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FT.com / In depth - Global shares hit by bank plan doubt

Global equities suffered heavy falls as investor doubts grew on Thursday over whether sweeping measures by central banks to tackle the credit crunch would be sufficient to defuse the crisis.

Wall Street stemmed its losses late in the day, but Asian and European shares were hit hard as analysts warned that the planned intervention looked modest compared with the scale of the problem - not least because there are signs that losses at big financial institutions are mounting.

"What the programme will not do is cure the cancer that got us here in the first place, the [US] housing bust and the collapse in credit conditions," said William O'Donnell, strategist at UBS. The stock market losses came in spite of surprisingly strong US retail sales figures.

Central bankers tried to counter investor concerns by stressing their willingness to intervene more radically if necessary.

Paul Tucker, Bank of England head of markets, said: "We must try to avoid a vicious circle in which tighter liquidity conditions, lower asset values, impaired capital resources, reduced credit supply and slower aggregate demand feed back on each other."

But the cost of borrowing funds in the European and US money markets remained close to seven-year highs. In the sterling interbank market, the cost of borrowing three-month money fell to 6.51 per cent from 6.63 per cent, while in the dollar market three-month rates dropped to 4.99 per cent from 5.06 per cent. In the euro market, three-month funding costs barely moved, trading at 4.95 per cent.

Meanwhile it emerged that Alan Greenspan, former chairman of the Federal Reserve, has raised his estimate of the probability that the US will slip into recession from about one in three to closer to one in two, though not actually 50 per cent as reported by some media.



"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet
by Melanchthon on Fri Dec 14th, 2007 at 12:51:29 AM EST
[ Parent ]
OpEd: Krugman

After the Money's Gone - New York Times

On Wednesday, the Federal Reserve announced plans to lend $40 billion to banks. By my count, it's the fourth high-profile attempt to rescue the financial system since things started falling apart about five months ago. Maybe this one will do the trick, but I wouldn't count on it.

In past financial crises -- the stock market crash of 1987, the aftermath of Russia's default in 1998 -- the Fed has been able to wave its magic wand and make market turmoil disappear. But this time the magic isn't working.

Why not? Because the problem with the markets isn't just a lack of liquidity -- there's also a fundamental problem of solvency.

[...]

[...]What's going on in the markets isn't an irrational panic. It's a wholly rational panic, because there's a lot of bad debt out there, and you don't know how much of that bad debt is held by the guy who wants to borrow your money.

How will it all end? Markets won't start functioning normally until investors are reasonably sure that they know where the bodies -- I mean, the bad debts -- are buried. And that probably won't happen until house prices have finished falling and financial institutions have come clean about all their losses. All of this will probably take years.

Meanwhile, anyone who expects the Fed or anyone else to come up with a plan that makes this financial crisis just go away will be sorely disappointed.



The fact is that what we're experiencing right now is a top-down disaster. -Paul Krugman
by dvx (dvx.clt ät gmail dotcom) on Fri Dec 14th, 2007 at 03:57:42 AM EST
[ Parent ]
Krugman
What's going on in the markets isn't an irrational panic. It's a wholly rational panic

...with many banks technically insolvent.

Well, this is certainly going to be interesting to watch.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Fri Dec 14th, 2007 at 08:08:03 AM EST
[ Parent ]

"We must try to avoid a vicious circle in which tighter liquidity conditions, lower asset values, impaired capital resources, reduced credit supply and slower aggregate demand feed back on each other."

We can't. (Well, we can try, but we cannot avoid...)

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Fri Dec 14th, 2007 at 04:30:44 AM EST
[ Parent ]

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