WASHINGTON, July 20 (Chinese media) -- IndyMac has failed. Fannie Mae and Freddie
Mac are under attack. Stocks are floundering in a bear market.
Add to the mix a set of U.S. leaders who appear to have run out of options to rescue an economy on the brink of recession, and the situation may seem rather volatile.
Secretary of the Treasury Henry Paulson announces that the U.S. Treasury Department and Federal Reserve will lend money and buy stocks if necessary to aid embattled mortgage lenders Fannie Mae and Freddie Mac during a statement to the media at the Treasury Building in Washington, DC July 13, 2008. (Chinese media/Reuters Photo)
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The shares of Fannie and Freddie, the troubled mortgage finance giants that
account for about 50 percent of the 10.6 trillion dollars of U.S. mortgage debt,
have tumbled by 80 percent over the past year.
California-based IndyMac, which specialized in a type of mortgage that
often required minimal documents from borrowers, became the third largest
banking failure in U.S. history days ago, as a housing bust and credit crunch
strain financial institutions.
"I fear that we're sitting on a financial powder keg," said Senator Richard
C. Shelby of Alabama, senior Republican on the upper house's Banking Committee.
Fannie and Freddie's woes "appeared to mark a new phase in the U.S.
financial crisis, with fears of a contagion effect that could yet weigh more
heavily on the global economy," noted a recent report in The Washington Post.
Some analysts have called on the Federal Reserve and the Bush administration to take swift action to prevent the crisis from deteriorating, noting the
tipping points of economic crises are almost always more about psychology than fundamentals,
with panic over a bank's insolvency, for instance, potentially becoming a self-fulfilling prophecy.
U.S. mortgage firm Freddie Mac headquarters is pictured in McLean, Virginia July 13, 2008. U.S. Treasury Department officials are trying to make sure that Freddie Mac will be able sell $3 billion in securities this week at a previously scheduled sale, the Washington Post reported on Sunday. (Chinese media/Reuters Photo)
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"I think the problem now is a general confidence crisis that is complicated
by some global contagion that's now spreading," said Brian Bethune, a chief
economist with Global Insight at Lexington, Massachusetts.
This crisis of liquidity and capitalization of the government-sponsored
enterprises is an unfortunate and potentially dangerous turn of events in the
current U.S. business cycle, he added.
"It must be defused swiftly and effectively, because failure to do so would
risk a further meltdown of the housing and mortgage markets of proportions not
seen since the Depression era," warned Bethune.
The Bush administration has urged Congress to temporarily increase lines of
credit to Fannie and Freddie and to let the government buy their stock.
Meanwhile, the Federal Reserve has offered to let the companies draw
emergency loans.
But if investor jitters prevent them from being able to sell bonds to
finance new mortgages, it could have far-reaching economic consequences, warns
the U.S. media.
Some investors are beginning to think the U.S. leaders are running out of
the ammunition they have used to support the stock markets
in past months.
Traders work on the floor of the New York Stock Exchange June 11, 2008. U.S. stocks fell sharply on Friday after Treasury Secretary Henry Paulson gave no signs of planning a bailout for home financing providers Freddie Mac and Fannie Mae, and oil prices hit an all-time high, clouding the outlook for the economy. (Chinese media/Reuters Photo)
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"Despite repeated intervention by the Fed and central banks and regulators
world-wide, no one seems to be able to prevent further damage to banks and other
financial institutions," said a Wall Street Journal report.
Though new government efforts to help Fannie and Freddie could temporarily
give markets a boost, investors are coming to grips with the fact that the big
rate cuts have been made, the market and the economy remain in trouble, and they
may now have to tough it out, said the report.
"I don't think the Fed can shake its magic wand and right everything in the
capital markets," said Ethan Harris, chief U.S. economist at investment bankers
Lehman Brothers.
He believes that the Fed may wind up cutting rates by another half a
percentage point, to 1.5 percent, but not until later this year or early next
year.
"They are trying to buy time for the economy to lick its wounds and
recover," he was quoted as saying by The Wall Street Journal.
Federal Reserve chief Ben Bernanke has warned that the U.S. economy
continues to face "numerous difficulties", including persistent strains in
financial markets, declining house prices and rising costs of oil and food.
"The U.S. economy and financial system have confronted some significant
challenges thus far in 2008," said Bernanke in a written testimony to the Senate
Banking Committee on Tuesday.
"Accurately assessing and appropriately balancing the risks to the outlook
for growth and inflation is a significant challenge for monetary policy-makers,"
the central bank chairman noted.
Bruce McCain, chief investment strategist at Key Private Bank, an arm of
KeyCorp in Cleveland, said the Fed does not look like they can drop interest
rates much further.
"A big part of what the Fed is able to do for the economy, theyhave already
done," he said.
To shore up the battered housing market, one Treasury official said they
are "turning over every stone looking for incremental ways" for assistance.
At his first press conference since April, President George W. Bush on
Tuesday voiced his confidence in "the long-term foundation of our economy."
"The bottom line is this: We're going through a tough time," said the
president, noting he understands there is a lot of nervousness, but the U.S.
economy is growing, productivity is high, trade is up, and "people are working
(although) it's not as good as we'd like."
However, when questioned about the soaring fuel prices, Bush admitted his
weakness.
"The president doesn't have a magic wand," he said.
SEC to limit naked shorting of Fannie,
Freddie, major brokers
NEW YORK, July 15 (Chinese media) -- Christopher
Cox, chairman of the Securities and Exchange Commission (SEC), said Tuesday the
regulator will try to limit so-called naked shorting of shares in Fannie Mae,
Freddie Mac and primary dealers including Lehman Brothers, Merrill Lynch, Morgan
Stanley and Goldman Sachs.
The SEC will issue an emergency order
stating that all short sales of shares in these companies will be subject to a
"pre-borrow" requirement, Cox explained. Full story
U.S. economy continues to face "numerous
difficulties"
WASHINGTON, July 15 (Chinese media) -- The
U.S. economy continues to face "numerous difficulties," include persistent
strains in financial markets, declining house prices and rising prices of oil
and food, Federal Reserve Chairman Ben Bernanke said on Tuesday.
"The U.S. economy and financial system have confronted some significant
challenges thus far in 2008," said Bernanke in a written testimony to the Senate
Banking Committee. Full story
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