Congress Attempts to Stimulate the Economy
Earlier in the year the US government sent out ‘stimulus’
checks to every taxpayer. The idea behind the move was that if consumers had extra funds available they would purchase goods and services. Unfortunately the move did little to stimulate the US economy. The US has lost approximately 170,000 jobs so far this year and the future looks anything but bright. US auto makers are in serious trouble and many plants are scheduled to close with job losses in the thousands. Consumers are uneasy about the future and instead of spending their stimulus checks as intended most chose to save it for the future or use the money to pay bills.
First Stimulus Package Ineffective
Despite the ineffectiveness of the stimulus checks Ben Bernanke the chairman of the Federal Reserve and congressional Democrats are proposing another round of stimulus checks. Earlier in the year congress sent out about $100 billion dollars in stimulus checks. Since then consumer confidence has evaporated and retail sales have fallen significantly in the last three months. Bernanke feels that the earlier $700 billion dollar bailout is starting to work but the effects will take months to be felt. Bernanke told congress that there is a likelihood of an extended economic slowdown and a second round of stimulus checks would help to get the consumer economy back on track. Fears of a US recession has fx traders around the globe uneasy and many predict a decline in the US dollar.
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Bailout Unpopular
To say that the US bailout was unpopular would be gross understatement. Despite a flood of calls, emails, and letters from constituents both the Senate and the House passed the $700 billion dollar bailout package. Part of the anger was over the millions that executives in failed financial institutions received despite poor performance. When the news broke that AIG executives had treated themselves to a $400,000 bailout party at taxpayer’s expense, demands for curbs on executive compensation were heard in congress.
Politicians Speak Out
Treasury officials have argued privately that banks that receive direct cash infusions should be exempt from the toughest executive pay restrictions. Most politicians disagree. In a letter to Treasury Secretary Paulson, Senator Charles Schumer of New York stated, “Restrictions on executive compensation will ensure that taxpayer money is not wasted enriching the same people whose poor decision-making created this crisis.”It is imperative that these restrictions, including limitations on the incentives for executives to take excessive risks and the elimination of golden parachutes, should apply to any capital injection program.” Treasury officials declined to comment on their position. Many in the US blame Wall Street for the dire economic straits the US finds itself in and fears of a recession have fx traders and investors uneasy.
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Stock Markets Still Volatile
Stock markets remain volatile with investors unsure whether the market has bottomed out or will decline even further. Last week Wall Street suffered its worse week in history with massive selloffs on world markets. Investors are waiting for the effects of the $700 billion dollar bailout to be felt but credit markets remain unaffected so far. Many, including forex traders and investors are beginning to have doubts about the future of the dollar.
Rebound Possible
Amid the chaos some saw reason for hope. U.S. stock futures indicated a sharp rebound in store for the major indexes ahead of the market’
s opening bell on Monday. Dow Jones industrials futures rose 235 points, or 2.8 percent, to 8,605. Nasdaq 100 futures rose 38.5, or 3 percent, to 1,321.00; and Standard & Poor’s 500 futures added 31.8, or 3.5 percent, to 922.80.
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Coordinated Rate Cuts
Following the lead of the Federal Reserve, central banks around the world announced rate cuts designed to lift the global economy in the face of a recession. The Fed slashed rates to 1.5%, while the Bank of England cut its rates to 4.50%, and the European Central Bank cut rates by half a point to 3.75%. Swiss, Canadian, Chinese, and Swedish banks also announced rate cuts. The Bank of England also stated that inflation was likely to rise to 5.0% in the near future but would decline as soon as lower oil prices and the Immense UK bailout take effect in the real economy. The UK bailout also allows for the partial nationalization of troubled banks.
Cuts Fail to Calm Investors
The cuts failed to calm investors in volatile markets and most world markets saw losses despite the rate cuts. The actions of American and European banks appear to be part of a global strategy that uses aggressive monetary policy and taxpayer recapitalization of ailing banks, generating cautious optimism among economic analysts. Said Jim O’Neill, chief global economist at Goldman Sachs, “The gravity of the times requires out-of-the box responses. Atop of all the other things we have seen this week, it gives me great confidence.”
The gravity of the world economic situation is cause for concern among forex traders and investors both large and small.
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Dollar Strong Despite Stock Markets
Despite the global financial crisis the dollar appears to be holding it’s own on world Forex markets. On Monday the dollar jumped against other currencies except the Japanese Yen. The Euro was at a 15 month low and bottomed at $1.3441 it’
s lowest level since 2007. The British Pound sank to $1.7388 down from $1.7781 a 4 percent drop and the lowest since 2006.
European Markets Fall
Stock markets in Europe fell due to the inability of European leaders to come up with a coordinated plan for Europe’
s troubled financial sector. A weekend long meeting of European leaders failed to produce tangible results. The 4 major European powers, Germany, France, Britain, and Italy called for more regulation but stopped short of advocating an American style bailout plan. Germany, Iceland, Denmark, Ireland, France, Greece, and Sweden all moved to guarantee bank deposits.
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A Lack of Confidence Despite Bailout
Even though the US congress passed a $700 billion dollar bailout package last week many Americans lack confidence in the current economy and are uncertain about the future. This uncertainty has affected consumer spending with many putting off major purchases and spending less on consumer goods and services.
The Credit Crunch and the US Economy
Credit is a major part of the US economy and with the current credit crunch many Americans are finding credit much harder to come by. Due to the subprime mortgage mess banks have tightened lending requirements putting access to credit out of the reach of many Americans. Since consumer spending is one of the leading economic indicators a reduction in retail sales could have serious ramifications for the economy across the board. Despite the passage of the bailout bill and the rally of the US dollar on forex markets many Americans find themselves faced with hard economic decisions to make.
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Bailout Fails in the House
The failure of the US House of Representatives to pass the 700 billion dollar bailout bill sent shockwaves through world financial markets. The bailout bill is unpopular with most Americans and most politicians are reluctant to go against the wishes of a majority of their constituents. Forex traders and markets were left in limbo and the prognosis for the US dollar is negative despite a slight rally against the Euro earlier in the week.
The Senate Vote
On Wednesday, October 1st the US senate will vote on the proposed bailout plan with several modifications. The vote will take place after sundown out of respect of the Jewish holidays of Rosh Hashanah. The bill includes a provision raising the FDIC insurance cap from $100,000 to $250,000. The Federal Deposit Insurance Corporation was created by Franklin D. Roosevelt’
s administration in 1933 after numerous bank failures eroded public confidence in the banking system.
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