Subprime Woes Are We Out of the Woods Yet
Within the last week, many batik keris signs have already been on the economic radar: The Bush administration has stated that a consensus has been reached about the impending $145 billion economic stimulus package, the Federal Reserve has cut their most significant interest rate by the biggest margin in 25 % century, and bond insurers are to get government help in order to ensure that banks can avoid further damaging losses. But are these steps enough to curb a recession in the global economy, or even the US? It would appear that are optimistic. The 22nd and 23rd of January both saw rallies, first in emerging economy markets and later in america, with the Dow concluding a stunning 1 the day it had been announced (Jan. 22nd). While the currency markets made substantial gains over the next couple of days, volatility may be the name of the game these days, and cutting the interest cut so suddenly on the heels of MLK Day's depressing Asian market performance looked to numerous just like a panic move. The Fed have the unenviable task of attempting to appear composed when they might not always be, and minimizing the impression that they aren't attentive to falling confidence. As no other central bank saw fit to act in concert with the Fed, (save Canada, whose meeting was scheduled and whose cut was a mere quarter-point) many analysts speculate that their motives are driven by short-term need for stability in financial markets, and less by the still-ominous sub-prime threat.
Finally, the bond insurance bailout. If it weren't because of this action, few would doubt that the united states is headed for imminent recession of a particularly painful variety. But if the mechanics of the financial system, much of which depends upon companies having the ability to confidently lend money (insured with solid capital) to one another, is allowed to grind to a halt? The sub-prime crisis would pale compared to the amount of profits that could instantly be lost, which some speculate would be in the hundreds of billions. This is clearly unacceptable, but an inherent danger still exists: Without the course correction on housing prices (and your debt which was used in major banks, and then with their bond insurance companies), we might be doomed to something such as japan housing bubble of the 1990's wherein bank managers actively colluded with policy makers to obscure their collateralized debts in an identical fashion to the structured investment vehicles of today's market meltdown.
Taken together, these factors would probably lessen a recession if it were impending. But unless folks are in a position to get more credit, exacerbating existing problems, the downturn the united states is now experiencing is going to be long and harsh. The kinks need to be exercised, and the unfortunate aspect of this reality is that those people who have the least must pay the most.