Bernanke, Europe's Central Banks Throw in Everything They've Got: To the Bunkers!

[Better Believe It]

October 8, 2008
Bernanke, Europe's Central Banks Throw in Everything They've Got
To the Bunkers!
By MIKE WHITNEY

Stocks fell sharply across Europe and Asia last night following another down day on Wall Street where the Dow Jones lost 508 points and the S&P 500 slipped below the 1,000 mark for the first time since 2003. Japan's benchmark index, the Nikkei, lost nearly 10 percent while shares in London at one point slumped more than 7 per cent. Trading was suspended in Indonesia and Russia where stocks fell 10 percent each on opening.

The present crisis, which has its roots in the unsupervised expansion of credit in the United States, has spread from subprime mortgages and toxic securities, to the entire global financial system, where it has savaged equities markets and is now threatening to do incalculable damage to the US and European banking systems.

Yesterday, Fed chairman Ben Bernanke announced plans to pump an estimated $1 trillion of short-term loans (commercial paper) to head off a growing liquidity squeeze. Unlike, Treasury Secretary Paulson's $700 billion bailout, which was opposed by over 200 economists, Bernanke's plan targets the source of the problem and could actually succeed. Commercial paper is a low-cost source of cash for companies to meet short-term financial needs. It's cheaper than tapping a line of credit at a bank. The Fed will start providing businesses and financial institutions with the short-term credit they need to maintain normal day-to-day operations. The Fed is invoking emergency powers under its "unusual and exigent circumstances" clause in order to avert an even larger shock to the financial system beyond the wreckage in the stock market and hundreds of bank closures that are expected into 2010. Providing unsecured loans directly to businesses is controversial, but necessary. If these corporations and financial institutions fail just because they cannot roll over their short term debt, the overall damage to the economic system could be devastating.

Bernanke has a good idea of the nearly-insurmountable challenges in front of him. Apart from the faltering banking system, the collapse in real estate, and the unwinding of trillions of dollars of counterparty bets via derivatives contracts; Bernanke faces the sudden capitulation in consumer spending. The US consumer is tapped out on credit card debt, student loans, car loans and home mortgages. Retail spending is falling and likely to get worse. Bernanke's plan to recapitalize the banking system ignores the larger issue that less people will be applying for loans and that less credit will be flowing through the system. Slower growth is inevitable. The sudden change in spending patterns is evident everywhere. Personal savings are increasing, home equity withdrawals are down (to nearly zero) and the new reality of "living within one's means" is becoming the prevailing ethos. America is hunkering down.

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