With banks more interested in improving their capitalization or buying up assets than reviving the credit market, perhaps the Federal Reserve’s commercial paper program will keep the wheels of commerce turning. Dozens of companies have already signed up to use the program, including General Electric. The response to the program “provides a signal to investors of greater liquidity support to this key financing market,” according to a spokesman for the Federal Reserve Bank of New York, which is running the commercial paper facility.
The Fed also created the Money Market Investor Funding Facility last week, which will “provide senior secured financing to a series of special purpose vehicles to facilitate an industry-sponsored private-sector initiative to finance the purchase of eligible assets from eligible investors.
Finally, the Federal Open Market Committee is widely expected to shave its discount rate further this week, and the European Central Bank and Bank of England will make additional rate cuts soon, analysts predict.
Despite all the activity, the thawing of credit is clearly in its early stages. Although overnight LIBOR has declined sharply, three-month credit rates continue relatively high, and banks remain cautious, to say the least.
Meanwhile, world governments continue to rescue their banks—if they can. Sweden, Korea, France, Kuwait, and Saudi Arabia fed their ailing financial institutions billions last week. Japan promised to support its banks. The G7 issued a terse statement on Sunday: “We reaffirm our shared interest in a strong and stable international financial system. We are concerned about the recent excessive volatility in the exchange rate of the yen and its possible adverse implications for economic and financial stability. We continue to monitor markets closely, and cooperate as appropriate.”
And President George W. Bush invited the G20 to meet on November 15 to “review progress being made to address the current financial crisis, advance a common understanding of its causes, and, in order to avoid a repetition, agree on a common set of principles for reform of the regulatory and institutional regimes for the world financial sector,” according to a statement by White House press secretary Dana Perino.
Some of those G20 nations, including Brazil, South Africa, and Poland, are talking with the International Monetary Fund about emergency loans, as are other non-G20 emerging economies. These countries do not have the resources to hold their financial systems together. The IMF has reached an agreement with Iceland, and it is trying to keep pace with this unprecedented workload.
Back in the U.S., Federal Deposit Insurance Chairman Sheila Bair continues to argue for foreclosure relief. She blamed the liquidity problem “largely” on the uncertainty about the value of mortgage assets,” in testimony last week before the Senate Committee on Banking, Housing, and Urban Affairs. Bair urged action under the Emergency Economic Stabilization Act, which “addresses the issue of foreclosure mitigation and provides authority that could hold significant promise for loan modifications.” The FDIC is working “closely and creatively with Treasury to realize the potential benefits of this authority,” Bair told the senators.
And on the stimulus front, Senator Sheldon Whitehouse (D-RI) gave a preview of where the $300 billion envisaged by his party might go: Roads, bridges, sewers, and school buildings, he wrote in a letter to Senate majority leader Harry Reid (D-NV) and Senate Committee on Appropriations Chairman Robert Byrd (D-WV). Then there’s the Weatherization Assistance Program, which could “help local contractors with employment, for a more ‘grass-roots’ stimulus,” Whitehouse observed.
But investors are spooked. The State Street Global Investor Confidence Index fell 17.5 points to 58.2 points in October, down from 75.7 in September; North American investor confidence tumbled 24.3 points to 50.8. “When you remember that this measure of investor confidence is not a survey, but rather is based on the actual trades of institutional investors, the readings are particularly striking,” according to State Street Associates director Paul O’Connell. The Dow Jones Industrial Average sank 2.4 percent or 203.18 points to 8175.77 yesterday. The Hang Seng fell 12.7 percent to 11015.84, while Nikkei skidded to 7162.9 for 26-year low. Germany’s DAX rose 0.91 percent and the Mexican IPC gained 0.13 percent. Everything else declined
