LEFT OF DAYTON

Time for Bank Rationalization [Gaurdian UK]

February 4, 2009
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Time for Bank Rationalization

By Dean Baker Guardian(UK)

February 2, 2009

http://www.guardian.co.uk/commentisfree/cifamerica/2009/feb/02/obama-bad-bank-plan

Leaks in the media indicate that the banks are about to inhale another helping of taxpayer dollars. This round is likely to be considerably larger than the $350 billion that they swallowed in the bailout last October.

The leaks from Obama administration officials without names suggest that the money will provide a further subsidy to bank executives and shareholders and may not even resolve the banks’ financial crisis. In other words, the banks may yet come back for more.

The rumored plan is for the government to buy up hundreds of billions of dollars of bad debt from banks and place it in a “bad bank.” The bad bank would then resell these assets for whatever price it could get from private buyers.

The basic problem with this sort of plan is that it requires that the government overpay for the bad assets. If we just pay Citigroup, Bank of America, and the rest what their assets are worth, then they would be bankrupt. They have taken enormous losses on these assets. If they had to own up to their losses, it would wipe out the capital of many, if not most, of the banks in the country.

Recent estimates from Goldman Sachs and Nouriel Roubini put the cumulative losses to the banking system at around $2.0 trillion. There is a lot of room for guess work in such estimates, but there can be little doubt that this number is in the right neighborhood.

We are in the process of losing $8 trillion in housing bubble wealth. Most of this will be absorbed by homeowners, but if just 10 percent of this loss accrues to banks, that would be $800 billion. In addition, banks have lent $3 trillion to support a bubble in commercial real estate. If one third of these more speculative loans go bad, and half of that loss is incurred by banks, that gets us another $500 billion. Add in $200 billion each in losses on credit card debt, car loans, and small business loans, all of which are now far shakier because borrowers no longer have home equity as a backdrop, and you get to the $2 trillion neighborhood.

This $2 trillion loss compares with bank capital of just $1.4 trillion, a large portion of which is rapidly disappearing “goodwill.” In other words, the losses to the banking system will almost certainly vastly exceed its capital. This is why the banks need to tap our wallets.

If we go the bad bank route and pay too much for bad assets, then taxpayers are effectively subsidizing bank shareholders, who would otherwise be wiped out, and bank executives, who would otherwise be looking at big pay cuts or unemployment.

But it gets even worse. There is no reason to think that the bad bank route will be sufficient for resolving the banks problems, at least not in Round I, because they may not come clean with all their bad assets.

It is important to remember that these banks are run by people who could not see an $8 trillion housing bubble. It is likely that they still don’t know the full seriousness of their problems. (The same can be said of Treasury Secretary Tim Geitthner and National Economic Advisor Larry Summers, the bad bank’s designers.)

Many of their loans have not yet gone bad. For example, underwater mortgages that are still current. The bad news on these loans will come when homeowners have to make short sales, which could leave banks with losses of $100k, or more, per loan. This means that the “bad bank” created under this plan will have to be an ongoing business, handing out more taxpayer dollars for the banks’ junk over the next several years.

There is a simple alternative, which can be called “bank rationalization” in order to avoid the “n” word. Under this scenario, the government would take possession of insolvent banks. This is not interference with the market, it is the market. Bankrupt banks go out of business, but due to their importance to the economy, we can’t let them be tied up in bankruptcy proceedings for years.

Dealing with the matter all at once can both allow for a quicker fix to the financial system and also ensure fairer treatment of bank creditors. First, the shareholders of bankrupt institutions must be forced to eat their losses. However, we may not want to honor all the debts of the banks at 100 cents on the dollar, which has been current practice.

While the government has guaranteed most deposits, it has not guaranteed the bonds and commercial paper of the banks, nor their commitments on credit default swaps (CDS) and other derivative instruments. If it takes possession of all the bankrupt banks at once, it can apply a uniform policy. For example, it could honor bonds at 90 cents on the dollar or only pay off full CDS obligations to those who actually own the bond that was being insured against default.

To force banks to own up to insolvency, bank rationalization can apply punitive terms to banks that fail subsequently and allow their creditors to hold bank executives personally liable for their losses. Such rules would lead to more truth telling from our bankers.

In short, bank rationalization is both much fairer and better for the economy than the bad bank plan. If only the people who missed the housing bubble can be forced to recognize this fact.


