The global financial markets are tanking by the day and the major indices around the world are collapsing at more than 5% a day and are closing at levels which have not been seen in the past five years. The financial markets are showing no signs of optimism and are sliding into recession. This is despite the US government's $700 bn bailout package, and a concerted and collective effort by all the major central bankers in the world to reduce the cost of debt and ease the liquidity situation. At this point, one should not ignore the assurances, guarantees and counter-guarantees of the heads of states and finance ministers around the world. The markets seem to be in no mood to calm down.
Starting off as a local problem in a specific credit market (subprime) in the US, the credit crunch has started affecting the global credit markets bringing down the stock markets and slowing down the pace of economic growth. The financial crises have swallowed many small and a few large financial institutions. Since the housing bubble burst, the banks are writing down huge amounts of default loans and still do not know what the final writedown will be. Many banks are sitting on toxic assets not knowing what they are worth and thus unable to sell them. The price discovery is quite challenging. Also, bankers and investors have become risk-averse and are not willing to lend due to fear of defaults. Adding to this are the huge amounts of funds stuck in illiquid mortgaged-backed assets. The interbank markets have seen less transactions and the cost of debt has skyrocketed.
To bring the situation under control and calm the market, the US government introduced a bill in the House of Representatives according to which the US Treasury would be in a position to buy $700 bn worth of toxic assets from the banks in return for preferred capital and equity stake. The bill was initially rejected by the House and had to be reintroduced after making some crucial amendments.
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