Thursday, October 09, 2008

Wall Street Isn't the Problem

Or, as Paul Krugman says, we have bigger problems to worry about. Naturally, a lot of people are flipping out because the Dow tanked this afternoon, falling to below 8600 points and losing almost 40% of its value in only a year. The Dow is more an indicator of troubles in other areas though as opposed to a precursor to it. Here's Krugman:

Stock prices are, however, the least of our worries. The money markets are frozen; the TED spread is 4.14%.

G7 meeting tomorrow, IMF-World Bank over the weekend. Now is the time for major action — an announcement of coordinated capital injections, liquidity measures, and more. If we’ve had nothing except vague assurances by Monday...

The TED spread is the difference between interest rates on short-term inter-bank loans and risk-free U.S. Treasury securities and it's a general indicator of credit risk in the global economy and as it rises, the interest rate on inter-bank loans rises as well, thus slowing the pace of lending. All this occurs even as drastic measures have been employed to unlock the freezing credit market; the Treasury Department has announced its intent to utilize a power Congress gave it in the bailout that it didn't even ask for (and had indicated no intention to use as only days ago) and take direct ownership in faltering banks, central banks around the world agreed to cut interest rates in an unusual and coordinated move and Britain passed it's own multi-billion dollar rescue package to shore up its faltering banks. But the hits keep coming; Iceland, in which British banks have invested billions, was forced to shut down it's stock market and nationalize another bank in an effort to avoid the country going into bankruptcy (yes, you read that correctly...the country is trying to stave off bankruptcy) consumer spending in the U.S. is dropping, Standard and Poor's considers a ratings cut for giants Ford and GM, whose share values have plunged, and economists say the situation is only going to worsen. Despite Krugman's hopes, Secretary Paulson says don't hold out hope for a coordinated response from the G-7.

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