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Markets respond as Fed steps in

Stephen Beard Mar 17, 2008

Markets respond as Fed steps in

Stephen Beard Mar 17, 2008


Scott Jagow: A lot has happened in the financial world since you went to sleep. I’ll begin with the fire sale of investment bank Bear Stearns. Former rival JP Morgan Chase is buying Bear for almost nothing — $2 a share. On Friday, Bear Stearns’ stock closed at more than $30 a share. It’s a very disturbing signal about what some of these banks’ assets are worth right now.

Minutes after that deal was announced, the Federal Reserve took some emergency measures. It cut one of its interest rates called the discount rate. It opened direct lending to Wall Street. One of the Fed’s actions hasn’t been used since the Great Depression, and this all happened on a Sunday night.

But the financial markets are not feeling reassured. We’ll begin in Asia. Japan’s Nikkei fell almost 4 percent. Shares in Hong Kong dropped almost 5 percent.

We’re joined now by Puru Saxena, an investment adviser based in Hong Kong. Puru, JP stepped in. The Fed stepped in. Why so much angst in Asia?

Puru Saxena: I think most people still believe that the worst is yet to come. I don’t think the markets have discounted the worst yet. I still maintain my view that the Asian economy is doing absolutely fine — China’s going by 10, 11 percent, India’s going by 9 percent or so. So these problems that we’re seeing in the financial markets are weighing, are coming basically from the Western world in the financial sector.

Jagow: What do you think it’s going to take to stabilize the markets there in Asia?

Saxena: I think we will have to see some more bankruptcies, unfortunately, because whenever you see a colossal boom in one sector, that is almost inevitably followed by a gigantic bust. So I think that the financial sector is likely to disappoint in the months and years ahead. I wouldn’t touch financial even with my own money today.

Jagow: Wow. All right, Puru Saxena in Hong Kong. Thanks so much.

Saxena: Ah, no problem, my pleasure.

Jagow: Let’s move on to Europe now. Our correspondent Stephen Beard joins us from London. Stephen, what’s been the reaction in the European markets?

Stephen Beard: More blood on the carpet here, Scott, I’m afraid. The London Footsie index downed almost 2 percent. In Paris, the main index there was down 3 percent. And some big falls in Frankfurt, too.

Jagow: But the Fed took these emergency actions last night, on a Sunday night, specifically to calm the world markets. Why hasn’t it worked?

Beard: Well, it is such a radical step. I mean, this clearly is a case of the Fed bailing out an investment bank, and this is the first time that’s happened since the Depression. And it’s prompted the markets to ask, who’s next?

Jagow: Obviously we don’t know who’s next, but this is a big week for the investment banks as we get reports from them. And the Fed meets on interest rates tomorrow. Might another interest rate cut do the trick here to calm people down?

Beard: Well, it doesn’t seem to be working. I mean, markets are now already assuming that short-term U.S. interest rates are going to come down from 3 percent to 2 percent. The problem is that, you know, when fear takes hold, then a central bank cutting interest rates recalls, in the phrase used by that great British economist, John Maynard Keynes. He said it’s like pushing on a string — it just doesn’t work.

Jagow: OK. Stephen Beard in London. Thank you.

Beard: OK, Scott.

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