The TED Spread is in normal range for the several months preceding the credit freeze. This means that banks are more willing to lend to each other. Although not a clear signal that adequate consumer and business credit will soon follow the resumption of interbank lending is a necessary precondition.

The Bank of England has cut interest rates to the lowest level in its 315-year history as it desperately attempts to prevent the UK recession deepening into a slump.

The bank rate has been reduced by 0.5 percentage points to 1.5pc after recent economic data suggested that the UK is in store for a deep recession this year as the house price slide, unemployment rises and spending slows.

Economists believe that because the UK is experiencing a significant downturn, with banks unwilling to lend and pass on interest rates cuts in full, the Bank will reduce rates close to zero to try and ease the impact.

Telegraph.co.uk

Friday’s TED Spread chart from Bloomberg indicates that big banks are becoming more willing to lend to each other. A necessary first step in getting liquidity pumping again throughout the system.

Forex traders may be the first to see the affect of greater liquidity with tighter bid/ask spreads in the afternoon Forex market.

The TED Spread is off its sheer panic highs but still way above normal. What can we take from this? That banks are still more concerned about not risking their capital, even with other banks, than they are about making money with it.

By Jeannine Aversa, AP Economics Writer

Government weighs plan to assume financing of short-term business debt to ease credit crunch

WASHINGTON (AP) — The government is weighing a bold plan to buy massive amounts of unsecured short-term debts in a dramatic effort to break through a credit clog that is imperiling the economy.

The Federal Reserve is working with the Treasury Department on the plan to buy “commercial paper,” a short-term financing mechanism that many companies rely on to finance their day-to-day operations, such as purchasing supplies or making payrolls, according to a person with knowledge of the plan. The person spoke on condition of anonymity because the plan is still being put together.

The market for this crucial financing, which relies on investors rather than banks, has virtually dried up. That has made it increasingly difficult and expensive for companies to raise money to fund their operations. Commercial paper is a way of borrowing money for short periods, typically ranging from overnight to less than a week.

The unstable situation has left many companies vulnerable. The notion under the plan is for the government to come up with a backstop that would provide companies with a new place to get cash. Depending on the ultimate shape of the plan, the Fed could become a source of credit for nonfinancial businesses in addition to commercial banks and investment firms.

The Fed made an opaque reference on Monday that it was exploring “ways to provide additional support” to “unsecured funding markets.”

The creation of a separate legal entity was being examined as one way for the Fed to get into the commercial paper market, the person with familiar with the plan said.

The Fed pledged Monday to take “additional measures as necessary” to battle the worst credit crisis in decades. Wall Street took a nosedive, with the Dow Jones industrials plunging more than 800 points at one point during the day before finishing down 370. Fears spread around the globe about the ability of policymakers in the United States and abroad to turn around the situation.

The lending lockup is a key reason why the U.S. economy is faltering. Unable to borrow money freely or forced to pay a high cost to borrow, employers are cutting jobs and reducing capital investments. Consumers have retrenched.

To help ease credit stresses, the Fed announced Monday it will provide as much as $900 billion in cash loans to squeezed banks. It said 28-day and 84-day cash loans being made available to banks will be boosted to $150 billion apiece. Those increases will eventually bring the amounts outstanding under the program to $600 billion.

Loans that will be made available in November to banks also will be increased to $150 billion each. That makes a total of $900 billion in credit potentially outstanding over year-end, the Fed said.

The Fed also said it will begin paying interest on commercial banks’ reserves, another way to expand the central bank’s resources to battle the credit crisis.

Source: Yahoo Finance

The Treasury bailout plan to recapitalize the U.S. banking system may help the U.S. avoid a deep and protracted recession. But even if the plan succeeds, it almost surely will not prevent a recession.

The major reason for this is that the credit markets have been under incredible stress for well over a year, and have recently taken a significant turn for the worse. During the last two weeks, the spread between Libor (the cost of borrowing between banks) and the rates on zero-risk Treasury bills exploded to more than 300 basis points, the widest gap since October 1987. This kind of stress reflects fear and a lack of trust among banks, which will be reflected in the real economy with a lag.

