Business Times - 14 Oct 2008
The week-long sell-off suggests the moves taken by Washington had failed to build the necessary investor confidence
By LEON HADAR
AFTER a week of pandemonium in the financial markets that ended on Friday, Wall Street is taking a three-day weekend break. (Monday is Columbus Day public holiday.) That has provided an opportunity for finance officials from the world's top economic powers, who gathered in Washington, to look for ways to restore the confidence of the world's investors to bring an end to the financial turmoil and to prevent an economic recession from turning into a global depression.
The financial leaders were in Washington for meetings of the World Bank and the International Monetary Fund (IMF).
The week-long sell-off on Wall Street suggested that the dramatic moves that were taken by Washington over the week - giving credit markets a boost by buying short-term loans; the announcement by the Federal Reserve that it was joining with five other central banks around the world to cut interest rates by a half-percentage point; the willingness by the US Treasury to take ownership stakes at US banks - had failed to build the necessary confidence among investors.
From the perspective of the investors, these moves seemed to have been taken too late and/or to constitute too little.
On Friday, these investors seemed to be counting on Washington to throw them a life saver. Indeed, a late-day bounce - the Dow ended down 'only' 128 points - reflected the hope in Wall Street that the weekend's Group of Seven meeting will bring some sort of coordinated move to unfreeze the global credit markets.
They sought an aggressive action plan committing the US and its allies to take specific steps that would finally help thaw the frozen credit market. In short, they wanted the finance ministers and their central bankers to demonstrate that, indeed, they mean business.
The confidence-building weekend in Washington started on Friday with an appearance by President George W Bush in the Rose Garden soon after the market opened on Friday. He was seeking to calm investors by stressing that his administration was working to contain the crisis, but it would take some time for the measures to take hold. 'We are a prosperous nation with immense resources and a wide range of tools at our disposal,' President Bush said. 'We can solve this crisis and we will.'
It was not clear whether his statement had any effect on the market. But one could argue that the Dow would have dropped more than 128 points if the president hadn't made the address early in the day.
And late on Friday evening, after a meeting of the financial officials from the leading industrialised nations chaired by US Treasury Secretary Henry Paulson, those assembled emerged from the talks with a five-point plan to reverse the credit crunch and, vowing 'decisive action' and pledging to 'use all available tools'.
Secretary Paulson and the other economic officials went out of their way to emphasise the 'collaborative' nature of their efforts. But it was clear that decisions on what specific steps to take in order to unfreeze credit would be left to each government.
At a press conference that followed the G-7 gathering, Treasury Secretary Paulson told reporters that the Bush administration, in a move not taken by Washington since the Great Depression of the 1930s, would proceed with a plan to buy stock in financial institutions. The step amounted to partial nationalisation of several financial institutions.
And it reflected a shift from the initial plan of the administration to buy troubled mortgage-related loans from financial institutions as a way of encouraging them to restart lending operations.
The good news for investors was that the US federal government, by using some of the US$700 billion of the financial rescue plan, would be complementing the efforts by the banks to raise capital from private sources through the purchases of non-voting shares. That was exactly the kind of action that many leading economists had been advocating and that Britain has already embraced.
But Mr Paulson indicated that the government would not take an active role in running the companies, an idea that has been advanced by economists who believe that Washington needs to direct the available capital towards those financial institutions that need it is as soon as possible and prevent the collapse of the entire financial system.
The confidence-building process continued on Saturday with President Bush meeting with financial officials and later expressing confidence that the global economy would be stabilised. Participating in that meeting with President Bush were, in addition to the G-7 officials, also representatives from the European Union, World Bank and IMF.
President Bush also made an unusual visit to the headquarters of the IMF during the day and, together with Mr Paulson and Federal Reserve chairman Ben Bernanke, he took part in the discussion of the Group of 20 which includes rich countries and major developing nations such as China, Brazil and India.
The visit by Mr Bush was aimed to demonstrate American's intention to mobilise support from the rising emerging economies for the strategy to contain the financial crisis.
The G-20 countries issued a joint statement in which the finance officials made a commitment 'to overcome the financial turmoil and to deepen cooperation to improve the regulation, supervision and the overall functioning of the world's financial markets'.
Was all this enough to restore investor confidence? The stock markets in Asia made some gains yesterday. But so did the yen and gold - which may indicate caution among investors.
Most likely in the US, the response would reflect a consensus that the G-7 seems to be moving in the right direction but that Wall Street expects more in the coming days. In particular, US investors are hoping that the central banks would help guarantee inter-bank lending so that the credit markets could start coming back to life.
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