US action gives markets a boost
Over the weekend, the US Treasury came out with further backing of US home loan government sponsored enterprises, Fannie Mae and Freddie Mac. The deal is essentially one of the biggest interventions by government in private financial markets. Although the 2 enterprises were initially government sponsored, they were run privately and indeed listed on the New York Stock Exchange.
These 2 entities allowed financial institutions to continue to lend, by buying and holding mortgages, and in this way essentially greased the lines of credit to the private homeowner.
US credit, financial and fixed property markets have been in a tailspin, for a year. One of the cogs in the system that was not working was the buying of mortgages by the 2 GSE’s as their balance sheets came under immense pressure.
The US government in the form of the US Treasury had no choice but to step in and place the 2 entities into conservatorship in terms of the new Housing and Economic Recovery Act of 2008, in order to stabilise credit markets.
This allows Treasury to advance funds for the purposes of stabilising the 2 entities, with a limit only to the total amount of federal government debt that the government is able to raise. This US federal government debt limit has been raised on a steady basis over the years, but was raised in one large dose of USD0,8 trillion, lifting the total US debt ceiling to USD10,7 trillion.
The deal gave an immediate boost to the global markets, especially financial companies.
The JSE had a torrid time with the market closed due to technical reasons for most of the day, but Financials had given it a boost. Currently the JSE All Share index is up 2,5% with Financials up 4%.
The London Stock Exchange also broke down in their biggest technical failure in 8 years. This on the day that Europe posted their biggest gains in 5 months.
So all in all an exciting day on global markets. Only time will tell if what the US government did was the right thing, but the sheer magnitude of the problem left them with little choice.
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