Credit Crunch is getting deeper in US

(10 am – promoted by ek hornbeck)

I was doing my usual perusing of the foreign newspaper and media websites (this is how I get the real news without that well known BushCo bias) and I came across an article at BBC.co.uk that caught my attention.

The credit crunch has hit the US economy hard. From Wall Street to Main Street, loans that looked rock-solid a year ago now look shaky.

And the US central bank, the Federal Reserve, is throwing away the rule book to contain the effects.

  My emphasis.

That is a pretty strong statement.  The Federal Reserve is Throwing Away The Rule Book to contain the effects.

There is more.

Kevin Logan of Dresdner Kleinwort, one of the less gloomy New York economists, summarises the state of play as the credit crunch has spread to different types of assets as follows: “We’re all sub-prime now”.

Another strong statement!  Sure, it is absolutely true, but why am I reading about this at BBC instead of WSJ?

The Fed did cut its main interest rate on Tuesday for the sixth time since September – by three quarters of one percentage point, to 2.25%.

This means that interest rates are now very close to going negative in real terms – once inflation is taken into account.

But amid the drama of the past few weeks, it almost seems par for the course.

Whether it’s rate cuts or special funding arrangements for Wall Street, the more the Fed does, the more the markets seem to need.

The more the markets seem to need, huh?  

I rather intrepret this statement as a bit of British politeness that allows the reader to replace the word “need” with the word “take” at their own discretion.

Moral hazard

There are some who say that the Fed should let all these institutions suffer the consequences – to the point of bankruptcy if need be.

The trouble is, the Fed Chairman, Ben Bernanke, knows that financial markets are now all too interconnected.

The big fear is that in over-estimating the losses out there in the housing market, the financial institutions will make those estimates a self-fulfilling prophesy.

That is because the more mortgage assets get marked down, the greater the hit to banks’ balance sheets, and the less they can lend to firms and households at decent rates.

That reduction in lending would take house prices down further, leading to more losses and the whole vicious cycle starting again.

Ben Bernanke is looking for the magic solution that will stop that dangerous dynamic taking hold.

He hasn’t found it yet.

Bold, unadulterated and to the point, the author of this piece, Stephanie Flanders, isn’t afraid to tell the story without the usual “but the underlying fundamentals of the economy are still strong” like we always see as the BushCo disclaimer in any story in the US media.

Take a look for yourself.  It ain’t pretty, but it is real.

http://news.bbc.co.uk/2/hi/bus…

Xposted at EENRblog.com