Waiting for the Thaw

It is hoped that the recent coordinated rate cuts by the US Federal Reserve and European Central Banks will thaw frozen credit markets globally. The credit crisis has been trickling down into the everyday economy. Corporations are finding it difficult, if not impossible, to obtain short term loans for everyday operations and consumers are feeling the pinch in the form of tightened credit for major purchases such as autos and appliances.

The central banks slashed rates by half a percentage point and at present it is not clear how long it will take for these cuts to affect credit markets. "These credit market conditions did not happen overnight, and it's not going to be resolved in one night, either," said Robert Dye, senior economist for PNC Financial Services Group. "These credit market conditions did not happen overnight, and it's not going to be resolved in one night, either," said Robert Dye, senior economist for PNC Financial Services Group. Moody's Investors Service predicted a spike in credit defaults by risky corporate borrowers making lending a less than attractive enterprise.

Minneapolis Federal Reserve President Gary Stern said on Thursday that in a fast moving crisis like the present one it is difficult to say when bank lending will respond to the intense measures already taken by government. Mistrust among financial institutions reigns and borrowing benchmarks are at historic highs. Stern also said that increased regulation would only go so far towards preventing similar crises in the future. "Better regulation is necessary but not likely to be sufficient" said Stern speaking to the National Investor Relations Institute.

The US presidential election adds to the uncertainty. With a new administration will come different policies and the new President could appoint a new Treasury Secretary with different views on how to keep the American economy on track. While both candidates voted for the massive $700 billion bailout bill there are clear differences in economic philosophy. Partisan bickering has been intense with Republicans attempting to lay the blame for the crisis at the feet of Democrats when in reality it was a combination of factors that cannot be blamed on any political party.

The events of the last two weeks are sure to affect the economy well into next year. The reduction of credit to consumers and businesses will affect economic performance. Personal consumption is expected to diminish. Although a slight decline in the price of oil is expected to give consumers a slight respite it will not be enough to spur consumer spending. Should credit conditions not return to something close to normal in the very near future then economic expectations will have to be adjusted accordingly.

While stock markets remain in turmoil, currency markets are not reacting as violently. While some economists predict a grim future for the US dollar it remains up against most major world currencies on Forex markets. The dollar has made amazing gains against the beleaguered Euro which has been severely affected by the current financial crisis. It remains to be seen where the credit crisis will take world markets but for the moment Forex markets are still offering opportunities and would seem to be an investors best bet.

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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