The commercial-paper market — which funds auto loans, credit cards, and short-term working capital for businesses — also is under incredible stress. Spreads on asset-backed commercial paper relative to comparable maturity Treasurys rose to more than 500 basis points in recent weeks. Not surprisingly, the commercial-paper market shrank by more than $100 billion in the last two weeks. It’s down by more than $520 billion since the summer of 2007, when the credit crisis began.

The Federal Reserve’s Senior Loan Officer’s Survey also shows record fractions of loan officers reporting tighter lending standards for the broad swath of business and household credit. Similar spikes in lending standards during 1990 and 2001 were marked by recession.

If a recession is unavoidable, the question is how deep and long it will be. While second quarter real GDP showed respectable 2.8% growth, trade was the only thing keeping the economy above water: Gross domestic purchases contracted during the second quarter. Gross domestic purchases also contracted during the fourth quarter of 2007, and only rose by 0.1% at an annual rate during the first quarter.

More bad news: Real retail sales growth has been negative on a year-to-year basis for nine consecutive months, the longest streak of declines since 1991. This data, and the tremendous spike in both jobless claims and the unemployment rate, are telltale signs of an economy that is in reverse gear.

The best we can hope for is that the downturn remains mild — and for a modest recovery to take shape in the second half of 2009. But the fiscal policies of the next administration will play a crucial role here. If tax rates on capital and labor are raised sharply, a hoped-for recovery may be jettisoned altogether.

Some have suggested we’re close to the housing price bottom. That’s hard to imagine, as new home sales just sunk to new cycle lows in August while inventories remain at elevated levels. New home sales bottomed three years before prices in the housing recovery of the early 1990s. Home prices also remain elevated relative to rents in a way they were not at the bottom of the home-price cycle in the early 1990s.

On the inflation front, the most recent bout of credit stress has a silver lining: Industrial commodity prices have declined sharply. At the same time, bond market inflation expectations recently receded to the lowest level in six years. Gold has risen aggressively off the lows of mid-September but remains below the March peak. The dollar is off the September highs, but is also well above the record lows seen in April. Collectively, these market-based signals suggest that headline inflation will ease from the 17-year highs seen in July.

The likely easing in inflation in the months ahead may not be permanent. In the past two weeks, the Fed’s balance sheet (the asset side of the monetary base) has exploded by nearly $300 billion. Yet this avalanche of liquidity has done little to relieve strains in credit markets. In other words, we cannot expect central-bank liquidity to be a substitute for financial-sector solvency.

The long-term outlook for price stability now depends on whether the Treasury pays for the bailout by selling U.S. debt to the public, or if the Fed finances it with printing-press money. If it is the latter, there will be an inflationary legacy that long outlasts the 2007-2008 credit crises.

Mr. Darda is the chief economist of MKM Partners.

Source: Wall Street Journal Opinion

By Susan C. Walker,
Elliott Wave International
September 7, 2007

Central bankers who "follow the yellow brick road" end up in Jackson Hole, Wyoming, every Labor Day weekend for their annual symposium sponsored by – who else? – the Kansas City Fed. (Who can forget Judy Garland saying to her little dog, "Toto, I’ve got a feeling we’re not in Kansas anymore," in the 1939 movie, The Wizard of Oz?)

The Jackson Hole Resort serves as the Federal Reserve’s equivalent of the Emerald City, as Fed governors and presidents meet with central bankers and economists from around the world to discuss economic issues. This year, the symposium focused on housing and monetary policy. Usually, the Fed chairman kicks off the symposium and, this year, the new chairman, Ben S. Bernanke, did the honors. He closed his speech with these words:

"The interaction of housing, housing finance, and economic activity has for years been of central importance for understanding the behavior of the economy, and it will continue to be central to our thinking as we try to anticipate economic and financial developments."

Then came the other speeches. And it seems that some of the guests in Emerald City were waiting for their chance to pull back the curtain and prove that the Wonderful Wizard of Oz isn’t such a wizard after all. Bloomberg reported that "Federal Reserve officials, wrestling with a housing recession that jeopardizes U.S. growth, got an earful from critics at a weekend retreat, arguing they should use regulation and interest rates yo prevent asset-price bubbles." Apparently, one academic paper presented at Jackson Hole graded the Fed an ‘F’ for the way it has handled the repercussions from the rise and fall of the housing market.

