Krugman is not an economic alarmist. Today he sounded the alarm. The Federal Reserve's efforts to stop a financial meltdown are increasingly desperate.
Still, that’s not what has me worried. I’m more concerned that despite the extraordinary scale of Mr. Bernanke’s action — to my knowledge, no advanced-country’s central bank has ever exposed itself to this much market risk — the Fed still won’t manage to get a grip on the economy. You see, $400 billion sounds like a lot, but it’s still small compared with the problem.
The Federal Reserve has cut interest rates repeatedly for months to try to increase liquidity in the markets. Yet, instead of dropping as the Fed cut rates, U.S. mortgage rates have gone up. Yesterday, Carlyle Capital went under because it lacked liquidity. Carlyle Capital had a portfolio of U.S. government backed mortgage securities, not subprime mortgages, but still failed because the value of those securities had dropped.
Today, Bear Stearns is being propped up by Chase and the Fed, but it is likely that Bear Stearns is going under as an independent investment bank. Bear Stearns specialized in mortgage backed securities.
The U.S. mortgage market is in crisis despite the Fed's intervention.
It's not just my opinion. It's Krugman's too.
Indeed, early returns from the credit markets have been disappointing. Indicators of financial stress like the "TED spread" (don’t ask) are a little better than they were before the Fed’s announcement — but not much, and things have by no means returned to normal.
Update: I know damn well that hope alone is not enough. We need a leader like FDR who will bring new ideas and new leadership to solving this crisis. We need to restore the regulations that FDR put in place to avoid a repeat of the Great Depression - in modernized form.
Financial deregulation allowed this crisis to happen.
What if this initiative fails? I’m sure that Mr. Bernanke and his colleagues are frantically considering other actions that they can take, but there’s only so much the Fed — whose resources are limited, and whose mandate doesn’t extend to rescuing the whole financial system — can do when faced with what looks increasingly like one of history’s great financial crises.
The next steps will be up to the politicians.
I used to think that the major issues facing the next president would be how to get out of Iraq and what to do about health care. At this point, however, I suspect that the biggest problem for the next administration will be figuring out which parts of the financial system to bail out, how to pay the cleanup bills and how to explain what it’s doing to an angry public.
And it's not just an American crisis. European markets continue to be dragged down by the American mortgage meltdown.
LONDON (MarketWatch) -- Stocks in Europe took a quick turn for the worse on Friday, as Bear Stearns turned to the Federal Reserve and J.P. Morgan Chase for liquidity, fanning concerns for rivals in Europe.
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Banks heavily exposed to capital markets, including Barclays (BARC) and UBS (UBS), led the decline, losing about 3% each.
Britain's HBOS (HBOS), a mortgage lender whose recent performance has disappointed, dropped 3.8%. Read Bear Stearns story.
The German DAX 30 index (1876534) fell 0.6% to 6,464.65, the U.K.'s FTSE 100 index (UKX) dropped 0.6% to 5,655.10 and the French CAC-40 index (1804546) fell 0.8% to 4,591.52.
We are having a crisis in confidence.
The next president needs to restore hope. The only thing we have to fear is fear itself.
With strong political leadership we can restore the financial markets.
Update: I know damn well that hope alone is not enough. We need a leader like FDR who will bring new ideas and new leadership to solving this crisis. We need to restore the regulations that FDR put in place to avoid a repeat of the Great Depression - in modernized form.
Financial deregulation allowed this crisis to happen.