In this article, author thinks that the recent Money Market is just like a Blocked pipes. Why? Because the banks are hoarding cashes. How did such things happen? Let’s have a look at the overview of the whole process. On Oct 1st, the dollars’ borrowing costs of banks reached 4.15% for three-month money, more than two percentage points above the fed funds target rate. It has kept growing for almost 1 year, especially went up during last month. Then the cycle began.
Higher borrowing costs for banks—higher borrowing costs for consumer, including both residents and companies— companies try to borrow money in other ways other than loans from banks—they would like to issuing commercial papers—this way performed not very well. First, buyers are requiring higher interests and shorter terms. Second, there are few buyers who are still confident in the economic—companies call on their back-up loans promised by banks when the economic situation is good—banks have to keep their cash in store to keep their promise and also in case depositors make large withdrawals—higher borrowing costs for banks...
In my mind, the cycle above only represents what happened in money markets. Actually, when bank is hoarding their cash, another cycle more close to our daily life emerges. Bank is hoarding their cash—residents find it cost more to get credit or loans or even unavailable. Because the bank is tightening their lending standards—consumption of goods such as houses and investment in stocks and securities market decline—companies suffer from lack of revenues and investment, which are necessary for them to continue operating—companies fire workers in order to cut costs—increase of unemployment rate makes people’s forecasts of economics worse—people all go to banks to get their deposits out in case of banks’ bankrupt—Bank have to hoard their cash...
Although the two cycles’ juncture is Banks’ holding cash, I think that is only one result not the reason for the crisis.
In the money markets, there are two terminals—Banks & Money Funds and Consumers (personal investors, companies, etc). In terms of consumers, to make the situation recover, it is essential for them to become confident again in the money markets and whole economics. As for the 700 million bailout plan, the federal still needs time the implement the plan. Before that, the most important thing that the government wants to show to the residents is their determination in getting the economics back, through which they are trying best to boost consumers’ confidence. As for banks and financial institutions, they should take their business more serious to be responsible to whether depositors or investors. As for federal government, which plays a role of regulatory power in market, they should make more efforts not only to help restoring the mutual trust between institutions and consumers, but also to regular the market in case of the same situation in the future.
The article is available at http://www.economist.com/displaystory.cfm?story_id=12342237
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As far as I am concerned, I think the most weird things happened before the subprime crisis is that why the Federal Reserve want to increased the borrow rate two years ago suddenly and raised the rate by 17 times which led to the subprime crisis and the blockages in the money markets as the article mentioned. When the US housing bubble increased to such a scale like two years ago, the action like raising the borrowing rate suddenly would certain made the people who borrow adjustable-rate mortgages unwillingly to return the money and then led to the credit risk of the whole market. From the angle of finance, we know that money is the most meaningless things in the world without the claim of the real assets. However, during the Subprime crisis， the only loss we could see is that the foreign government, bank and companies invested billions of dollors in American Subprime Mortgage and those investment became zero just because a simple desicion of the Federal Reserve. Let's see what happened in the passed four weeks, nearly all the band in the Iceland had been taken over by the government and almost all the countries who hold balance of trade surplus lose billions money because of the crisis. Moreover, the countries which depend on exportation need to pay American government money to maintain the purchasing power of the American Customers. What a conspiracy. The confident could be restored; the stock price could be the same level as two years ago if we have enough time, but export surplus of the poor countries was gone and will never back.
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