How long will the ECD and Fed hold up

10-18-2008 19:38

Even though the U.S. Congress has finally accepted the economical rescue plan, the problems are far from over. Consume rates are dropping, and at the same time the number of people currently on unemployment is growing. The European situation, at the same time, is even worse. European governments and banks are depending on the ECB’s ability to lend them money and provide cash to protect them from bankruptcies. The current situation for the dollar is slightly better, but the prospects remain negative.

Skepticism

The question is whether or not the $700 billion plan, which is by now approved by both the Senate and the House of Representatives, will cause investors to gain enough confidence again to make the investments our deteriorating markets so desperately need. However, the consequences of this current financial crises may be bigger then we think. U.S. assets may as well remain the object of skepticism by foreign investors. This leads us to the next problem, which is the extra financial burden the U.S. taxpayers are facing, if the inflow of money to the U.S. remain slow. Under these circumstances it will not be easy to finance this emergency rescue plan. However, there is a possibility that the Federal Reserve (Fed) will cut its rates now or at the beginning of the new year, to create some breathing space on the markets.

ECB is struggling

The European Central Bank (ECB) on the other side of the ocean, is struggling as well. During the weekend several European banks have borrowed almost €600 billion as an insurance against the frightful possibility that some banks, whom are currently balancing on the edge of bankruptcy, go belly-up, a scenario which would cause even bigger problems for European governments. Despite the fact that opportunities to cut rates are increasing, as the oil price is coming down again, the ECB left once again rates unchanged, last Thursday. Mr. Trichet acknowledges that the economic condition of the market could deteriorate further, and the main goal at this point is preventing inflation rates to increase even more.