Barely more than a week ago, the U. S. government stepped in and more or less nationalized Fannie Mae and Freddie Mac. Today, two huge brokerage houses cease to exist and the Dow drops 504 points. Yet despite this economic melt down, John McSenile thinks "the economy is basically sound." What planet does McSenile live on? In this area of the country - which is somewhat insulated from wild economic shifts due to the huge payroll of the U. S. Military signs are everywhere that the economy is sinking. Especially, in any industries relating to construction or residential real estate although the ripple effect extends far beyond those industries. Here are highlights from The Economist concerning the fragile economy:*
EVEN by the standards of the worst financial crisis for at least a generation, the events of Sunday September 14th and the day before were extraordinary. The weekend began with hopes that a deal could be struck, with or without government backing, to save Lehman Brothers, America’s fourth-largest investment bank. Early Monday morning Lehman filed for Chapter 11 bankruptcy protection. It has more than $613 billion of debt.
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Other vulnerable financial giants scrambled to sell themselves or raise enough capital to stave off a similar fate. Merrill Lynch, the third-biggest investment bank, sold itself to Bank of America. . . The situation remains fluid, and investors stampeded towards the relative safety of American Treasury bonds. Stockmarkets tumbled around the world.
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With these developments the crisis is entering a new and extremely dangerous phase. If Lehman's assets are dumped in a liquidation, prices of like assets on other firms' books will also have to be marked down, eroding their capital bases. The government's refusal to help with a bail-out of Lehman will strip many firms of the benefit of being thought too big to fail, raising their borrowing costs.
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Wall Street has company in its misery. Washington Mutual, a big thrift, is fighting for survival under a new boss. Even more worryingly, so is AIG, America’s largest insurer, thanks to a reckless foray into CDSs of mortgage-linked collateralised-debt obligations.
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Even if markets can be stabilised this week, the pain is far from over—and could yet spread. Worldwide credit-related losses by financial institutions now top $500 billion, of which only $350 billion of equity has been replenished. This $150 billion gap, leveraged 14.5 times (the average gearing for the industry), translates to a $2 trillion reduction in liquidity. Hence the severe shortage of credit and predictions of worse to come. . . . . As spectacular as this weekend was, more drama is on the way.
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