Excess Debt and Deflation = Depression

December 13, 2008
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I’m trying my best to understand the current economic crisis. I thought the the following article was very illuminating.

Global Research, December 12, 2008

Irving Fisher (1867 – 1947) was perhaps the most noted economist of his day. The Concise Encyclopedia of Economics calls him “one of America’s greatest mathematical economists and one of” its clearest writers. He earned special acclaim for his work on monetary and statistical theory, policy, index numbers, econometrics, and the distinction between real and nominal interest rates.

He’s also remembered for having made one of the worst and most ill-timed ever stock market calls that cost him his reputation and millions in the subsequent crash – on October 17, 1929 (a week before Black Thursday) when he said “stock prices had reached what looks like a permanently high plateau.” (more…)


THE FOX IN THE CHICKEN COOP/WHITHER THE “BAILOUT”??

November 22, 2008
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Speculation and suspicion about what political position the “most liberal” Senator, now President Elect Barack Obama, will assume once he arrives in office abounds. I understand the need to “hit the ground running”, especially considering the dire circumstances of the economy. At the same time, from this distant post,it starting to look like  the new administration is going to epitomize the line out of the old Who song, Won’t Get Fooled Again…”meet the new boss, same as the old boss…”
Hillary at State, Gates still guarding the coop at Defense. OMG. Really?
One unrepentant hawk, Gates, and saber rattling Hillary.
k, maybe Obama can focus them on HIS vision. Maybe.
With those two  he risks alienating the left even more on policy toward Iraq & Afghanistan.
He wants to stay; she’s never regretted her vote [“thought the prez was going to use diplomacy….]

And for the  Treasury post  we have the president of the New York Fed, Timothy F Geithner, from the District Bank most linked to Wall Street. Partnered with Current Treasury Secretary Paulson and Fed chairman Bernake, Geithner has been one of the architects of the current Bailout fiasco.
How well has THAT worked??? Trying to save the Monopoly Capitalist system before main street totally collapses has proven to be a task beyond the capabilities of our current technicians.

I don’t pretend to have answers but a couple of things seem clear. “saving” the big 3 looks to me like a better bet than giving Billions to banks so they can buy other banks, pay off dividends and golden parachutes and hold half million dollar weekend junkets.

Dayton’s economy is so far down the tank [the view from this post on Main Street] that another blow coming in the form of closing local GM facilities, may be one that it takes years [if ever] to recover from. With some three million direct &  related jobs on the line nationally,  the fallout in cities with GM plants and suppliers will absolutely be devastating.

And oh yes, the “big 3” did it to themselves, anyone with a brain can see that. There are cars in Japan that get 50 miles to the gallon of gas. Detroit, with the help of DEMOCRAT legislators like the recently deposed John Dingell, has resisted higher fuel & emission  standards, further digging itself in the hole as it produced various SUV behemoths that just increased USA dependence on foreign oil.

Maybe some form of nationalization is what we need.
Dump the guys who so very stupidly flew to Washington in separate corporate jets.
Implement a “Manhattan Project”  for cars?
Because giving the fox access to the chicken coop is NOT working

Some pertinent viewpoints:

Honeymoon: Left Cuts Obama Slack for Now

By: Ryan Grim and Glenn Thrush
November 21, 2008 02:41 PM EST
<http://www.politico.com/news/stories/1108/15845.html>
_____________________________________________

Dingell Loses to Waxman and Auto Stocks Dive
Call It What It Is: Corruption

By Joshua Holland, AlterNet
Posted on November 21, 2008
AlterNet
<http://www.alternet.org/story/107974/>


Miscellaneous Posts I found Interesting>>01/23/08

January 23, 2008
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Army Gets Fewer High School Grads in ’07
http://ap.google.com/article/ALeqM5jGqkVjgOw8nOOgvDqpNAlfqXIF_g

Deregulation and the Financial Crisis
by Robert Weissman
http://www.commondreams.org/archive/2008/01/22/6531/




Chicken Little and the Mortgage-Housing Crisis

November 29, 2007
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Maybe Chicken Little is right, the sky IS falling! I don’t know about you but the news about the resignation of Citigroup CEO Charles Prince, [who will no doubt exit the crisis with his pockets stuffed…] coming on the heels of an announced loss over at Merrilly-Lynched of about 8 BILLION DOLLARS, is starting to sound more and more like the dam is slowly breaking apart. I’m no Paul Krugman or Thomas Friedman economist type….but the creaking I hear sure don’t sound good.

