Markets Start to Calm After Cash Injections

The specter of a credit crunch looms over the world's financial markets, but investors' fears have begun to settle. The European Central Bank pumped more money into the financial system Monday, and investment bank Goldman Sachs put $3 billion into one of its troubled hedge funds.

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JOHN YDSTIE, host:

It's MORNING EDITION from NPR News. Steve Inskeep is on assignment. I'm John Ydstie.

RENEE MONTAGNE, host:

And I'm Renee Montagne.

We turn first this hour to the markets, which continued to be haunted worldwide by a credit crunch.

In Asia, there's no sign of the panic selling of last week. Still, investors in Asia and Europe seem to be taking a cue from the U.S. and remain cautious. Yesterday, the European Central Bank pumped more money into the financial system, even after injecting more than $200 billion last week in an effort to calm markets there.

And here in the U.S., the giant investment bank Goldman Sachs said it would put $3 billion into one of its troubled hedge funds. Overall, yesterday was a calm day on Wall Street, with none of the wild volatility and panicky selling that have characterized the markets lately.

NPR's Jim Zarroli reports.

JIM ZARROLI: For weeks, the markets have been grappling with the fallout from the subprime lending debacle. There has been a big increase in defaults and delinquencies that has dragged down some big mortgage lenders. And that has hurt some hedge funds, which tend to be major investors in mortgage-backed securities.

Yesterday the markets seemed to return to normal. There was a report from the Commerce Department that retail sales went up in July, and for once the good news wasn't drowned out by fear and anxiety.

Jim Paulson of Wells Capital Management says the fact that the markets even seem to pay attention to the news was encouraging.

Mr. JIM PAULSON (Wells Capital Management): A lot of what the market's had been trading on in the last couple of weeks has been rumor and nightmarish scenarios. And today it started back maybe - I hope it will continue to trade more in fundamental reports.

ZARROLI: Paulson says there has been some other good news in the markets that hasn't been wildly noted. Stock in smaller companies has done well. And banking stocks, which have been battered lately, are faring a bit better. The good news suggests that efforts by the world's central banks to reassure the markets may be having some impact. But neither Paulson nor anyone else is breathing too much easier.

James Bianco of Bianco Economic Research says there's still a lot of fear in the markets right now.

Mr. JAMES BIANCO (President, Bianco Economic Research): I think we're more in the eye of the hurricane right now. Whatever issues we had late last week were not resolved today. Yes, the stock market is showing a bit of a gain, but all of the concerns that we had about credit and with subprime are still there.

ZARROLI: One source of worry lately has been that more big hedge funds are about to fail. And there have been repeated rumors about Goldman Sachs and Merrill Lynch funds. Yesterday, Goldman tried to squelch those rumors. It said it would pump $3 billion into one of its most troubled funds, though it stopped short of calling the move a bail out. The move was a stark reminder of the uncertainties facing big investment banks. But it also underscored the fact that whatever their losses, the big banks still have plenty of resources to help them through their current troubles.

Jim Zarroli, NPR News, New York.

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Pumping Money: Financial Market Liquidity Explained

This week's frantic news from Wall Street sent central banks around the world pumping money into the financial system, providing liquidity, or ready cash. Adam Davidson talks to Debbie Elliott about what exactly this means.

Let's say you own a big, beautiful $1-million house. The pizza delivery guy arrives with your dinner but you don't have any cash. He doesn't care how valuable your house is; he wants you to give him some money right now.

Banks basically work the same way. Every afternoon, they add up all the money they owe and all the money they have. The banks figure out whether they need money to meet their obligations. The banks that have extra money lend it to the banks that need money in the form of very short-term, overnight loans.

That constant process of lending extra cash provides the liquidity that funds the global economy.

This normally works very easily, but this past week there was a liquidity crisis. A few key banks around the world announced to everyone's surprise that they had a lot of sub-prime mortgages and that their assets were worth much less than anyone thought.

Banks began to worry: What if there are other banks that aren't disclosing how much their assets have shrunk. It caused a panic among banks, and they reduced lending to each other.

Suddenly, other banks that needed the money didn't have the ready cash to pay off the people who needed it.

The Federal Reserve, the European Central Bank and other central banks around the world stepped in, pumping extra liquidity — billions of dollars — into the system. The central banks provide extra cash all the time, but this week the amounts were much larger than normal.

But there's a potential downside to the central banks' action. Eventually, the fear is that they would pump so much money into economy that it would cause inflation. So the Fed will be keeping its eye out against that possibility and is likely to stop long before inflation sets in.

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