Back in 2002, when his reputation as “The Man Who Saved the World” was at its peak, Alan Greenspan, former chairman of the Federal Reserve, came to Britain to pick up his knighthood. His biggest fan, Gordon Brown, now the UK prime minister, had ensured that the citation said it was being awarded for promoting “economic stability”.
During his trip, Mr Greenspan visited the Bank of England’s monetary policy committee. He told them the US financial system had been resilient amid the bursting of the internet bubble. Share prices had halved and there had been massive bond defaults, but no big bank collapses. Mr Greenspan lauded the fact that risk had been spread, using complex derivative instruments. One of the MPC members asked: how could this be? Someone must have lost all that money; who was it?A look of quiet satisfaction came across Mr Greenspan’s face as he answered: “European insurance companies.”
Six years later, AIG, the largest US insurance company, has in effect been nationalised to stop it blowing up the financial world. The US has nationalised the core of its mortgage industry and the government has become the arbiter of which financial companies should survive or die.
U.S. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke proposed moving troubled assets from the balance sheets of American financial companies into a new institution.
Congressional leaders who met with Paulson and Bernanke late yesterday in Washington said they aim to pass legislation soon. The initiative, which may also insure money-market funds, is aimed at removing the devalued mortgage-linked assets at the root of the worst credit crisis since the Great Depression.
Part I of a three-part series looking at how so-called “credit default swap” derivatives could ignite a worldwide capital markets meltdown.
Are you shell-shocked? Are you wondering what’s really going on in the market? The truth is probably more frightening than even your worst fears. And yet, you won’t hear about it anywhere else because “they” can’t tell you. “They” are the U.S. Federal Reserve and the U.S. Treasury Department, and they can’t tell you what’s really going on because there’s nothing they can do about it, except what they’ve been trying to do – add liquidity.
Frustrated by the US government’s rescue of AIG, Fannie Mae and Freddie Mac, a group of 100 conservative congressmen today urged the Bush administration to stop keeping Wall Street afloat.
In a letter to the treasury secretary and Federal Reserve chairman, members of the conservative Republican Study Committee (RSC) lamented the abandonment of free-market principles.
Rescuing failing financial firms has “set a dangerous and unmistakable precedent for the federal government both to be looked to and relied upon to save private sector companies from the consequences of their poor economic decisions,” the RSC members wrote.
In the space of just two momentous weeks, the landscape of global finance has been dramatically transformed. President George W. Bush’s administration has mounted a multi-billion-dollar rescue of the financial system at the cost of inflicting severe damage on the US model of free- market capitalism.
Heavy costs will be inflicted on the American taxpayer, who is now subsidising Wall Street – and indeed financial institutions around the world – in a bail-out of unprecedented size.
In effort to calm critical part of the broader financial system, Fed and Treasury take three-pronged measure to stabilize troubled funds.
NEW YORK (CNNMoney.com) — Coming to the rescue of a bedrock of American investing, the Treasury Department and the Federal Reserve took three big steps Friday to shore up the $3.3 trillion U.S. money-market fund industry.
Investors have beenfleeing money-market funds after a week of chaos on Wall Street that included the bankruptcy of Lehman Brothers, an $85 billion government bailout of American International Group and a sweeping plan for the federal government to buy up financial companies’ troubled mortgage debt.
…………….. Experts: No need to cash out
Money-market experts say investors shouldn’t panic. They felt most funds were safe even before Friday’s government action, which will only add more confidence in the investments.
By Tami Luhby, CNNMoney.com senior writer
Last Updated: September 19, 2008: 1:13 PM EDT
Full article here: CNNMoney
Money-Market Funds Get $50 Billion Backstop From U.S.
Sept. 19 (Bloomberg) — The U.S. will insure money-market funds against losses for the next year as it seeks to prevent a run on $3.35 trillion of assets that average investors and institutions rely on as a safe alternative to bank deposits.
……………. “They’re putting up a firewall,” said Paul McCulley, managing director at Pacific Investment Management Co., which oversees $830 billion including money funds. ``It’s the ultimate nightmare to have a run on the money markets — that is truly the Armageddon outcome — and they’re not going to allow that to happen.”
By Christopher Condon
Full article here: Bloomberg
Imagine what a run on the banks would do to the financial market.
Now you know why the government and ‘the experts’ panic that the investors might panic.
Watch this video to understand more about money and why a run on the banks would be so devastating.