On Sunday, the chairman and chief exec of Citigroup, Inc., Charles Prince, threw in his ATM card and stepped down — this as the bank announced it would probably have to write off 11 BILLION dollars in subprime mortgage losses……now, if this sounds a bit like old news, it may be because Citicorp just wrote down 6.5 BILLION lastquarter

.http://www.biggerpockets.com/renewsblog/2007/11/05/subprime-mortgage-crisis-brings-citigroup-ceo-down-in-flames/

Thats TWO companies, and 25 Billion Dollars. And, it doesn’t even begin to add in the fallout from the really big mortgage & housing construction companies, AND Fannie & Sallie Mae…drip drip drip…


Mortgage Crisis deja vu: A Catastrophe Foretold

October 26, 2007
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“Increased subprime lending has been associated with higher levels of delinquency, foreclosure and, in some cases, abusive lending practices.” So declared Edward M. Gramlich, a Federal Reserve official.

NY Times op-ed columnist

Paul Krugman. 10/26/07

These days a lot of people are saying things like that about subprime loans — mortgages issued to buyers who don’t meet the normal financial criteria for a home loan. But here’s the thing: Mr. Gramlich said those words in May 2004.

And it wasn’t his first warning. In his last book, Mr. Gramlich, who recently died of cancer, revealed that he tried to get Alan Greenspan to increase oversight of subprime lending as early as 2000, but got nowhere.

So why was nothing done to avert the subprime fiasco?

Before I try to answer that question, there are a few things you should know.

First, the situation for both borrowers and investors looks increasingly dire.

A new report from Congress’s Joint Economic Committee predicts that there will be two million foreclosures on subprime mortgages by the end of next year. That’s two million American families facing the humiliation and financial pain of losing their homes.

At the same time, investors who bought assets backed by subprime loans are continuing to suffer severe losses. Everything suggests that there will be many more stories like that of Merrill Lynch, which has just announced an $8.4 billion write-down because of bad loans — $3 billion more than it had announced just a few weeks earlier.

Second, much if not most of the subprime lending that is now going so catastrophically bad took place after it was clear to many of us that there was a serious housing bubble, and after people like Mr. Gramlich had issued public warnings about the subprime situation. As late as 2003, subprime loans accounted for only 8.5 percent of the value of mortgages issued in this country. In 2005 and 2006, the peak years of the housing bubble, subprime was 20 percent of the total — and the delinquency rates on recent subprime loans are much higher than those on older loans.

So, once again, why was nothing done to head off this disaster? The answer is ideology.

In a paper presented just before his death, Mr. Gramlich wrote that “the subprime market was the Wild West. Over half the mortgage loans were made by independent lenders without any federal supervision.” What he didn’t mention was that this was the way the laissez-faire ideologues ruling Washington — a group that very much included Mr. Greenspan — wanted it. They were and are men who believe that government is always the problem, never the solution, that regulation is always a bad thing.

Unfortunately, assertions that unregulated financial markets would take care of themselves have proved as wrong as claims that deregulation would reduce electricity prices.

As Barney Frank, the chairman of the House Financial Services Committee, put it in a recent op-ed article in The Boston Globe, the surge of subprime lending was a sort of “natural experiment” testing the theories of those who favor radical deregulation of financial markets. And the lessons, as Mr. Frank said, are clear: “To the extent that the system did work, it is because of prudential regulation and oversight. Where it was absent, the result was tragedy.”

In fact, both borrowers and investors got scammed.

I’ve written before about the way investors in securities backed by subprime loans were assured that they were buying AAA assets, only to suddenly find that what they really owned were junk bonds. This shock has produced a crisis of confidence in financial markets, which poses a serious threat to the economy.

But the greater tragedy is the one facing borrowers who were offered what they were told were good deals, only to find themselves in a debt trap.

In his final paper, Mr. Gramlich stressed the extent to which unregulated lending is prone to the “abusive lending practices” he mentioned in his 2004 warning. The fact is that many borrowers are ill-equipped to make judgments about “exotic” loans, like subprime loans that offer a low initial “teaser” rate that suddenly jumps after two years, and that include prepayment penalties preventing the borrowers from undoing their mistakes.

Yet such loans were primarily offered to those least able to evaluate them. “Why are the most risky loan products sold to the least sophisticated borrowers?” Mr. Gramlich asked. “The question answers itself — the least sophisticated borrowers are probably duped into taking these products.” And “the predictable result was carnage.”

