'Sheer terror' in financial markets contrasts with sound fundamentals: economist
Mon Aug 20, 12:47 PM
ca.news.finance.yahoo.com
By Laura Bobak
TORONTO (CP) - There is a "crisis of confidence in the financial system" that is not grounded in economic reality and should be quelled to prevent "contagion" beyond the markets, a TD Bank economist says in a special report issued Monday.
"Contagion into the broader economy seems unlikely at present," Richard Kelly, a senior economist at TD Economics (TSX: TD.TO), wrote but he nevertheless outlined several indicators to watch for.
He said the current turmoil is the fourth U.S. disruption in 20 years that has forced the Federal Reserve to inject liquidity into financial markets, but the first featuring such as profound gap between the level of emotion and the underlying economic landscape.
The U.S. did not slip into recession after the last three times the feds injected cash into financial markets to soothe frazzled investors, he said.
"The unique feature about the current turmoil is the near total disconnect between the economic fundamentals and the sheer terror in financial markets," Kelly wrote.
"This is no longer an issue about subprime mortgages, the U.S. housing market, or the U.S. or even global economy. Rather, this is a crisis of confidence in the financial system. There is reduced trust between institutions," Kelly wrote.
The anxiety setting the tone for trading and investment around the world right now is counter-productive, Kelly wrote.
"Profit is the mother of invention in financial markets, but fear is the father of destruction. And unfortunately, they do tend to come in tandem," he wrote.
Montreal-based National Bank said Monday it is acquiring about $2 billion worth of asset-backed commercial paper, or short-term loans, to help ease a liquidity problem that erupted last week among a number of non-bank Canadian financial services firms.
National Bank, the sixth-largest Canadian chartered bank, was among 10 signatories to the so-called Montreal Proposal for dealing with a lack of buyers for asset-backed commercial paper managed by Toronto-based Coventree Inc. (TSX: COF.TO) and other non-bank firms. |
