Turmoil seen in finances

Published 8:56 am Monday, September 22, 2008

By Staff
With an unprecedented level of economic uncertainty, one thing remains crystal clear.
Events that are larger than most anything we have ever seen during our lifetime are occurring at such a rapid rate that by the time I finish this column, much of what I started writing has likely already changed.
That makes the task of trying to explain what has happened in recent days - or even fully comprehend and absorb it - very difficult indeed. In an obviously simplified conclusion, however, we are left with the reality that from the housing crunch to wild swings of three, four and five hundred points in the Dow Jones industrial average, America is truly in the midst of a tumultuous and uncharted time.
As President Bush said last Friday in an effort to try to calm a nervous nation, “this is a pivotal moment for America's economy.”
Just as he did in the hours and days after the worst terrorist attack on American soil in history, the president once again has sought to restore confidence, this time to a financial system that is admittedly intricate and complex.
The Washington Post went so far as to call the current market crisis potentially “the greatest destruction of financial wealth that the world has ever seen.”
As you know, the giant investment bank, Lehman Brothers, which was founded in Montgomery in 1850 as a cotton brokerage, filed for bankruptcy protection last week.
Just two days later, the federal government seized control of the insurance giant American International Group (AIG) in order to preserve a crucial piece of the global financial system.
These two announcements came on the heels of a string of federal interventions already in 2008, including $9 billion for IndyMac, $29 billion of risk from Bear Stearns, $85 billion from AIG, and at least $200 billion from the Fannie Mae/Freddie Mac bailouts.
Because of the complex interconnectedness of this market, a failure of one large institution, such as AIG, poses a fatal (or “systemic”) risk to the entire market.
One thing is certain; the collapse of our financial markets would prove to be disastrous to every American's well being.
The actions of the Federal Reserve and the U.S. Treasury, invoking powers granted after the 1929 stock market crash to purchase a majority stake in AIG, while unfortunate, were necessary.
Regretfully, it is obvious that even more must now be done to increase confidence in the system. Unfortunately, there are no guarantees.
Treasury and Congress are readying a plan that would authorize the government to buy hundreds of billions of dollars in bad mortgages from banks and other financial institutions in order to take the debt off of their books.
The goal of removing this debt is to take away some of that uncertainty that has wreaked havoc on the markets and free up capital in order to stabilize the markets.
Jo Bonner is a member of the house of representatives.

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