Is The Financial Storm About To Break?

Financial experts say the current financial crisis isn't an echo of the Great Depression. Instead, it will look more like the worldwide downturn of the early 1980s. Central banks around the world have reduced their official interest rates, but little has changed. World financial leaders are meeting in Washington to discuss formulas to end the meltdown.

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It's Morning Edition from NPR News. Renee Montagne has been reporting from New Mexico this week. I'm Steve Inskeep, good morning. Many of the world's leading central bankers and finance ministers will finish this week in Washington, D.C. They'll be considering what to do now after so many days of stock market losses. News of a U.S. government bailout did not calm the markets. Neither did an interest rate cut that was synchronized by central bankers around the world. In a moment, we'll ask what individual investors are doing now. First, we find out how the markets are responding to government moves so far. Here's NPR's John Ydstie.

JOHN YDSTIE: Market traders had been calling for a Federal Reserve rate cut to help staunch the bleeding on Wall Street. As trading opened Wednesday, investors were reeling from a 1,350 point decline in the Dow in the previous five trading days. In answer to their calls, traders got more than they might have hoped for, a half a point drop in official interest rates by six central banks, including the Fed, the European Central Bank, the Bank of England, and central banks in Canada, Sweden, and Switzerland. For good measure, China dropped its official rate by a quarter of a percent.

But having gotten more than they expected, stock traders continued to push shares sharply lower, and the Dow ended down 189 points after a volatile day of trading. Edwin Truman of the Peterson Institute for International Economics, who has managed financial crises at the Federal Reserve and the US Treasury, says in the current environment it's hard to predict how actions will be interpreted.

Dr. EDWIN TRUMAN (Senior Fellow, Peterson Institute for International Economics): Even good news - central banks are acting together, lowering interest rates - that should help to cushion the economy is interpreted as bad news. That doesn't mean that they shouldn't have done it. But it means that expectations are a delicate thing.

YDSTIE: Truman says investors may have concluded the coordinated action was a sign that things are even worse than they'd thought, that the central bankers had taken the unprecedented action because they see a severe recession coming as the damage of the financial crisis seeps into the rest of the economy. Truman says there likely will be a severe recession, but he doesn't think we're headed for another Great Depression. He expects something more like the severe worldwide downturn of the early 1980s.

Dr. TRUMAN: It was the worst global downturn since Word War II, and we're certainly close to that. I mean, I think there's a 50-50 chance anyhow that you will have a global recession, which economists usually say is sort of global growth on average of less than two and a half percent.

YDSTIE: And the U.S. economy actually shrinking. Truman says it is likely the U.S. will come out of the recession earlier than the rest of the world since it has likely entered into a downturn sooner. Finding strategies to cushion and shorten a damaging downturn will be one of the tasks of the G7, IMF, and World Bank meetings over the next several days. Yesterday, Treasury Secretary Paulson praised the central banks for their coordinated rate cut and urged continued cooperation among countries on measures to calm markets and build confidence. However, he was cool to a proposal being circulated by British Prime Minister Gordon Brown urging that G7 nations guarantee interbank lending, which has been severely curtailed in the current crisis. Paulson did express confidence in America's ability to weather this financial storm as it has previous ones.

Secretary HENRY PAULSON (Treasury Department): We are a strong and a wealthy nation with resources to address the needs we face. I am confident that with the right policy response, time, and effort we will conquer these challenges as well.

YDSTIE: Paulson said the administration is working hard to implement the rescue package approved by Congress and signed by the president last week. He said the government hopes to begin buying up the troubled mortgage-related securities that are clogging the credit system in just a matter of weeks. But he warned that patience will be needed.

Secretary PAULSON: Neither passage of this new law nor the implementation of these initiatives will bring an immediate end to current difficulties.

YDSTIE: According to Paulson, the administration has also begun work to implement other elements of the bailout plan, including foreclosure prevention and executive compensation guidelines. John Ydstie, NPR News, Washington.

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