Accessibility links

Global Markets in Disarray Despite US Government Efforts to Reverse Decline


Equity markets in Europe and the Americas declined sharply on Wednesday as investors worried that the overnight decision by U.S. authorities to take over the troubled insurer American International Group, or AIG, may not be enough to stem the financial crisis. VOA's Economics Correspondent Barry Wood has more.

The seizure of AIG by federal authorities is one of the biggest government interventions in the U.S. economy in history. The giant insurer, which operates worldwide, was seen as too big to fail and that its collapse would undermine the financial system. In addition to traditional insurance products, AIG is a huge player in insuring the loan portfolios of financial institutions.

On Tuesday night, the U.S. Federal Reserve, America's central bank, extended a two-year $85-billion emergency loan to AIG that will allow the firm to remain in business. In return, the government will own 80 percent of AIG and will be paid 11 percent interest on the loan.

Peter Boockvar of Miller Tabak securities says such a large government bailout of a private sector company carries significant risks.

"I mean the 85 billion they're lending to AIG, they can just turn the printing presses and create that out of thin air. And I think that is what we're seeing," said Peter Boockvar. "The response to that is that gold is up 55 dollars. The market is catching on to this. The Fed [the Federal Reserve] and the U.S. government can't just print money out of thin air and have people not pay attention."

Speaking on Bloomberg Television, Boockvar said he expects the dollar to weaken as a result of the expensive government rescue of both AIG, and Fannie Mae and Freddie Mac - the two giant government-sponsored home mortgage institutions.

The Federal Reserve and Treasury actions are intended to calm financial markets that are deeply unsettled by a 13-month credit crisis that began with a wave of home mortgage defaults related to the downturn in U.S. home prices.

Six months ago, the government rescued Bear Stearns, a big investment bank that faced bankruptcy because of losses on sub-prime mortgage loans. Lehman Brothers - the fourth largest U.S. investment bank - filed for bankruptcy this week.

This month, the government nationalized Fannie Mae and Freddie Mac after their share prices fell by nearly 90 percent. A similar share price collapse occurred with AIG.

Analyst Peter Boockvar says the loss of billions of dollars of wealth in the stock market decline will have an adverse impact on the U.S. and global economies.

"Don't be lulled into thinking there are not going to be any more AIGs or Fannie Maes, no more Lehmans [Lehman Brothers], and that everything is OK," he said. "There are going to be repercussions from this that last a long period of time."

But Ron Rimkus, a money manager at BB&T in North Carolina, says the government did the right thing in coming to AIG's rescue.

"These are important steps in the healing process, starting with Bear Stearns, getting Fannie and Freddie shored up, letting Lehman fail, getting AIG under conservatorship - these are important steps in the cleansing process," said Ron Rimkus.

The government's actions in attempting to stabilize financial markets are controversial and, thus far, have not been very successful. Many experts say stability is unlikely to be achieved until there is a recovery in the U.S. housing market - something that has not yet occurred.

XS
SM
MD
LG