Global economy, global credit crunch

Reminding us that problems of mortgage lenders -- and the financial markets that back them -- are global, the Bank of England has been forced to bail out one of Britain's biggest lenders, Northern Rock, to stop a bank run. From this picture a reader of the blog Calculated Risk e-mailed from London, looks like they were able to quell the panic (see the BBC's roundup of stories).

While much of the attention in recent weeks has been focused on what the Federal Reserve will do next, this incident highlights the international nature of the global credit crunch. Foreign investors -- especially countries that export a lot of goods to the U.S. like China and oil producing nations -- were once big buyers of mortgage-backed securities, but lost their taste for such investments when U.S. defaults and foreclosures soared.

Worries about the potential for losses in complex securities backed by mortgage loans have since spread to other types of debt, making it harder for corporations to borrow money.   

If you're not worried about casting a pall over your entire weekend, read Business Week's take on the enormous amount of short-term corporate debt coming due this week and next -- an estimated $417 billion. If corporations are forced to pay exorbitant interest rates to refinance this mountain of asset-backed commercial paper coming due, those costs will be passed along to consumers -- including higher rates on mortgages, credit cards and car loans.

As Inman News columnist Lou Barnes notes today, the European Central Bank has already loaned its banks $100 billion to ease the global credit crunch, giving them 90 days to repay -- "an extraordinary throwing-in-of-towel, as central banks typically inject liquidity only overnight or for a few days," Barnes writes.

Barnes said he continues to be astonished at "the absence of grip and clarity among the authorities about the extent and character of the credit crisis," and suggests this view is shared by officials at the International Monetary Fund.

Barnes, like most other observers, says it's a given that the Fed will cut the overnight federal funds rate "a bit" on Tuesday (and then have "something murky and inane to say" about the move), but that long-term rates depend on economic data coming out in coming weeks.

There's also some speculation that the Fed will cut the discount rate again, as it did on Aug. 17, to give banks a place to run to in an emergency. Although banks don't like to use the discount window because it's costly and could tarnish their image, they borrowed $7.2 billion that way Wednesday -- the biggest one-day withdrawal since after the 9/11 attacks. That's yet another indication that the credit crunch ain't going away anytime soon (see AP story).

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