Friday, September 19, 2008

Markets rally after US treasury steps in

World stocks have rallied after the US followed Britain’s lead in the banning of short selling [BBC / CNN video]. The ban may stop the practice of creating false rumours which has led to uncertainty in otherwise stable markets [BBC]. A bail out by the US treasury has also helped put financial market in a positive mood [BBC / CNN]. Shares soared on European markets and in Russia the stock exchange was suspended after shares rose too steeply [BBC / CNN]. Trading was halted on the RTS and Micex indexes within an hour of opening. They then reopened only to close again after rising to 25.4% and 20.2% respectively. It is the second time the Russian exchange has been halted this week. On Thursday trading was halted after huge falls, prompting the state to pump billions of dollars into banks. Asian markets also partially recovered on Friday [CNN].
The crisis may not however be ended. On BBC’s Question Time the Labour MP Harriet Harman was unable come up with any clear solution except to look into the matter of regulation. But regulations are too inflexible and may not address the constantly changing global financial situation. Simon Wolfson said there needed to be more supervision and oversight. The son of Lord Wolfson, he is a former Next chairman and chief of staff to Margaret Thatcher. Recently he described the current economic climate as "gloomy" and predicted that UK businesses faced "another tough year". Indeed if as suggested the ban on short selling is temporary, the problems existing in the financial markets may well return. Of course, it is not just the gambling and speculation that has rocked world markets. Some firms are in crisis due to many bad debts. The issuing of so called NINJA mortgages where individuals in the US had been lent vast sums of money to purchase property despite having 'no income, no jobs or asset.' Many analysts have said the US interventions are only a stop-gap. The ban on short-selling only applies to 799 financial firms and is only temporary. Ralph Sylva, a CNN analyst, says, “Until there is a period of calm no-one is going to lend to anyone else...and banks are not lending to each other they are buying bonds”.
But others have questioned the stability of global capitalism. Writing on the BBC website Noam Chomsky says “The unprecedented intervention of the Fed may be justified or not in narrow terms, but it reveals, once again, the profoundly undemocratic character of state capitalist institutions, designed in large measure to socialise cost and risk and privatize profit, without a public voice. That is, of course, not limited to financial markets. The advanced economy as a whole relies heavily on the dynamic state sector, with much the same consequences with regard to risk, cost, profit, and decisions, crucial features of the economy and political system”.
Others are far more concerned. Tony Benn a former Labour MP warns of the risks that might come with a financial crash. “This economic crisis is a global crisis. It is more serious than the crisis in 1929. In this climate, people get very frightened and, when they are frightened, their fear can be exploited just like Hitler did in the 1930s to get to power”. He questioned the apparent inconsistency of government spending. “They will say there seems to be plenty of money for war. We are bombing in Iraq and we are bombing in Afghanistan and, if we can do that, why don't we have enough money to meet our own need?” Tony Benn said that the good times had ended and the outlook was now much bleaker. “It's the end of an era when we were told to borrow and spend and keep government out. Many people will now lose their jobs, lose their houses, lose their livelihoods. This is a failure of a system where we relied on the markets and excluded government. And the markets failed.”

The US Treasury Secretary Henry Paulson said today that a “prompt bipartisan effort was needed” to help “stabilize the system and get at the root cause”. He added that more action and “hundreds of billions of dollars are needed to resolve US financial crisis” [BBC].
Soon after Paulson had made a statement, President Bush spoke about the crisis and justified the government intervention which he said was “not only warranted but necessary”. He too said the root causes needed to be addressed. One of the reasons he said he had implemented a ban on short-selling was to stop investors upsetting financial markets for their own personal gain.

At the close of European markets on Friday the picture was far more optimistic. The FTSE 100 had risen by 9.33% while major banks too regained some of the value lost in the last week. HBOS rose by 31%, Lloyds TSB gained 24% & Barclays stocks rose by 29%.

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