http://www.counterpunch.org/whitney10082008.htmlOctober 8, 2008
Bernanke, Europe's Central Banks Throw in Everything They've Got
To the Bunkers!
By MIKE WHITNEY
Stocks fell sharply across Europe and Asia last night following another down day on Wall Street where the Dow Jones lost 508 points and the S&P 500 slipped below the 1,000 mark for the first time since 2003. Japan's benchmark index, the Nikkei, lost nearly 10 percent while shares in London at one point slumped more than 7 per cent. Trading was suspended in Indonesia and Russia where stocks fell 10 percent each on opening.
According to Bloomberg News: "The Federal Reserve, European Central Bank, Bank of England, Bank of Canada and Sweden's Riksbank cut interest rates in an emergency coordinated bid to ease the economic effects of the financial crisis."
The move by the Fed's Open Market Committee (FOMC) brings the Fed's Fund rate down to 1.5 per cent, 500 basis points below the current rate of inflation.
Following yesterday's 508 point bloodbath, President George Bush tried to calm terrified investors about the turmoil in the markets. He said, "I know that the days are dim right now for a lot of folks. But I firmly believe tomorrow is going to be brighter."
Just hang in there.
The present crisis, which has its roots in the unsupervised expansion of credit in the United States, has spread from subprime mortgages and toxic securities, to the entire global financial system, where it has savaged equities markets and is now threatening to do incalculable damage to the US and European banking systems.
Yesterday, Fed chairman Ben Bernanke announced plans to pump an estimated $1 trillion of short-term loans (commercial paper) to head off a growing liquidity squeeze. Unlike, Treasury Secretary Paulson's $700 billion bailout, which was opposed by over 200 economists, Bernanke's plan targets the source of the problem and could actually succeed. Commercial paper is a low-cost source of cash for companies to meet short-term financial needs. It's cheaper than tapping a line of credit at a bank. The Fed will start providing businesses and financial institutions with the short-term credit they need to maintain normal day-to-day operations. The Fed is invoking emergency powers under its "unusual and exigent circumstances" clause in order to avert an even larger shock to the financial system beyond the wreckage in the stock market and hundreds of bank closures that are expected into 2010. Providing unsecured loans directly to businesses is controversial, but necessary. If these corporations and financial institutions fail just because they cannot roll over their short term debt, the overall damage to the economic system could be devastating.