With credit markets remaining under stress, and with uncertainty growing regarding the status of megabank Citigroup (NYSE: C), the U.S. Congress may have to take more action to maintain financial system stability and prevent the U.S. economy from spiraling into a deeper recession, so says economist David H. Wang.

"The U.S. Congress may have to approve a 'TARP 2,'" Wang told BloggingStocks Friday. "Whether Congress does it as part of a fiscal stimulus package, or separately, it is clear we will need more money to purchase toxic assets, improve bank capitalization and allocate funds for home mortgage refinance programs, and other financial stabilization measures. At this stage of the crisis, the $700 billion TARP is not going to be enough, in my interpretation."

Bank sector stress remains

Wang said that if Citigroup, whose CEO Vikram Pandit said has adequate capital, for some reason cannot, when needed, find additional capital in the private sector, then "the Fed and or U.S. Treasury will step in, and take necessary measures to stabilize the bank," Wang said. If the U.S. Treasury is the primary funder, "that action, and other forthcoming, planned actions by the Treasury may use up a considerable amount of TARP funds, requiring a TARP 2."

Once again, Dow 8,000 has come back into focus.

For those investors who may not follow indices closely, the 8,000 level has a psychological but not technical support, the latter of which measures such things as the number of investors who are buying / selling, whether investors are committing more money to the market etc.

Even so, right now, a battle is taking place between the bulls and the bears: the bears argue the worst economic news stemming from the financial crisis is yet to come; the bulls argue that the worst news is behind us, and that government stimulus, fiscal and monetary, will get the U.S. economy moving again.

The Dow Jones Industrial Average Wednesday closed below 8,000 at 7,997. If the bears can keep the Dow below 8,000 and then push it through 7,800, then 7,600, it will not be a pleasant time for investors.

Let's do a condensed, cross-methodology analysis to see if we can arrive at an informed investment decision / conclusion regarding where the Dow is headed, near-term.

With apologies to actor William Shatner, How big could the bailout of AIG get? Really big.

The U.S. government -- which is all of us, citizens and taxpayers -- may have to increase its investment in American International Group (NYSE: AIG) by still another $70-80 billion to keep the insurer solvent through the end of 2009.

Just call it USG-AIG

AIG, which reported $43 billion in losses tied to home mortgages in the past quarter, "will probably not function properly if it doesn't receive another cash infusion by September 2009," economist David H. Wang told BloggingStocks Tuesday. Wang based his forecast on his projection for cashed-in credit default swaps stemming from home mortgage defaults.

AIG is a major issuer of credit default swaps, actually a type of credit default insurance, which many holders of mortgage backed securities and bonds purchased to hedge against bond issuer defaults.

"If we project a rise in home mortgage defaults through Q2 2009, that will likely take credit default claims to levels that will require more money for AIG in late 2009," Wang said, although he qualified his projection by stating that it is contingent on negative U.S. GDP for Q1/Q2 2009. A U.S. economic recovery in Q2 2009 is possible, but not likely, Wang said.

AIG's shares fell 15 cents to $2.14 on Tuesday at mid-day, amid a broader market sell-off.

The credit market thaw continues.

Interest rates for three-month loans in dollars fell again early Wednesday, after three major central banks offered lenders unlimited dollars for the first time.

The London three-month rate for dollars decreased 9 basis points to 4.55%, Bloomberg News reported Wednesday. Meanwhile, a comparable euro rate dipped 5 basis points to 5.18% and the London interbank overnight rate, or LIBOR, fell 4 basis points to 2.14%.

The European Central Bank, Bank of England, and Swiss National Bank all offered lenders unlimited dollars for the first time, Bloomberg News reported.

Short-term rates, including overnight rates, are key sources of cash for corporations and other large institutions, which use the cash to pay suppliers, make payroll, roll over debt etc. Hence, very high overnight and short-term rates will discourage corporations from conducting business, restricting commerce and slowing the economy, economists say.

Coordinated dollar offering helps

Economist Peter Dawson told BloggingStocks Wednesday the coordinated dollar offering, combined with Tuesday's $250 billion U.S. bank recapitalization by the U.S. Treasury, should keep short-term interest rates heading in the right direction: lower.

As the United States, Europe and worlds other major economic powers implement programs and policies to end a financial crisis that threatens to severely damage economies worldwide, a number of myths and misnomers -- some promoted by the current U.S. administration -- are being dispelled, and we'll review each in the months ahead.

BloggingStocks has asked economist David H. Wang, a colleague and friend of yours truly, to help dispel a few of these myths.

Wang approaches the economic scene from a unique perspective. Wang was born and raised in Communist China for 22 years, before moving permanently to the United States in 1989 for graduate school, completing his Ph.D. in economics in 1995.


Myth: "The best thing government can do for business is get out of the way."

Pretty thin argument here, Wang said. As the events of the last year demonstrate, government getting out of the way -- creating a no- / low- regulation banking sector and market -- can lead to very negative and in some cases disastrous results.

"Businesses in financial services and mortgage financing were permitted to have free rein over mortgages and mortgage finance," Wang said. "The market was the judge."

Gosh. Golly. Gee Whiz.

That was the reaction Monday of traders and economists to the European Union's coordinated decision to invest a staggering $2.4 trillion in interbank loan guarantees and bank recapitalizations, ft.com reported, to end the global financial crisis.

(Of course, 'gosh, golly' etc. were not exactly the reactions of traders and economists -- this is a family-appropriate financial blog -- but you get the point.)

Europe's decision sparked a global rally in stocks. The Dow closed up 936.42 points -- the largest one-day point gain in its history -- to 9,387.61.

