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U.S. stock market has worst week since 2008

Federal Reserve takes extreme measures to protect wealthy
By Masao Suzuki |
March 22, 2020
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San José, CA - Last week the financial news was dominated by the falling stock market, which had its worst week since the 2008 financial crisis. But behind the scenes the U.S. Federal Reserve, or Fed, was working feverishly to prevent another financial crisis, taking actions not even done during the 2008 crash.

Wall Street ended the week with stocks falling again on Friday, March 20. All the major stock market averages fell by about 4%, to end the week down 13%. The Dow Jones Industrial Average wiped out all its gains during the Trump administration and is down 35% over the last month.

At the same time, stress continued to build in the financial markets. Usually when stock prices go down, bond prices go up, as investors rush to the safety of more stable bonds. But on Wednesday, March 18, the supposed safest of the safe, U.S. government bonds, fell as investors were desperate to sell to raise cash. When bond prices fell, interest rates went up. This happened despite the Fed restarting its Quantitative Easing, or QE, program of buying longer-term U.S government and mortgage backed bonds.

One of the most important functions of the Federal Reserve is to be a ‘lender of last resort’ during financial crises. To prevent a total meltdown of the financial system, during the financial crisis in 2008 the Fed started to buy longer-term bonds (QE) and insured money market mutual funds - often called a ‘shadow banking’ system, as they make loans using investors’ money but aren’t insured or regulated as tightly as banks. While the Fed cannot directly make loans to non-financial businesses, it extended loans to banks and other finance companies to buy so-called ‘commercial paper’ which are short term IOUs issued by companies. The Fed opened up its ‘discount window,’ where it makes loans directly to commercial banks.

The Fed did all this during the last two weeks. While other loan markets seemed to settle down towards the end of the week, a crisis emerged in municipal debt, that is bonds issued by local and state governments. On Friday, March 20, the Fed began to lend money to financial institutions to buy municipal bonds, an action that was not needed in 2008.

Back in 2008, the financial crisis was mainly caused by speculation in a housing market that was supercharged by exotic mortgages which were anchored by Wall Street financial derivatives. While the economy was in a recession that started in December of 2007, unemployment had only risen by 1.7% (from 4.4% to 6.1%) between the pre-recession low in May of 2007 and the financial crisis in September of 2008. GDP - or Gross Domestic Product, the measure of all goods and services sold to households, businesses, the government, and other countries - fell 2.1% during the last three months of 2008.

On Friday, Wall Street investment bank Goldman Sachs predicted that unemployment insurance claims could top 2 million next week, an eight-fold increase from this week’s report. This means that by the end of the month, unemployment could rise this month as much as the last recession took in 16 months. Even worse, the bank predicted that GDP would fall at a 24% annual rate in the April to June period, or about 6% in the three months. This is the fastest drop on record going back to World War II. During the Great Depression, total GDP fell about 30% between the summer of 1929 when the downturn began, and the low point in the summer of 1933, or at about 2% each quarter. This means that GDP could fall at three times the rate as the worst downturn in U.S. history.

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