Mr. Frank is now trying to push through legislation that extends moderate regulation to the subprime market. Despite the scale of the disaster, he’s facing an uphill fight: money still talks in Washington, and the mortgage industry is a huge source of campaign finance. But maybe the subprime catastrophe will be enough to remind us why financial regulation was introduced in the first place.


NY Times: Reports Suggest Broader Losses From Mortgages Worse Than Expected

October 25, 2007
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By VIKAS BAJAJ and EDMUND L. ANDREWS

Published: October 25, 2007

Every time economists and Wall Street executives think they have acknowledged the full extent of the losses from the meltdown in real estate mortgages, more bad news turns up.

 

Merrill Lynch said yesterday that it would take a charge for mortgage-related securities on its books that is $3 billion more than the $5 billion it expected just two weeks ago. And a report from the National Association of Realtors showed that sales of existing homes in September fell twice as much as economists had expected, to their lowest level in nearly 10 years.

Stocks fell sharply early yesterday on the news, with the Standard & Poor’s 500-stock index falling 1.8 percent before recovering in the afternoon. Investors also bid up Treasuries as they sought the safety of government-backed debt.

At this juncture, economists say the troubles in the mortgage market could, all told, cost financial firms and investors up to $400 billion.

That is far more than the roughly $240 billion cost, adjusted for inflation, of the savings and loan crisis of the early 1990s, according to estimates of the combined financial toll of that crisis on both the federal government and private sector. The loss in total real estate wealth is expected to range from $2 trillion to $4 trillion, depending on how far home prices fall, according to several economists.

Read the whole article @

http://www.nytimes.com/2007/10/25/business/25mortgage.html?_r=1&ref=business&oref=slogin


Monetary Crisis Bigger than Dayton…Saving the City??

August 11, 2007
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Two articles today which point to much larger economic issues that will inevitably impact life in the Valley of the Miami’s…I make no claim to being anymore astute on Monetary Policy than the average guy on the street, but the link here is clear. Montgomery County has one of the highest home foreclosure rates in the country, impacting hundreds, if not thousands of Valley residents. Unstable home mortgages are a fundamental and underlying crack in the economic dike and the question may well be whether the crack can be fixed without major pain. The question to  ask on a local level is what our County and City officials doing to prepare for and address before it becomes overwhelming.

Next week I plan to ask some of those officials what they are going to do. In the meantime read and educate yourself>>>

First  Paul Craig Roberts gives a follow up to his article  about being “In the Hole to China” which I posted yesterday >>>>

China’s “Nuclear Option” is real

By Paul Craig Roberts

08/11/07 “ICH‘ — — Twenty-four hours after I reported China’s announcement that China, not the Federal Reserve, controls US interest rates by its decision to purchase, hold, or dump US Treasury bonds, the news of the announcement appeared in sanitized and unthreatening form in a few US news sources.

The Washington Post found an economics professor at the University of Wisconsin to provide reassurances that it was “not really a credible threat” that China would intervene in currency or bond markets in any way that could hurt the dollar’s value or raise US interest rates, because China would hurt its own pocketbook by such actions.

US Treasury Secretary Henry Paulson, just back from Beijing, where he gave China orders to raise the value of the Chinese yuan “without delay,” dismissed the Chinese announcement as “frankly absurd.”

Both the professor and the Treasury Secretary are greatly mistaken.

First, understand that the announcement was not made by a minister or vice minister of the government. The Chinese government is inclined to have important announcements come from research organizations that work closely with the government. This announcement came from two such organizations. A high official of the Development Research Center, an organization with cabinet rank, let it be known that US financial stability was too dependent on China’s financing of US red ink for the US to be giving China orders. An official at the Chinese Academy of Social Sciences pointed out that the reserve currency status of the US dollar was dependent on China’s good will as America’s lender.

What the two officials said is completely true. It is something that some of us have known for a long time. What is different is that China publicly called attention to Washington’s dependence on China’s good will. By doing so, China signaled that it was not going to be bullied or pushed around.

The Chinese made no threats. To the contrary, one of the officials said, “China doesn’t want any undesirable phenomenon in the global financial order.” The Chinese message is different. The message is that Washington does not have hegemony over Chinese policy, and if matters go from push to shove, Washington can expect financial turmoil.

