Investor Confidence and the Bailout

The recently passed $700 billion dollar bailout which was supposed to rebuild economic confidence instead triggered massive sell offs in global markets. Investors feared that the plan was too little and too late. While markets around the world fell the US government worked to inject more money into the world's banking system and loosed up frozen credit markets.

The US Treasury Department named a former Goldman Sachs executive Neel Kashkari to oversee the new program. The Treasury Department also announced it would increase bond sales to pay for the huge bailout package recently approved by congress and hastily signed by President Bush. The US Federal Reserve increased a short term loan program to $900 billion dollars. Despite all these moves world markets remained in chaos.

The bailout plan failed to reassure investors in Asia where markets fell. Markets in Europe reacted and suffered some of the heaviest losses in history. Said economics professor Anil Kashyap, "People have just lost a lot of trust in the financial system and in these large institutions." Mr. Kashyap also suggested that the current crisis had evolved from a credit crisis to one where financial institutions faced greater chances of insolvency.

European banks faced more problems and a weekend meeting of European leaders failed to produce any coordinated plan to address the economic crisis. In Asia it was feared that a global recession could harm exports. In the US the credit crunch has started to affect the day to day economy affecting consumer credit. Home loans, student loans, auto loans, and even short term loans necessary for the survival of many businesses, suddenly became difficult, if not impossible, to obtain. In a credit oriented society where consumer spending accounts for two thirds of the economy any slowdown in credit markets is bound to have a ripple effect. Another troubling factor is the nine consecutive months of job losses in the US.

Pressure has been mounting for the Federal Reserve and European banks to announce a global rate cut. It has been suggested by some economists that the Federal Reserve cut its rate from the current 2% to 1% in hopes of encouraging consumers and businesses to spend more and boost the flagging economy. Other economists remain skeptical believing that the panic is so widespread that almost any action would be ineffective. Rob Shapiro, former economic advisor to President Bill Clinton said that the crisis in Europe would be as severe as the crisis in the US.

Shapiro suggested that a government program to make loans to those facing foreclosure may help to restore confidence. Another suggestion would allow government to turn all the mortgages held by mortgage giants Fannie Mae and Freddie Mac into 30 year fixed rate loans.

Despite all the negative news from stock market and credit markets, the US dollar is still trading strong on Forex markets. The Euro fell to a 14 month low against the dollar trading at $1.3457 on Monday. Despite the dismal economic forecasts the currency markets including the Forex are still offering investors opportunities.

About the Author

Anthony Wayne works in the marketing department of the Forex Opportunity site Forex Opportunity.org in Pennsylvania. He is also editor of the Forex Network Site a network of Forex information and news sites.

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