US Federal Reserve chief Ben Bernanke zeroed in on the volatility of the global market. By slashing its key interest rate, the Fed helped to calm international markets. The purpose of easing liquidity is to head off panic and a global capital crunch.
The markets demand much more. Investors want transparency in financial institutions so that the system can find its own level.
Skepticism of the independence of market forces has not receded in the aftermath of the Enron, WorldCom and all the other scandals left in their wake. The inflation of the US real estate markets was originally played down as limited. The way experts and analysts kept the subject alive suggested a dangerous nationwide spread.
The subprime mortgages held throughout international financial markets thus became intrinsically combustible. They are estimated to have lost more than $6 trillion in value this month alone.
US consumers, who have long used rising real estate values to finance their spending, have had a nasty shock. That is bad news for the world. The US remains the market of final demand for much of the world’s production. The bipartisanship exhibited in crafting a stimulus package is laudable.
The Fed’s intervention must be seen for what it is: an initiative to restore confidence and provide a baseline to the markets. With enough spur, the economy may be able to stem its hemorrhage.
Much more will depend on how far financial institutions – banks, investment houses and bond insurers – go in playing their part. They must come clean on the scale of their losses and become aggressive in cleaning up their books. The long-term perils of avoiding transparency today are too high.
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