Why could over $60 trillion in credit derivatives turn this financial crisis into market mayhem?
*The Economist, September 23, 2008:
"Financial Crisis - Carping About the TARP
Congress Wrangles Over How Best to Avoid Financial Armaggedon
IF ONLY, America’s financial authorities must feel, they could gag
congressmen as easily as they have muzzled short-sellers. Financial
markets around the world were choppy this week as Republicans and
Democrats wrangled over the $700 billion rescue plan for Wall Street
proposed last week by Hank Paulson, America's treasury secretary.
One fear is that Mr Paulson’s troubled asset relief programme (TARP)
will be blocked on Capitol Hill. That is possibly overdone: the risk of
being blamed for plunging the world’s greatest economy into financial
ruin is a good incentive for all sides to reach a compromise. Of more
concern is that the plan, if it were approved, would neither shore up
the financial system nor save the American economy. On that point there
is room for argument, and hence for more uncertainty in the markets.
Mr Paulson’s plan is to use public money to buy assets from banks whose
value has slumped with every lurch downwards in America’s housing
market and which have been shunned by the private sector. With a floor
put under the value of those instruments it should be easier for banks
to raise capital. Without capital, and amid relentless write-downs on
those toxic assets, banks would have to curtail lending, causing a
massive credit drought in America. That would not only further batter
the housing market. It might also push companies into bankruptcy, too,
causing mayhem in the $62 trillion market for credit derivatives."
*This information is solely a highlight of the opinion of a third-party publication and is incomplete. Please subscribe to this publication for the full and timely opinion of the author and call a Monex Account Representative for any additional up-to-date information. This is not an offer to buy or sell precious metals. Investors should obtain advice based on their own individual circumstances and understand the risk before making any investment decision.
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