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October 27, 2008
When the Market Needed
Unprecedented Steps, America Had the Biggest Shoes
When the financial crisis started in the United States, it affected the
entire global financial system. That’s the bad news.
When unprecedented steps were needed to help stabilize the world
financial system, the United States had the biggest shoes. That’s the
Unprecedented steps by the Federal Reserve Bank, the U.S. Treasury and
the FDIC were not always pretty but necessary, and they were certainly
criticized and politicized to death. But our deep debt pockets, enough
confidence in our weak dollar by the rest of the world, and our overall
financial framework allowed the U.S. to drop the biggest anchor in these
financially troubled waters.
When some banks finally admitted that their balance sheets had gotten
out of balance (too many liabilities for too little in assets), they
stopped lending to each other. Go figure! Not all banks were in deep
trouble, but too many of them had over extended themselves.
banks are not lending to each other then there’s a slim chance to none
that they are going to make loans to you and me and Joe the Plumber.
Thus, the flow of credit and cash froze up domestically and around the
The credit freeze was not caused totally by the failure of Fannie Mae
and Freddie Mac, but they were the catalyst because of the size of their
toxic mortgage-related holdings, along with some bad decisions by some
When the credit markets came to a halt, the Federal Reserve Bank
injected some liquidity by making some unprecedented loans to banks.
This was intended to inspire the banks to start lending again, but that
action alone was not enough.
With the authorization of the Economic Rescue Legislation, the Treasury
then purchased temporary equity in some banks at a preferred dividend
rate. This would provide some additional liquidity to the banks to help
thaw the credit markets, which would include direct loans, lines of
credit and the short-term commercial paper market.
When consumers got nervous about their bank deposits and money market
accounts, the FDIC was able to step up and provide increased limits of
insurance on deposits and new coverage of money market accounts. If they
had not taken these steps there could have been a “put it under the
mattress” run on accounts that would have compounded the problem.
the same time the domestic and international stock markets were going
crazy looking for the bottom and a new equilibrium. We may be near the
bottom, but finding a new equilibrium is months away.
It’s called a recession, and it is here.
The financial crisis has caused historic levels of volatility in stock
markets around the world. It is also going to cause some financial pain
on Main Street with job losses we have not seen in the last 50 years.
The good news is that, in the last 50 years, the economy has been in a
growth mode 84 percent of the time, while in a recession 16 percent of
now need to give all of these unprecedented steps by the Federal Reserve
Bank, the Treasury and the FDIC some time to work their way through the
Not many countries could have taken the steps we have taken to address
this crisis to the degree we have. Yes, we should not have gotten into
this situation in the first place. And yes, there were some better
approaches to the problem. But politics does not always allow the best
solution to come to the forefront.
When we have the biggest economy in the world, we have to take the
biggest steps in the world to address the problems.
now need to take a big chill pill and let it work.
© 2008 North Star
Writers Group. May not be republished without permission.
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This is Column # HC134.
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