bush and the economy

Posted on August 10, 2007

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Talk about being out of touch.

Look at what happened right after Bush took the rare chance to talk about the economy and told reporters that the economy was in a good shape “…the fundamentals of our economy are strong. Inflation is down. Real wages are increasing. The job market is a strong job market. People are working. Small businesses are flourishing,” the decider was quoted as saying.

Well, markets worldwide went into a tail-spin on Thursday, as fears of liquidity drying up spread. Banks reacted in shock, jacking up interbank borrowing rates as many big name companies like Bear Stearns, BNP Paribas and Deutsche Bank revealed massive losses in their hedge funds arms.

Central banks from Europe and the US had to inject large amounts of money into the system to calm nerves and stabilize rattled markets and financiers.The New York Fed even took the unusual step of buying over $30 billion worth of mortgage-backed securities, the very sub-prime loans that have been sold by investment banks and repackaged as financial investment instruments.

The sub-prime mortgage industry in the US is the often-cited villain, lending to dodgy owners without regards to credit history and their ability to repay loans.

These loans have been repackaged into other complex instruments like bonds and derivatives and have been sold to financial institutions worldwide. Thus, financial institutions around the world are taking hits from a US-originated problem, thanks to the globalized nature of financial services.

A large part of the problem is no doubt due to market sentiment, which reacted from the debt to the equities market. It’s believed that the scale of losses in the sub-prime loan sector could be in the neighborhood of $100 billion.

Equities investors are going to be feeling the brunt of this for a while, especially those with holdings in banking stocks.

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Posted in: business, economy, politics, US