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The global financial system is highly interconnected. So problems in one part of the world can reverberate almost everywhere else - risking a cascade of default, contagion, contracting credit and collapsing economic activity. Exhibit A now is Europe. European Union leaders met this week to at last deal with a debt crisis rattling investors worldwide who once thought lending to euro zone countries was virtually risk-free. The graphic here helps you see the intertwined complexities.
[IMG]http://i.imgur.com/eg6KT.jpg[/IMG]
It starts with the euro
In 1999, most countries in the European Union adopted the euro as a common currency. This union allowed poorer countries such as Portugal, Italy, Ireland, Spain and Greece to borrow money at the same low interest rates as rich and financially prudent Germany, even though their inflation rates were higher. That gave them a strong incentive to borrow.
And goes bad in Greece
Greece financed a large public-welfare state and built up huge debt for its size that it has scant hope of repaying now. In 2010, European financial institutions began bailing out Greece (later Ireland and Portugal, too); lenders were prodded to agree to modest, voluntary debt write-downs, or "haircuts". But Greece still needs money. And its credit bill grows ever larger as lenders charge more and demand government cutbacks, which in turn have provoked civil unrest. After years of propping up the spendthrift Greeks, the Germans are fed up. The problem is, a chaotic Greek default could hurt all European banks and pension funds that have extended Greece credit down the years, and maybe cause a wider bank panic. So bailouts continue - for now, at least:
BEST CASE Bailouts in the form of new European credit eventually work. Greece pays down its hefty debts for years to come.
MORE LIKELY Bailouts don't work. Greek debt grows in an anaemic or shrinking economy. The country defaults, either in a negotiated, orderly manner or chaotically, forcing lenders to take big losses either way. But damage could be contained if countries in the euro zone can erect a financial firewall to backstop the credit of the four other shaky nations: Ireland, Portugal, Spain and Italy. This is what the European Union agreed to on Thursday, after France prodded a more reluctant Germany.
Presented by Nick Santiago November 13, 2012 10:37AM
Everyone knows that the Federal Reserve Bank Chairman Ben Bernanke is responsible for the asset prices in the United States. Since the financial crisis began in 2007 it has been Chairman Bernanke's policies that have inflated the stock markets not the policies put forth by President Obama. In December 2008, Chairman Bernanke cut the fed funds rate to basically zero percent. The fed funds rate is the overnight interest rate that is given to the large banks such as Citigroup Inc (NYSE:C), J.P. Morgan Chase & Co (NYSE:JPM), Wells Fargo & Co (NYSE:WFC), and Bank of America Corp (NYSE:BAC).
The powerful central bank has also been buying mortgage backed securities (MBS), U.S. Treasuries, and other debt instruments. These purchases are called quantitative easing by the Federal Reserve. The central bank is now on its third quantitative easing program called QE-3. This latest and greatest stimulus program includes the purchasing of $40 billion in mortgage-backed securities each month. The ending of this program has not been announced and that is why many investors call it QE-eternity. All of these bond buying programs artificially push down long term interest rates. Lower interest rates allow money to be easily accessible for qualified borrowers. These policies have certainly helped to boost the U.S. housing market which has been very depressed since 2007.
Leading home-builder stocks such as Toll Brother Inc (NYSE:TOL), Lennar Corp, and others stocks in the sector are now trading near four year highs. The last time the Federal Reserve cut interest rates so aggressively was in 2002. Many traders and investors blame the central bank for the last housing and credit bubble. Could they be creating another bubble at this time with these extremely low interest rate policies?
Since the 2009 low in the S&P 500 Index the stock market has faced several major stock corrections. To the credit of the Federal Reserve and Ben Bernanke they have been able to inflate the stock markets higher just before a major technical breakdown in the major stock indexes. Many investors will say that you should never fight the Federal Reserve. So far, every stock market dip has been a buying opportunity. What will happen when and if the stock market no longer inflates from the central bank's monetary policies? This is where it pays to be a technical trader and investor in the stock market. A strong case can be made that the central banks around the world simply create bubbles before the next recession and possible stock market collapse. This is why it should be a traders market for years to come. The real concern for traders and investors is going to be when the central bank can no longer inflate the stock markets higher. Until that time, trade the technical charts.
The powerful central bank has also been buying mortgage backed securities (MBS), U.S. Treasuries, and other debt instruments. These purchases are called quantitative easing by the Federal Reserve. The central bank is now on its third quantitative easing program called QE-3. This latest and greatest stimulus program includes the purchasing of $40 billion in mortgage-backed securities each month. The ending of this program has not been announced and that is why many investors call it QE-eternity. All of these bond buying programs artificially push down long term interest rates. Lower interest rates allow money to be easily accessible for qualified borrowers. These policies have certainly helped to boost the U.S. housing market which has been very depressed since 2007.
Leading home-builder stocks such as Toll Brother Inc (NYSE:TOL), Lennar Corp, and others stocks in the sector are now trading near four year highs. The last time the Federal Reserve cut interest rates so aggressively was in 2002. Many traders and investors blame the central bank for the last housing and credit bubble. Could they be creating another bubble at this time with these extremely low interest rate policies?
Since the 2009 low in the S&P 500 Index the stock market has faced several major stock corrections. To the credit of the Federal Reserve and Ben Bernanke they have been able to inflate the stock markets higher just before a major technical breakdown in the major stock indexes. Many investors will say that you should never fight the Federal Reserve. So far, every stock market dip has been a buying opportunity. What will happen when and if the stock market no longer inflates from the central bank's monetary policies? This is where it pays to be a technical trader and investor in the stock market. A strong case can be made that the central banks around the world simply create bubbles before the next recession and possible stock market collapse. This is why it should be a traders market for years to come. The real concern for traders and investors is going to be when the central bank can no longer inflate the stock markets higher. Until that time, trade the technical charts.
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