Truth be told, these folks are a little late to the table as critics of the Fed. We’re glad they’re joining us, but here’s what they still haven’t learned: It isn’t because the Federal Reserve messes up by allowing credit, asset and stock bubbles to form that it’s not a wizard. The Federal Reserve isn’t a wizard for one particular reason that it doesn’t want anybody to know – and that is that the Fed doesn’t lead the financial markets, it follows them.

People everywhere want to believe in the Fed’s wizardry. But all this talk about how the Fed will be able to help the U.S. economy and hold up the markets by cutting rates now is as much hooey as the Wizard of Oz promising Dorothy, the Scarecrow, the Tin Man and the Cowardly Lion that he could give them what they wanted: a return to Kansas, a brain, a heart, and courage. Because when the Fed does do something, it always comes after the markets have already made their moves.

If you don’t believe it, you should look at one chart from the most recent Elliott Wave Financial Forecast. It compares the movements in the Fed Funds rate with the movements of the 3-month U.S. Treasury Bill Yield. What does it reveal? That the Fed has followed the T-Bill yield up and down every step of the way since 2000. And the interesting question becomes this: Since the T-bill yield has dropped nearly two points since February, how soon will the Fed cut its rate to follow the market’s lead this time?

[Editor's note: You can see this chart and read the Special Section it appears in by accessing the free report, The Unwonderful Wizardry of the Fed.]

We’ve got our own brains, heart and courage here at Elliott Wave International, and we’ve used them to explain over and over again that putting faith in the Fed to turn around the markets and the economy is blind faith indeed.

"This blind faith in the Fed’s power to hold up the economy and stocks epitomizes the following definition of magic offered by Teller of the illusionist and comedy team of Penn and Teller: a ‘theatrical linking of a cause with an effect that has no basis in physical reality, but that – in our hearts – ought to be.’" [September 2007, The Elliott Wave Financial Forecast]

Because, you see, what makes the markets move has less to do with what the unwizardly Fed does and more with changes in the mass psychology of all the people investing in those markets. The Elliott Wave Principle describes how bullish and bearish trends in the financial markets reflect changes in social mood, from positive to negative and back again. To extend the metaphor: The Fed can’t affect social mood anymore than the Wonderful Wizard of Oz could change the direction of the wind that brought his hot air balloon to the Land of Oz in the first place.

As our EWI analysts write, "With respect to the timing of the Federal Reserve Board rate cuts, we need to reiterate one key point. The market, not the Fed, sets rates." Being able to understand this information puts you one step closer to clicking your ruby red shoes together and whispering those magic words: "There’s no place like home." Once you land back in Kansas, your eyes will open, and you will see that an unwarranted faith in the Fed was just a bad dream.

Susan C. Walker writes for Elliott Wave International, a market forecasting and technical analysis company. She has been an associate editor with Inc. magazine, a newspaper writer and editor, an investor relations executive and a speechwriter for the Federal Reserve Bank of Atlanta. Her columns also appear regularly on FoxNews.com.

By Susan C. Walker, Elliott Wave International
August 28, 2007
Remember that catchy love song that Frank Sinatra made popular in the 1960s, “The Best Is Yet To Come”?

“The best is yet to come and, babe, won’t that be fine?
You think you’ve seen the sun, but you ain’t seen it shine.”

At the risk of mixing musical metaphors and styles, it looks more like the sun has deserted us right now in the financial markets, and we’re about to see “The Dark Side of the Moon,” the title of Pink Floyd’s 1973 smash album. With the subprime mortgage problems reaching farther and farther out to touch hedge funds, U.S. and European banks, mortgage companies and money-market funds, what we’re going to experience sounds more like “The Worst is Yet To Come.”

That’s because the financial markets must contend not only with the credit crunch brought on by rising foreclosures now; they must also deal with the repercussions from more foreclosures over the next 18 months as more adjustable-rate mortgages (whether subprime or not) reset from low teaser rates to higher interest-rate levels.

How bad can it get? Investment adviser John Mauldin recently published a month-by-month account of the dollar amount of mortgages that will be reset through 2008, and the largest reset amounts pop up in the first six months of next year. In fact, as he points out, the $197 billion of mortgage resets so far this year is “less than we will see in two months (February and March) of next year. The first six months of next year will see more than the total for 2007, or $521 billion.”

