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A Newer Deal for the Economy

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Lower bank rates necessary for bailout to succeed.

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One major international bank after another is collapsing; they're either being nationalized or sold off in sections. Although a bailout plan for beleaguered banks has been passed by the US Senate, the House of Representatives has yet to approve it.

There's a sudden shortage of US dollars in global money markets. Major central banks are injecting enormous amounts of money into money-market systems worldwide.

Japan and the US are already in economic recession, while Europe is on the brink. The economy of China, which has been the major driving force behind global economic growth, is slowing down, which is causing commodity prices to decline.

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Understandably, equity markets worldwide are finding themselves in sharp bear markets.

The causes of the above are legion, but can be summarized as follows: Money-hungry financial institutions lent too much money too readily to eager individuals and institutions for the purchase of overvalued assets. If the one who bought last cannot find a buyer, he -- as well as the one who financed him -- will be in trouble. This has a domino effect, as no one wants to buy or take over the debt.

The critical positions in which the banks find themselves have led to virtually frenzied activity in all financial markets as they tried to reduce their risks and neutralize market positions at all costs, and take out cover on other assets. This is similar to the 1920s in the US when banks allowed investors to use equities as collateral. When equity prices dropped, the investors could not repay their debt, resulting in the banks holding collateral that had no value. Many of the banks subsequently went bankrupt.

The question is: What now?

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No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

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