Will Mere Injection of Money Pull Out the Markets From Current Crisis?
Markets have received a new life via additional liquidity poured by central banks worldwide in recent past. European Central Bank, Bank of England, United States` Federal Reserve and other major central banks are fighting tooth and nail with current financial fiasco. Markets have been rocked by news of problems in banks and funds exposed to risky investments in U.S. mortgage and asset-backed markets, provoking fears of a choking-off of the cheap credit that has been fueling global growth. Asian markets are not water proof i.e. sooner or later they are going to yield all gains of last year. The major central banks are creating a financial rescue blueprint for the anticipatory money market turmoil. They are providing liquidity in the market at last minute in order to retard nosedive and a lot yet to be come out from the basket of policy makers.
Stock markets have tumbled down noticeably all over the world in the recent past. HangSeng of Hong Kong has gone well below 20,000 levels, Indian National Stock Exchange closed below psychological 4,000 levels on Friday, and Dow Jones is hovering around magical 10,000 levels. Japanese Nikkei, Chinese shanghai, French CAC, German DAX, UK FTSE, Indian BSE SENSENX shredded off almost all gains of last year. What we are evidencing is just a tip of iceberg the major meltdown may come if some strong decision has not been made in coming days in order to bypass looming catastrophe. Major reforms are inevitable and need of hour in financial sector. Fire in the banking and investment sector has to be put out in initial stage itself otherwise whole world must get ready to pay for the damage. At present largely it is limited to United States, the largest economy of the world, but this inferno ready to engulf vulnerable emerging economies if situation prevails in near future.
Banking and investment giants like Lehman brothers holdings (already filed chapter 11), Merrill lynch, American International Group, Goldman Sachs, Wachovia all are standing in queue for rescue. The major concern is whether socialization of risks and privatization of rewards will work in free economic era or once again this artifact will work. At present it is it is very difficult to think about ethics because the situation is too much grim and it must be given immediate new life otherwise the situation will become too harsh to disentangle.
The Bank of Japan injected a total of 1.5 trillion yen (14 billion dollars) into the Tokyo money market a week earlier. The Reserve Bank of Australia had injected 3.57 billion Australian dollars (US$4.4 billion; EUR3.3 billion).The European Central Bank has pumped 70 billion Euros into money markets. The Bank of Canada had injected a total of C$2.305 billion into markets to improve liquidity, its biggest such intervention since February 2000. The Fed’s dramatic $105 billion liquidity vaccine in yester week (pre-market) was just enough to keep key institutional accounts from following through on the sell orders and starting a stampede of cash that could have brought large tracts of the US economy to a halt. Paulson knew the $105 billion injection was not a real solution. A broader, more radical answer was needed.
At present $700 billion bailout plan is in limbo but the US government is hell-bent to break the impasse and equally optimistic to get it done through the Capitol Hill. But the same time economists are skeptic about the bailout plan that it might lead a catastrophe in long term because this step of Capitol Hill may cause the significant damage to the taxpayers’ sentiments. Policy makers are already well undermined by the inflationary pressure, slow growth rate, rising consumer price index and diminishing exports. GDP growth rate estimate for second quarter is revised downward to 2.8% from earlier 3.3%. It does not hold well that experts are relating the status quo with 1929 fiasco. Henry Paulson and Ben Bernanke have failed to convince the congress that bailout plan will do the great to the tottering financial sector. Senators are skeptic about the upshots of the bailout plan that buy out of the bad assets may not do a big to financial sector in long term and situation may recur sooner or later.
Commodities like gold silver are attracting the investment since the status quo is not foreboding well for the king dollar and inflation is rocking, henceforth world is taking shelter of the precious metals as the hedge against the greenback which is likely to adjust its recent gains southwards. Major currencies of the world viz. Euro, GBP, Japanese Yen etc. already adjusted and ready to move upward in near future against the greenback. Dollar index, a measure against basket of currencies, has fallen sharply from 80.37 to 75.89 before quick recovery to77.25 in last week. That has helped US dollar denominated commodity prices to move up. Gold received biggest single day gain a fortnight ago after two and half decade. And silver and other commodities also moved in tandem with gold.
Now the question arises that whether the pumping of money in markets will give a new life to financial markets?
As I discussed earlier that billions of dollar have already been poured in the markets throughout the world but markets are still thirsty and waiting for a big boost from the US government of $700 billion in near days. If the bailout plan gets through the white house and new money start to flow in markets certainly it will change the market sentiment all over the world and at least in short term it can put a full stop over the anticipatory downtrend. Not only government but all financial institutes has to come together and work out the most needed blue print for the stability in long term. This will put markets on the track of sustainability and get back the investors into confidence.
Investment funds, hedge funds, hedge funds, financial institutions must not left scot free for their recklessness under the guise of their largeness and public image, this will undermine the long term stability of the system and it will also send wrong message across the world. Everyone knows that most of the diseases give enough symptoms before fatal stage and they should be diagnosed at early stage itself. Therefore only pouring money in the markets is not enough for bailout, the concern regulatory authorities must have stringent regulations in order to avoid such financial crises.
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