So, we haven’t even begun to feel the pain yet. It’s bad enough for the folks who will find that they can’t keep up with the higher mortgage payments and will have to move out of their homes. But the financial markets won’t be catching a break either. The antiseptic phrase used to describe the situation is “repricing risk.” That means that investors have woken up to the fact that the AAA-rated mortgage-backed securities and derivatives they invested in look more like junk bonds now. This eye-opener causes them to want higher yields from what they now see as riskier vehicles.

That new investor caution plays out this way: investment banks, hedge funds and any other entity that bought securities backed by subprime loans now find it hard to sell the darn things. It’s almost the same as homeowners trying to find buyers for their homes – nearly impossible in a market where home prices are falling. In the financial markets, it’s nearly impossible because no one even wants to attach a price to a collateralized debt obligation today for fear that it will be priced much lower tomorrow.

The Fed can try to calm such fears all it wants by lowering the discount rate and giving banks more time to pay back loans (from overnight to 30 days), but the real problem can’t be fixed with more access to credit. The fact is nobody wants any more of that. What they really want is cash to pay off their debts, be it a mortgage or an unwinding of a securities bet.

Wall Street’s denizens are in the dark about how much their schemes depend on the ocean of liquidity created by the bull market, say Elliott Wave International’s analysts, Steve Hochberg and Pete Kendall. They are particularly struck by the image of the Grim Reaper that Business Week magazine put on its cover recently with the headline, “Death Bonds:”

“The grim reaper is the perfect visage to welcome the arriving wave of liquidation; it will wreak havoc with their work. The field’s dark fate is clear in one fund manager’s description of what caused ‘forced sales’ at another fund: ‘The models work when they look at history, but not when history is all new.’ What’s ‘new’ is that for the first time in the experience of many model makers, confidence is on the run. As they rob Peter to pay Paul, all assets will be impacted in negative ways that do not compute in their models.” (The Elliott Wave Financial Forecast, August 2007)

And the bad news just keeps accumulating:

Housing prices dropped 3.2% percent in the second quarter compared with last year, the largest drop since Standard & Poor’s started tracking home prices in 1987.
CIT Group closed its mortgage unit this week, while Lehman Brothers closed its own last week. Mortgage companies that specialize in low-quality mortgages are either going out of business (London-based HSBC) or struggling (California-based Countrywide).

The Wall Street Journal lists the number of fired employees at seven mortgage companies, including First Magnus (6,000), Capitol One’s Greenpoint (1,900), Associated Home Lenders (1,600) and Lehman (1,200), which totals more than 12,000 suddenly unemployed mortgage writers.

To top it off, Bloomberg reports that the subprime mess may lead to lower bonuses for the first time in five years on Wall Street, according to Options Group, a company that’s been tracking this kind of information for a decade.

Somewhere, the world’s smallest violin is playing a sad song for the fund managers and investment bankers who won’t be taking home that million-dollar-plus bonus this year. And Frank Sinatra is singing a sad refrain… “The worst is yet to come.”

Susan C. Walker writes for Elliott Wave International, a market forecasting and technical analysis company. She has been an associate editor with Inc. magazine, a newspaper writer and editor, an investor relations executive and a speechwriter for the Federal Reserve Bank of Atlanta. Her columns also appear regularly on FoxNews.com.

For more information on the housing market and the credit crisis, access the free report, “The Real State of Real Estate,” from Elliott Wave International.

At Bear Stearns Cos., a group of hedge-fund managers at the Wall Street firm spent the weekend scrambling to line up new investors or lenders to keep afloat their fund, called High Grade Structured Credit Strategies Enhanced Leverage fund. The fund, which invests in many securities that are backed by subprime mortgages, suffered heavy losses in recent months.

On Friday, credit-rating firm Moody’s Investors Service slashed ratings on 131 bonds backed by pools of speculative subprime mortgages. -WSJ

Higher interest rates can lead to an array of woes for the stock market. But one of the worst — a downturn in corporate profits — still isn’t among the big worries for most investors and Wall Street pros, even after the latest run-up in benchmark Treasury debt yields. WSJ