Easy money
AS GM goes -- so goes America." GM is going (bankrupt) and America is going deeper into a downturn. General Motor's stock plummeted to close at its lowest since 1935 to $1.45 a share on March 5. The Dow Jones Industrial Average lost nearly 60% of its market value in less than a year. Stock market investors are now buying low and selling lower for fear of losing it all as the market keeps plummeting.
Home foreclosure continues unabated, and the government is unveiling a plan to bring down loan value and mortgage payments to affordable levels.
Citigroup, Bank of America and insurance giant AIG (80% stakes now owned by tax payers) are asking for more bailout green packs. The financial crisis is debilitating the banking system so depressingly that an unthinkable prospect of limited nationalisation of large banks in return for more assistance is looming large.
With February's job loss of 651,000, the unemployment rate has peaked at its 25 years high of 8.1% (based only on jobs seekers over the last four consecutive weeks). Counting the underemployed and the full timers forced to work half time, the unemployment rate is around 14.5%.
The easy credit-driven consumer spending is at a near standstill. Consumer confidence dropped to a new low of 25 in February, from 37.4 in the preceding month -- the lowest since 1967. The 2008, fourth-quarter real GDP fell at an annual rate of 3.8%.
The $787 billion stimulus package (in addition to the $700 billion Troubled Asset Recovery Program) will be channeled to the destinations. For example, tax rebate checks of $800 for married couples are being sent out by the Treasury to boost immediate consumer spending. With this year's Federal budget of $410 billion, the deficit will hit an unprecedented $1.75 trillion.
The economic climate is getting worse because the credit markets that are essential for small businesses and consumers are strained. Because of the underlying risk and uncertainty, fund raising in the capital market is nearly non-existent. Banks have become more stringent in applying their lending criteria as they return to risk, rather than market-led, pricing.
Lack of readily available funding means a reduction in business operations and employment, forcing businesses to hold on to their cash reserves to survive worsening business conditions.
Treasury Secretary Tim Geithner stressed that the salvation of the economy lay in both job creation and in the restoration of credit flow.
This involves stabilising the shaky financial markets to restart the flow of credit, strengthening the banking system, and providing aid to homeowners and small businesses. Geithner accentuated a "comprehensive and forceful" response to the financial crisis and warned: "There is more risk and greater cost in gradualism than in aggressive action." He said that the afflictions of the Great Depression and the Japanese recession of the 1990s were prolonged because of halting of fiscal activism too early.
Investments will be placed in a new Financial Stability Trust, in addition to a Public-Private Investment Fund. The latter is set to start out at around $500 billion, then expanded "based on what works."
In addition, the Federal Reserve's Term Asset Backed Securities Loan Facility (TALF) will be radically expanded with capital from the Treasury and financing from the Fed. The size of TALF could reach $1 trillion.
TALF is intended to help investment companies' purchase of securities backed by auto and business loans. The outcome is expected to ease the credit markets in accommodating consumers and small businesses' credit needs by facilitating the issuance of asset-backed securities and improving their marketability.
Fed Chairman Ben Bernanke told the Senate banking committee that the Fed was making an all out effort to unfreeze credit markets and persuade lending and borrowing. However, he said: "A full recovery is potentially at least a year away."
The Bangladesh economy, so far, hasn't felt much adverse pressure from the global financial crisis partly because its capital market and the financial institutions have little or no exposure to foreign capital markets.
Also, most household transactions are made in cash. However, some adverse effects are bound to impinge on the economy through declining exports and expatriate remittances. Besides, foreign aid and disaster management funds may not come as generously as in the past. It is, therefore, important that policy makers learn how the US and other countries are coping with the crisis.
The World Bank predicts a falling global GDP in 2009, along with global trade shrinking for the first time since 1982 and the biggest since the 1930s. Many economy watchdogs believe that global recovery is dependent on the recovery trajectory of the US economy.
Last week, British Prime Minister Gordon Brown proposed initiation of a global "New Deal" to President Obama. Will the credit-driven consumer-spending US economy ever return to" credit-driven higher living standard" in the near future as a forerunner of global recovery?
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