Paulson can talk tough, but the Treasury has no foreign currencies with which to redeem its debt. The way the Treasury pays off the bonds that come due is by selling new bonds, a hard sell in a falling market deserted by the largest buyer.

Paulson found solace in his observation that the large Chinese holdings of US Treasuries comprise only “one day’s trading volume in Treasuries.” This is a meaningless comparison. If the supply suddenly doubled, does Paulson think the price of Treasuries would not fall and the interest rate not rise? If Paulson believes that US interest rates are independent of China’s purchases and holdings of Treasuries, Bush had better quickly find himself a new Treasury Secretary.

Now let’s examine the University of Wisconsin economist’s opinion that China cannot exercise its power because it would result in losses on its dollar holdings. It is true that if China were to bring any significant percentage of its holdings to market, or even cease to purchase new Treasury issues, the prices of bonds would decline, and China’s remaining holdings would be worth less. The question, however, is whether this is of any consequence to China, and, if it is, whether this cost is greater or lesser than avoiding the cost that Washington is seeking to impose on China.

American economists make a mistake in their reasoning when they assume that China needs large reserves of foreign exchange. China does not need foreign exchange reserves for the usual reasons of supporting its currency’s value and paying its trade bills. China does not allow its currency to be traded in currency markets. Indeed, there is not enough yuan available to trade. Speculators, betting on the eventual rise of the yuan’s value, are trying to capture future gains by trading “virtual yuan.” The other reason is that China does not have foreign trade deficits, and does not need reserves in other currencies with which to pay its bills. Indeed, if China had creditors, the creditors would be pleased to be paid in yuan as the currency is thought to be undervalued.

Despite China’s support of the Treasury bond market, China’s large holdings of dollar-denominated financial instruments have been depreciating for some time as the dollar declines against other traded currencies, because people and central banks in other countries are either reducing their dollar holdings or ceasing to add to them. China’s dollar holdings reflect the creditor status China acquired when US corporations offshored their production to China. Reportedly, 70% of the goods on Wal-Mart’s shelves are made in China. China has gained technology and business knowhow from the US firms that have moved their plants to China. China has large coastal cities, choked with economic activity and traffic, that make America’s large cities look like country towns. China has raised about 300 million of its population into higher living standards, and is now focusing on developing a massive internal market some 4 to 5 times more populous than America’s.

The notion that China cannot exercise its power without losing its US markets is wrong. American consumers are as dependent on imports of manufactured goods from China as they are on imported oil. In addition, the profits of US brand name companies are dependent on the sale to Americans of the products that they make in China. The US cannot, in retaliation, block the import of goods and services from China without delivering a knock-out punch to US companies and US consumers. China has many markets and can afford to lose the US market easier than the US can afford to lose the American brand names on Wal-Mart’s shelves that are made in China. Indeed, the US is even dependent on China for advanced technology products. If truth be known, so much US production has been moved to China that many items on which consumers depend are no longer produced in America.

Now let’s consider the cost to China of dumping dollars or Treasuries compared to the cost that the US is trying to impose on China. If the latter is higher than the former, it pays China to exercise the “nuclear option” and dump the dollar.

The US wants China to revalue the yuan, that is, to make the dollar value of the yuan higher. Instead of a dollar being worth 8 yuan, for example, Washington wants the dollar to be worth only 5.5 yuan. Washington thinks that this would cause US exports to China to increase, as they would be cheaper for the Chinese, and for Chinese exports to the US to decline, as they would be more expensive. This would end, Washington thinks, the large trade deficit that the US has with China.

This way of thinking dates from pre-offshoring days. In former times, domestic and foreign-owned companies would compete for one another’s markets, and a country with a lower valued currency might gain an advantage. Today, however, about half of the so-called US imports from China are the offshored production of US companies for their American markets. The US companies produce in China, not because of the exchange rate, but because labor, regulatory, and harassment costs are so much lower in China. Moreover, many US firms have simply moved to China, and the cost of abandoning their new Chinese facilities and moving production back to the US would be very high.

When all these costs are considered, it is unclear how much China would have to revalue its currency in order to cancel its cost advantages and cause US firms to move enough of their production back to America to close the trade gap.

To understand the shortcomings of the statements by the Wisconsin professor and Treasury Secretary Paulson, consider that if China were to increase the value of the yuan by 30 percent, the value of China’s dollar holdings would decline by 30 percent. It would have the same effect on China’s pocketbook as dumping dollars and Treasuries in the markets.

