The Treasury’s sweeping new plan to stabilize the financial system and dramatic efforts by the Fed to support money markets promise to reduce sharply the downside 'tail' risks to the economy, and likely will have significant implications for investors, for financial institutions and for monetary policy. Of course, there’s no guarantee that it will work: First, enabling legislation must be quickly enacted, and authorities must use their new powers aggressively to underpin markets and restore confidence. Moreover, it won’t quickly reverse the global economic slowdown that is now underway. But this comprehensive plan looks like a game changer to us: It makes more likely our expectations for economic recovery within the next year and it means that investors should look for opportunities in risky assets. Here’s why.
Stephen Roach, Head Economist, Morgan Stanley
Weekly Bank Research Center 09-29-08
The Plan to Fix the Financial System: Will it Work, and How Will Markets React?
Stephen Roach, Head Economist, Morgan Stanley
The Treasury’s sweeping new plan to stabilize the financial system and dramatic efforts by the Fed to support money markets promise to reduce sharply the downside 'tail' risks to the economy, and likely will have significant implications for investors, for financial institutions and for monetary policy. Of course, there’s no guarantee that it will work: First, enabling legislation must be quickly enacted, and authorities must use their new powers aggressively to underpin markets and restore confidence. Moreover, it won’t quickly reverse the global economic slowdown that is now underway. But this comprehensive plan looks like a game changer to us: It makes more likely our expectations for economic recovery within the next year and it means that investors should look for opportunities in risky assets. Here’s why.
Fierce Political Debate of Paulson's Bailout Plan
Niels-Henrik Bjørn Sørensen, Senior Analyst, Danske Bank
US Treasury Secretary Henry Paulson's plan to set up a federal fund to buy up problem assets from various financial institutions has come under intense fire from the country's politicians. The plan needs to be approved by Congress before it can be rolled out, and to begin with there was broad agreement that the plan would be approved as quickly as possible. As the week has progressed, though, a fierce political debate about the details of the plan has erupted, fuelling market fears that the plan will not be approved in time. At Wednesday's Congress hearing, Federal Reserve chairman Ben Bernanke expressed deep concern about the consequences for the economy if Congress did not "act quickly to address the grave threats to financial stability that we currently face". For now there seems to be agreement on the main thrust of the plan, which would allow the Treasury to issue securities worth up to USD 700bn to fund the purchase of problem assets from financial institutions. There is also talk of awarding Congress a clear supervisory role, imposing a ceiling on executive pay at institutions receiving substantial injections of government money, and the possibility of the government being issued warrants by the institutions receiving aid.
Deal or No Deal
Steve Chan, Economist, TD Bank Financial Group
Last week it was drama on Wall Street, this week it was drama in Washington. Lawmakers met all week on Capitol Hill trying to reach an agreement on the terms of the Treasury backed Troubled Asset Relief Program (TARP). On Thursday a deal in principle looked to have been reached. The outline of the agreement contained limits on executive compensation, loan modification for struggling homeowners and additional Congressional oversight and approval for use of funds over the first $250 billion. But, just as it seemed things would pull through, house Republicans came out with an alternative proposal based on tax-credits and government sponsored insurance for the troubled securities. By the time markets opened Friday, negotiations were back to square one.
Despite the Credit Crisis, Debt Accumulation Still On Going in the UK
Trevor Williams, Chief Economist at Lloyds TSB Financial Markets
The credit crisis is still in full swing; in fact, it is worse now than when it first started in Q3 of last year. Credit spreads have widened out and interbank spreads are the widest that they have been at any time in the last 12 months. But our focus in this weekly is on the fact that with credit conditions tightening - a higher cost of borrowing and less credit being made available - we should be seeing a significant reduction in leverage by households and companies by now. But the data do not yet show that this is occurring; although debt accumulation is slowing it is still taking place. Given current events in financial markets, is it just a matter a time before it slows more sharply? We look at some evidence of where we are currently in the analysis that follows.
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