell.

One of the vital functions of central banks is to prevent the break of a link, or links in the banking chain from freezing the national, and potentially international, banking system. “If Northern Rock went under you’d be faced with a house of cards,” referring to the troubled British mortgage lender that had to be bailed out by the Bank of England to the tune of billions of pounds.An ECB study estimates that 18 of the biggest eurozone banks are exposed to risks which, if handled in the same way, would require additional funding “of approximately 244 billion euros (356 billion dollars).”

Those words should scare you stiff. Using the term “house of cards” and the loss of $356B are big red flags to all of us who are innocent bystanders in this mega-monopoly play for wealth and power.

Here are Monday’s closing details:
DJ30 – 13,167 (Down 173 points)
10 year US Treasury Bond – 4.19% (Down 0.04%)
Euro $1.4401 – the dollar holds its move up in strength.
Gold closed at $799 per ounce. (Up $1)
Oil Closed at $90.63 (Down $0.64)
Gasoline is $2.34 (Down $.01)