Editor’s Note: The Down Jones has now rebounded 500 points, up 100 since this article was posted two hours ago. Remember that the Dow Jones Industrial Average is just one small measure of a vastly complex economy, one that is often determined by psychological factors.
Good morning, cosmic siblings,
With the Moon coming to full phase and Mercury stationing direct this week, world finance leaders acted heroically over the weekend, holding meetings on both sides of the Atlantic. In a major strategy move, the Bush administration changed course. Instead of merely buying worthless assets of banks, it will be infusing cash directly into the system, including into foreign banks. Every single rule of a free market economy is being broken; the world has seen nothing like this since the Soviet Union crumbled.
We are as concerned as you are as the situation unfolds, doing our best to approach it with a sense of adventure. However, with all this action being taken with Mercury retrograde, it is questionable whether it will get any results at all: we need to be prepared for that possibility. Some are saying it’s going to stem the tide but not bring the game back to full speed; the game consumed itself, like holding an edible baseball eating competition at the World Series.
Banking customers in Iceland were the first and hopefully the last to see their country run out of cash, unable to take money out of ATMs anymore. The emphasis of the crisis has shifted to Europe, for the moment, with a bit part of the problem in Iceland, where England had ВЈ840 million in cash from more than 100 UK local authorities was invested. In other words, local towns in England had their money in the bank offshore, in Iceland — and basically lost their money.
It’s not all bad news though; here is what we know from Columbus Day weekend. Stock markets are open today, banks are closed and bond markets are closed. News sources are reporting that the Dow Jones Industrial Average was up 400 points Monday “following a series of measures and cash injections by governments and central banks designed to prop up the banking sector and avoid a global meltdown,” according to CNBC.
“G-7 met Friday [the biggest seven industrial countries] and issued a statement of cooperation, committing to use all tools to support systemically important financial institutions and to work together to unfreeze credit markets. Earlier in the week, major central banks cooperated in a coordinated interest rate reduction. The G-20 [G-20 includes the G-7 plus countries like India, Russia, China, Saudi Arabia and Brazil] met Saturday in Washington and Eurozone leaders met Sunday in Paris.”
After the market fell 18% last week, and dropped 1,000 points on Friday, a bounce back in any amount is a positive thing. Today, the Federal Reserve Bank (the US central bank) announced it’s giving away an unlimited amount of greenbacks to three global banks in an attempt to add liquidity to the market, and to encourage lending between banks.
The three lucky banks are: the Bank of England, the European Central Bank and the Swiss National Bank. “The plan allows the central banks to exchange assets on their books for more liquid assets,” said John Silvia, chief economist for Wachovia. “It will then allow institutions that need dollars to conduct the business they need to conduct.”
On Sunday, the British government announced it will invest $63 billion in three major UK banks: the Royal Bank of Scotland, HBOS and Lloyds TSB. The government has ordered that no board members receive bonuses this year, in effect nationalizing those banks. We are witnessing the end of “free market capitalism” which does not work so well when the market is all that free (deregulated).
Following suit only hours later, the German Finance Ministry “announced a rescue package including more than $500 billion in loan guarantees to stimulate lending between banks and $108 billion to bolster the banking system…the Spanish government had also agreed to a package worth around $130 billion. France and Italy planned to announce their own packages within hours.”
Here is how Paul Krugman of the New York Times summed it up — and he just won the Nobel Prize for economics, if that means anything. “At a special European summit meeting on Sunday, the major economies of continental Europe in effect declared themselves ready to follow Britain’s lead … And whaddya know, Mr. Paulson — after arguably wasting several precious weeks — has also reversed course, and now plans to buy equity stakes rather than bad mortgage securities.”
While I think buying equity stakes, offers better protection to taxpayers, and it may slow everything down, in the end it will not bring the game back. I think it is interesting that Paulson rejected this plan out of the gate, even as many economists were urging an equity purchase plan when the bailout talks started weeks ago. IВ wonder why Paulson changed his mind, and I wonder if he will change it again.
Yours & truly,
Additional research by Rachel Asher
Eric – trust you will also know that Sir Fred Goodwin, CEO of Royal Bank of Scotland (my bank in fact) has stepped down as of last night. It was also part of the deal. I suspect he will not be the only one to be forced to fall on his sword – but he was singled out particularly because he asked shareholders to help find ВЈ12bn a month or two ago, to no avail. The financial hole they were in was deep, deep as the ocean. Nothing could fill it.
PW is great work. Thank you.