Politics

An Urgent Crisis

I wanted to share an excellent article that recently appeared in The Economist with you, titled ?Blocked pipes.? The article describes the turmoil in a specific lending market, the money market, which is used to raise short term cash for financial institutions and businesses. It presents an excellent summary of the fears expressed by Secretary Paulson and Chairman Bernanke about the successive chain of events that will come to pass if money market stop working efficiently and individuals and institutions continue hoarding their cash instead of investing it.

The article summarizes what illiquidity in credit markets mean to individuals by stating ??the rates on loans paid by many consumers (adjustable-rate mortgages, for example) and companies are set with reference to the money markets. Higher rates for banks mean higher rates for everyone. Second, if the markets are blocked for more than a week some companies may find it hard to get any finance at any price. That could mean more bankruptcies and job losses. Third, more banks could go bust if the blockage continues, making investors even more risk-averse. The downward spiral would take another turn. ?

Our current economic situation is not desperate, but it is urgent, and it is most definitely not simply a Wall Street problem.- Mike

Full post as published by Mike Conaway's Blog on October 08, 2008 (boomark / email).