US Treasury Secretary Henry Paulson expressed on the same day that the US government is putting together a rescue plan to clear away the mountains of bad debt that have weighed down banks and caused the worst financial crisis in decades.
Professor 陈志武 thinks that US is currently facing the worst financial crisis since 1929. The US government will have to pay a heavy price for the various measures undertaken to help alleviate the current financial crisis. In order to help out the various financial institutions, the US government has to issue about 500 billion USD worth of US government bonds. This will increase the US budget deficit and the US dollar will depreciate which will badly affect the US economy.
With the direct or indirect actions by the US government to help to resolve the financial crisis, JP Morgan Chase bought over US fifth largest investment bank Bear Stearns, BOA bought over US third largest investment bank Merrill Lynch. Such acquisitions will result in creating huge financial giant institutions who are able to 'hijack' the US government in future due to their sheer size and financial mights.
UN's global finance monitoring department's 洪平凡 has a description for the influence of the financial crisis to the US economy. He says that the US economy is like the human body, the financial industry is the heart, funds are the blood and the real economy is like the various organs in the human body. If the financial industry were to be hurt strongly, it would be like having a heart attack affecting the blood flow which will result in other organs failing.
洪平凡 thinks that this current financial crisis will cause big harm to the US economy. Because the financial industry suffer heavy losses in the current financial crisis, the future US credit scale and conditions will face tightening which will result in suppressing of consumption and production developments. The US economy is not very optimistic in the near future.
Latest Updates
19 September 2008
- US financial rescue plan to cost "hundreds of billions" of dollars
19 Sept (AFP) -- WASHINGTON - Treasury Secretary Henry Paulson said Friday a rescue plan for the troubled US financial sector will cost "hundreds of billions" of dollars.
"We're talking hundreds of billions. This needs to be big enough to make a real difference and get at the heart of the problem," Paulson told reporters ahead of talks with Congress on details of the massive rescue effort, unveiled initially late Thursday.
"We are going to be coming to them with a proposed legislative package and working with them to flesh out the details through the weekend and we're going to be asking them to take action on legislation next week," Paulson said.
Paulson announced "other immediate actions" including an acceleration of purchases of mortgage securities by the Treasury and by Fannie Mae and Freddie Mac, the two government-sponsored enterprises taken over by the government this month in the face of massive losses.
Republican Senator Richard Shelby said earlier the overall cost of government actions to steady the financial sector could be one trillion US dollars, including 500 billion US dollars for the new effort to clean up bad assets from bank balance sheets.
"I figure it will be at least half a trillion," Shelby said in an ABC television interview.
"But if you look at what the Fed has already done, and the extension of power to Treasury to deal with Fannie Mae and Freddie Mac, I believe we're talking about a trillion dollars," he said.
- Will the US dollar be next to fall?
19 Sept (Business Times) -- OVER the last two months, the US dollar has managed a decent recovery, buoyed by hopes that the US economy was going to be the first out of recession, and therefore require the US Federal Reserve Bank to raise interest rates. This, at a time when their counterparts in Europe and Japan are more likely to contemplate rate cuts. In Q2 2008, the US economy grew a sparkling 3.3 per cent, thanks to some US$110 billion in tax rebates as well as the stronger exports facilitated by the weaker US dollar earlier in the year. In sharp contrast, the UK economy flat-lined, Japan's fell sharply, and those in the eurozone tanked too.
Since then, however, US financial giants have fallen like tenpins, starting with Fannie Mae and Freddie Mac, then followed by the collapse of Lehman Brothers and the Fed bailout of insurance giant AIG this week. Worse, bluechip stocks tumbled the best part of 4 per cent on Wednesday night, rattled by fears that there'll be more to come. In response, the search for safe refuge alternatives saw gold recording its largest ever one-day rise, exploding almost 10 per cent higher overnight, the Japanese yen and Swiss franc topping overnight currency gains, and short-term US Treasury securities bought despite near-zero yields.
Based on a broader-based US dollar index, however, the greenback is still some 10 per cent above its all-time lows of March 2008, although key Wall Street indices have fallen more than 25 per cent off their all-time highs of 2007 - to lows not seen in three years or more. This is possibly due more to a short-term technicality than true US dollar resilience. It happened in July this year, and is happening again this month, as risk aversion and flight to safety considerations take centre stage. In short, US investors have sold - or are hurriedly selling - more of their overseas investments, and repatriating the proceeds. This requires them to sell foreign currencies in favour of the US dollars that they then send home - either into the safety of US Treasuries or to patch up losses sustained on the home front.
The same thing happened in July this year, the latest month for which such flow statistics are available. July's net flow of funds only just managed to register a small plus (in favour of inflows into the US) because of massive repatriations. We're told that Fannie Mae and Freddie Mac losses may have helped persuade - or force - US investors to bring home the proceeds from the sale of some US$14 billion worth of foreign bonds and US$18 billion worth of equities.
Given Wall Street's huge losses, and the massive deleveraging we are witnessing, it shouldn't be a surprise that US-based hedge funds have cut and run again - especially when they have to report Q3 results by end-September. Thereafter, they can put on new trades, and perhaps only then will the US dollar see its mettle truly tested.
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