G.O.O.D

Source: breitbart.com

The governor of the Bank of Spain on Sunday issued a bleak assessment of the economic crisis, warning that the world faced a “total” financial meltdown unseen since the Great Depression.

“The lack of confidence is total,” Miguel Angel Fernandez Ordonez said in an interview with Spain’s El Pais daily.

“The inter-bank (lending) market is not functioning and this is generating vicious cycles: consumers are not consuming, businessmen are not taking on workers, investors are not investing and the banks are not lending.

“There is an almost total paralysis from which no-one is escaping,” he said, adding that any recovery — pencilled in by optimists for the end of 2009 and the start of 2010 — could be delayed if confidence is not restored.

Ordonez recognised that falling oil prices and lower taxes could kick-start a faster-than-anticipated recovery, but warned that a deepening cycle of falling consumer demand, rising unemployment and an ongoing lending squeeze could not be ruled out.

“This is the worst financial crisis since the Great Depression” of 1929, he added.

Ordonez said the European Central Bank, of which he is a governing council member, would cut interest rates in January if inflation expectations went much below two percent.

“If, among other variables, we observe that inflation expectations go much below two percent, it’s logical that we will lower rates.”

Regarding the dire situation in the United States, Ordonez said he backed the decision by the US Federal Reserve to cut interest rates almost to zero in the face of profound deflation fears.

Central banks are seeking to jumpstart movements on crucial interbank money markets that froze after the US market for high-risk, or subprime mortgages collapsed in mid 2007, and locked tighter after the US investment bank Lehman Brothers declared bankruptcy in mid September.

Interbank markets are a key link in the chain which provides credit to businesses and households.

Technorati Tags: Bank of Spain

Source: Bloomberg.com

Money-market rates in Europe jumped to records after the U.S. Congress rejected a $700 billion rescue plan for financial companies, heightening concern more banks will fail, and as lenders hoarded cash as the third quarter ends.

The euro interbank offered rate, or Euribor, that banks charge each other for one-month loans climbed to a record 5.05 percent today, the European Banking Federation said. Rates on three-month loans in dollars were as high as 10 percent as of 10:50 a.m. in London, said Ronald Tharun, a money-market trader in Stuttgart at Landesbank Baden-Wuerttemberg, Germany’s biggest state-owned lender. The dollar Libor-OIS spread, a gauge of the scarcity of cash, advanced to a record. Rates in Asia also rose.

“The money markets have completely broken down, with no trading taking place at all,” said Christoph Rieger, a fixed- income strategist at Dresdner Kleinwort in Frankfurt. “There is no market any more. Central banks are the only providers of cash to the market, no-one else is lending.”

Credit markets have seized up, tipping banks toward insolvency and forcing U.S. and European governments to rescue five banks in the past two days, including Dexia SA, the world’s biggest lender to local governments, and Wachovia Corp. Money- market rates climbed even after the Federal Reserve yesterday more than doubled the size of its dollar-swap line with foreign central banks to $620 billion. Banks yesterday borrowed the most since 2002 at the ECB’s emergency rate.

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Source: FT.com

Money markets seized up once more on Wednesday amid deepening uncertainty about whether Congress would approve the Bush administration’s $700bn financial rescue plan and whether revised proposals would succeed in restoring confidence.

The rates that banks charge each other soared as investors sought the safety of short-dated US government debt – and US officials struggled to address mounting objections to the rescue plan in Congress and beyond.

On Wednesday, John McCain, Republican nominee for president, said he would suspend his campaign on Thursday in order to return to Washington and join talks on the bail-out effort. The Arizona senator also asked for a postponement of Friday night’s scheduled debate with Barack Obama, his Democratic opponent.

Ben Bernanke, Federal Reserve chairman, argued against suggestions that the scheme would pay too much for distressed assets, and the head of the Congressional Budget Office warned lawmakers of possible “chaos” if Congress does nothing.

“You would have a financial market meltdown that would cause very severe dislocations . . . maybe on the magnitude of the Great Depression,” said Peter Orszag, the CBO chief.

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More Gov’t bolstering of the “Free Market”…

Source: money.cnn.com

The Treasury Department and Federal Reserve took steps Friday to help stabilize the U.S. money market fund industry, which has come under severe strain following the dramatic events that took place across the financial system this week.

The Treasury said it would guarantee up to $50 billion dollars for the next year for both retail and institutional investors.

Complementing that was a double-edged plan by the central bank, which would include the Fed offering loans to banks to provide them with the cash they need to meet the withdrawal demands of money market customers.
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Typically, putting money in these funds was thought to be as safe as money in the bank.

But these funds, which also serve as a fundamental source of financing for both financial institutions and capital markets, have come under severe strain in recent days following the dramatic events from earlier this week - including the dramatic collapse of Lehman Brothers (LEH, Fortune 500) and the federal government’s rescue of the insurance giant AIG (AIG, Fortune 500).

Fearing that many of these funds could see their value wiped out, several financial institutions - including Wachovia’s (WB, Fortune 500) Evergreen Investments and Frank Russell Funds - announced plans Thursday to step in to prop up their funds now. But experts seemed certain that they could not do it indefinitely.
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Details of the plan remain cloudy, although it likely that the government could absorb billions of dollars in mortgage assets.

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