Consider also, that as revaluation causes the yuan to move up in relation to the dollar (the reserve currency), it also causes the yuan to move up against every other traded currency. Thus, the Chinese cannot revalue as Paulson has ordered without making Chinese goods more expensive not merely to Americans but everywhere.

Compare this result with China dumping dollars. With the yuan pegged to the dollar, China can dump dollars without altering the exchange rate between the yuan and the dollar. As the dollar falls, the yuan falls with it. Goods and services produced in China do not become more expensive to Americans, and they become cheaper elsewhere. By dumping dollars, China expands its entry into other markets and accumulates more foreign currencies from trade surpluses.

Now consider the non-financial costs to China’s self-image and rising prestige of permitting the US government to set the value of its currency. America’s problems are of its own making, not China’s. A rising power such as China is likely to prove a reluctant scapegoat for America’s decades of abuse of its reserve currency status.

Economists and government officials believe that a rise in consumer prices by 30 percent is good if it results from yuan revaluation, but that it would be terrible, even beyond the pale, if the same 30 percent rise in consumer prices resulted from a tariff put on goods made in China. The hard pressed American consumer would be hit equally hard either way. It is paradoxical that Washington is putting pressure on China to raise US consumer prices, while blaming China for harming Americans. As is usually the case, the harm we suffer is inflicted by Washington.

Article originally posted at

http://www.informationclearinghouse.info/article18154.htm

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The second article comes from this mornings NY Times and addresses the impact of the mortgage crisis on the the global marketplace>>>>>>>>>>>>>

Central Banks Intervene

to Calm Volatile Markets

 

Patrick Andrade for The New York Times

By VIKAS BAJAJ

Published: August 11, 2007

Central banks around the world acted in unison yesterday to calm nervous financial markets by providing an infusion of cash to the system. But stocks still fell sharply in Asia and Europe, and in early trading in New York, before they recovered and closed essentially flat for the day on Wall Street.

 

 

 

 

Enlarge This Image

Mauricio Lima/Agence France-Presse — Getty Images

Traders in Brazil negotiating in the pit. Global stock markets fell for a second day running with investors dumping shares on fears of a widening economic crisis caused by a global credit crunch.

 

Enlarge This Image

Wally Santana/Associated Press

Mortgage debt problems are roiling the global economy. Above, watching the markets in Taipei.

As in recent weeks, the markets moved in wild swings — sharp drops were followed by steep gains and vice versa — underscoring the uncertainty. Investors weighed concerns that losses in the American mortgage market would deepen and spread against their faith in the ability of a strong global economy to withstand additional shocks.

Hoping to provide some comfort that there is ample cash available, the Federal Reserve made its largest intervention since the markets reopened Sept. 19, 2001, in the wake of the terrorist attacks. The central bank injected $38 billion into the financial system on top of the $24 billion it put in on Thursday.

The intervention steadied the markets — at least for the day. The Standard & Poor’s 500-stock index closed at 1,453.64, a gain of 0.55 point, and the Dow Jones industrial average closed down 31.14 points, to 13,239.54. For the week, the Dow was up 0.4 percent, the S.& P. 500 rose 1.4 percent and the Nasdaq was up 1.3 percent.

The question that remains is just how exposed the financial system and the economy are to losses in the credit markets and the increase in borrowing costs. The answer will set the agenda at the Federal Reserve, which finds itself confronting its first major financial crisis under the leadership of Ben S. Bernanke, who took over last year.

The Fed will be guided by its assessment of how much do banks, hedge funds, pension funds and others stand to lose and whether consumers and businesses will be able to stomach higher interest rates and stricter loan underwriting.

“There are a lot of risks in front of us,” said Liz Ann Sonders, chief investment strategist at Charles Schwab. “Financial crises, in the past, when not accompanied with a recession have been good for the markets.”

But, she added, “if the economic landscape deteriorates much from here, then we are going to have to suffer through a more difficult market period.”

That debate, Ms. Sonders and others agree, will not be resolved anytime soon, which suggests that markets will remain choppy as information about failing hedge funds and mortgage companies dribbles out.

Investor anxiety has been so heightened in recent weeks that days of stability have been shattered by the first sign of trouble tied to the debt markets.

Volatility, as measured by one popular index of options trading, has surged to its highest levels in more than four years, though it remains far lower than it was early this decade and in the late 1990s.

