Confidence Where Are You?

By Andrew Paparozzi
In March 18, 2008

Confidence Where Are You?

Can the actions by the Federal Reserve along with those of government agencies restore confidence in the credit markets? The answer is yes, but it’s going to take time. The latest blow-up in the financial system resulted from the demise of Bear Stearns, and it’s fire sale purchase by JPMorgan. The concern: What else is out there? The Fed is aggressively pumping liquidity into the credit markets and easing borrowing rates. That may seem odd given that excess liquidity was a factor that started the whole mess. But at the moment, the Fed really doesn’t have a better alternative. Financial institutions are sitting on mounds of assets with uncertain value. In time, when the dust settles, some value may be determined—but currently they’re looked upon as worthless. Not exactly what you would call great collateral. To let de-leveraging proceed unabated is too much of a risk to take. Much more so than the economy, the functioning of the financial system is built on confidence.

With today’s 0.75% cut, the Fed has slashed its target for the federal funds rate (the rate at which institutions lend to themselves) by 3.00% in less than a year to 2.25%. The rate at the discount window (the rate at which member banks can borrow directly from the Fed) was also cut by 0.75%—down to 2.50%. More importantly, the window is being opened to securities firms as well as banks. In addition, the Federal Reserve previously announced a $200 billion lending facility, where it will accept mortgage-backed securities as collateral. And the facility can be expanded if needed. That the financial crisis hasn’t disappeared doesn’t mean these and previous efforts to alleviate the mortgage and credit market mess are for naught. But restoring confidence is going to take time.

It is important to remember that the Bear Stearns situation is part of a financial crisis (namely a crisis of confidence) and not necessarily an economic one. Sure, the economy has its problems and has become decidedly weaker. The March consensus forecast from Blue Chip Economic Indicators is for inflation-adjusted GDP to rise 1.5% in 2008—half the forecast made a year ago. Sure, the housing correction is not close to being over and consumers and businesses continue to be squeezed by rising prices. The economy is going through a correction, and financial difficulties can aggravate the situation. But the economy is not at a point of utter collapse.

Will lower interest rates turn things around quickly? No. Will additional liquidity turn things around quickly? No. Will some action to firm up the U.S. dollar (advisable) resolve the situation quickly? No. Are we doomed? No. Improvement will come as confidence begins to be restored in the financial system, portfolios are adjusted, and excesses, particularly in housing, are corrected. And that is going to take time. How much time? We don’t know. We do know that it’s not going to happen overnight. How deep will the economic correction be? We don’t know. We do know that companies cannot just wait it out; they must be prepared. How printers can prepare to protect their profit margins and come out of the downturn stronger than going in is discussed extensively in the NAPL SOI: 2008 Strategic Perspective, our latest report it the State of the Industry Series.

Joseph V. Vincenzino

Andrew Paparozzi

Epicomm's Andrew Paparozzi, Vice President/Chief Economist, is well-known for his accurate and thoughtful discussions on the economy and US commercial printing industry. A foremost author and speaker on economic business trends in the printing industry, Paparozzi heads Epicomm's Printing Economic Research Center.

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