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Describing the financial markets as an active today is substantively an underestimation. The combination of high oil prices and problems with Fannie Mae and Freddie Mac caused sharp instability in the equity and currency market. At a certain point through the US trading session, the Dow popped 200 points within minutes, driving EUR/JPY to a record high. The market was at first very disappointed by US Treasury Secretary Paulson’s disinclination to bailout Fannie Mae and Freddie Mac, but they were pleasantly surprised by Bernanke’s offer the right to use the discount window. However their confidence was short-lived as stocks resumed their slide. The main query in the monetary markets right now is if Fannie and Freddie are too big to fail? If the government stepped in to stop the Bear Stearns meltdown from crushing the market, they are going to certainly step in to avoid a collapse in Fannie Mae or Freddie Mac because if either GSE fails, Americans will have to face the burden. Fed Chairman Ben Bernanke has already stated that the GSEs can have the right to use the discount window, which would permit them to use money directly from the Federal Reserve rather than the markets. If Fannie and Freddie's problems are not solved and they still have trouble borrowing, this means that they will have problems with lending, which is something that the US government can not jeopardize at this moment. For the currency market, it is a lose-lose circumstances for the US dollar. More problems at Fannie and Freddie would lead stocks to go lower once again, which would cause another flight to safety out of US dollars. A bailout would basically double the public debt, jeopardizing a downgrade in the US credit rating.
12:40
Posted on Jul-13-2008