The financial sector has been among the most volatile — stocks there fell by as much as 1.7 percent during the day, only to climb as much as 1.1 percent before closing little changed.

Shares of Countrywide Financial, the nation’s largest mortgage lender, and Washington Mutual, the sixth-biggest lender, opened sharply lower after both companies said they were facing a harder time selling loans and could potentially have problems raising money.

While those stocks recovered much of their losses for the day, they are both down significantly for the year.

A common pattern has been a surge in trading late in the afternoon, around 3 p.m., that has often sent stocks higher, as it did yesterday — though on some days, like Thursday, the move has been just as sharp on the downside.

Richard X. Bove, an analyst at Punk Ziegel & Company, noted the trend in a recent note to investors and suggested that the reason was strong buying from portfolios that use computer models to buy and sell quickly, a practice known as program trading, or a foreign source like the investment arm of the Chinese government.

“We are talking about such a sizable amount of buying and volume goes up and stocks react strongly one way or the other,” Mr. Bove said. “What I have trouble with is trying to figure out where it’s coming from.”

But he acknowledges that the pattern will probably not last long, because as sophisticated traders figure it out they will jump in on the other side to profit from the trades.

Using data from the New York Stock Exchange, Ms. Sonders of Charles Schwab estimates that program trading accounted for about 40 percent of all trades on the Big Board in recent days, up from the 30 percent range earlier this year.

“That’s why we are getting these swings, this is professional- to-professional trading,” she said. “This is money that has a time horizon measured in minutes.”

Indeed, there is evidence that the average individual investor has not been a big player in recent days.

Flows into mutual funds that specialize in American stocks were essentially flat for the week that ended on Wednesday, according to AMG Data Services. But investors put $36.2 billion into money market accounts, the largest weekly inflow this year. Investors often put cash into money market funds, which earn more than savings accounts, that they eventually plan to invest in the market.

It is not surprising that individuals are sitting on the sidelines, given the sharp moves in the market. Yesterday, for instance, all three major American indexes fell immediately after the opening bell, and at one point the Dow Jones industrial average was down 212 points. By noon, stocks were on the rebound and the indexes were briefly in positive territory, then declined. The Nasdaq finished at 2,544.89, down 11.60, or 0.4 percent.

“You can’t invest into a market that does that,” Mr. Bove said. “You have a better chance at making money on the craps table than in this market.”

Treasury prices were little changed yesterday. The 10-year note fell 9/32, to 99 18/32 and the yield, which moves in the opposite direction from the price, rose to 4.81 percent, from 4.77 percent on Thursday.

Earlier, stocks in Japan, Hong Kong and Australia dropped by more than 2.5 percent. The benchmark Kospi in South Korea fell 4.3 percent, the biggest decline since June 2004. Most major European indexes plunged by 3 percent or more.

In both Asia and Europe, fears about the American housing market prompted investors to sell assets and forced commercial banks to reel in credit lines.

Central banks around the work stepped up efforts to slow the losses. The Bank of Japan added liquidity for the first time since the market problems began.

The European Central Bank injected money into the system for a second day, adding another 61 billion euros ($84 billion), after providing 95 billion euros the day before. The Federal Reserve yesterday added $19 billion to the system through the purchase of mortgage-backed securities, then another $19 billion in three-day repurchase agreements.

In Washington, Treasury Secretary Henry M. Paulson Jr. spent the day in what his aides said was hourly contact with the Fed, other officials in the administration, finance ministries and regulators overseas and people on Wall Street — where until last year he had worked as an executive at Goldman Sachs.

“We’ve been in touch with our colleagues in other agencies and among the financial regulators and are monitoring the situation carefully,” said Michele Davis, the Treasury Department spokeswoman. “Beyond that, we are not commenting.”

As investors in Asia sold off assets considered relatively risky, like Philippine stocks, they bought those considered safer, like Japanese government bonds. Asian currencies like the Thai baht also retreated against the dollar and more liquid and stable currencies like the yen.

“Everyone’s been talking about a credit crunch, and not surprisingly it turned into one,” said Jan Lambregts, head of Asia research at Rabobank.

While Asian banks did not seem to be directly affected, he said, “the main problem is we don’t know who is bearing the losses, and that kind of uncertainty is creating the situation that we’re in right now.”

Wayne Arnold, Steve Weisman and Jeremy W. Peters contributed reporting.

 

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