Europe takes the lead

At minimum, Europe is saying that its economic stake in the current global financial system is so large that it's willing to err on the side of over-committing public funds, economist Peter Dawson said.

"Europe's response is very large, unexpected, and it could prove to be the pivotal move in this crisis," Dawson said. "Europe appears to be saying, 'well the United States is doing what it can do, given its political constraints' now let's do what our political culture allows. Basically, Europe is saying 'the storm of fear starts to lose its strength here.' "

The measures were both sweeping and unprecedented in size and scope, Dawson said. Germany said it offered about $680 billion in loan guarantees and will invest $108 billion in its banking system, ft.com reported. France said it would provide up to $435 billion in loan guarantees and invest as much as $52 billion. The United Kingdom has committed about $70 billion for investment in key banks, along with a guarantee for banks deposits and interbank lending. The Netherlands, Spain, and other nations announced similar plans.

The U.S. Federal Reserve is leading an unprecedented effort by major central banks to push dollars into the global financial system, the Fed announced Monday, backstopping government fiscal policies to restore confidence,

The European Central Bank, Bank of England, and the Swiss Central Bank, will offer unlimited dollar fund auctions with maturities of seven days, 28 days, and 84 days at a fixed interest rate. The Bank of Japan may offer similar measures, the Fed said.

The Fed added that "central banks will continue to work together and are prepared to take whatever measures are necessary to provide sufficient liquidity in short-term funding markets."

Dollar falls on increased currency supply

The dollar fell early Monday against the world's other major currencies on the news, as traders adjusted positions to the increased supply of dollars. The dollar fell one half cent to $1.3615 versus the euro, 1.5 cents to $1.7286 versus the British pound and one-third yen to 100.37 versus Japan's yen.

Economist Richard Felson told BloggingStocks Monday the major central banks' effort is clear: keep financial markets adequately supplied with dollars amid a world that's hoarding dollars.

"It's one of the paradoxes of this current global financial crisis that despite the fact that the crisis originated in the United States, banks and financial institutions around the world are hoarding dollars. The reason is the dollar is still the world's reserve currency and investors are engaging in a flight to safety. The consequence has been a credit crunch," Felson said. "The central banks' policy should help alleviate that crunch by ensuring that there's adequate dollar liquidity. It's the correct move."

Readers of this space know that economist David H. Wang, a colleague and friend of yours truly, approaches the economic scene from a unique perspective.

Wang was born and raised in Communist China for 22 years, before moving permanently to the United States in 1989 for graduate school, completing his Ph.D. in economics in 1995.

Of course Wang still talks with family and friends in China, and right now there's this joke making the rounds in the great centers in Beijing and Shanghai.

Question: What's the difference between U.S. President George W. Bush and Chairman Mao?

Answer: Chairman Mao actually put some bankers in jail.

**

As officials and citizens in China, India, Russia, Brazil, and many other developing nations look on, the United States is attempting to end a financial crisis that threatens to severely damage economies worldwide.

In the process, Wang and other economists agree, a number of myths and misnomers -- some promoted by the current U.S. administration, are being dispelled, and we'll review each in the months ahead.

Nouriel Roubini, the once obscure New York University economics professor who two years ago predicted the current global financial crisis, now says leaders of the world's major industrialized economies and developing countries must implement an 'all fronts' approach to avert a financial calamity and a global depression.

"It will take a significant change in leadership of economic policy and very radical, coordinated policy actions among all advanced and emerging-market economies to avoid this economic and financial disaster," Roubini said on his web site, RGE Monitor.

Roubini urged that national policy makers take immediate action to end the crisis, which has dramatically tightened credit conditions worldwide, constraining the ability of corporations to undertake daily operations, which will hurt GDP growth rates in every region.

And, ironically or by coincidence, leaders will have an opportunity to dialogue and implement a common strategy: officials from the International Monetary Fund, World Bank, and Group of Seven (G-7) nations meet in Washington, D.C. this weekend for their previously-scheduled annual meeting.

Thus far, credit conditions remain almost as cold as the ice in the Arctic.

Interest rates for three-month loans in dollars continued to rise early Thursday, as a coordinated interest rate cut by the world's major central banks failed to jump-start bank-to-bank lending.

The London three-month rate increased 7 basis points to 4.82%, Bloomberg News reported Friday. However, the London interbank offered rate, or LIBOR -- the rate banks charge each other for overnight dollar loans -- plunged 262 basis points to 2.47% early Friday morning, a hint that some liquidity may be creeping back into super-stressed credit markets.

Also, Hong Kong's three-month interbank offered rate, or HIBOR, climbed 1 basis point to 4.41% Friday. Singapore's three-month dollar loan rate increased for a fourth straight day, climbing 23 basis points to 4.74%, the highest this year.

Overnight rates are key sources of cash for corporations and other large institutions, which use the cash to pay suppliers, make payroll, roll over debt etc. Hence, a very high overnight will discourage corporations from conducting business, restricting commerce and slowing the economy, economists say.

The resources of the central bank of the world's second strongest economy have now been marshaled to address the global financial crisis.

The European Central Bank, led by President Jean-Claude Trichet has shifted policy - - a remarkable, historic change - - and is now working in coordination with its companion major central banks - - the U.S. Federal Reserve, Bank of England, Bank of Japan, and the Bank of China - - and others, to end a credit crisis that threatens to cripple international business and seriously damage economies, worldwide.

A legendary inflation hawk,Trichet, whose ECB lowered its key, short-term interest rate by 50 basis points in conjunction with the other major central banks on Wednesday, declined to rule out further steps to solve the crisis, including additional interest rate cuts, Bloomberg News reported Thursday.

ECB: banks offered unlimited cash at 3.75%

Further, and equally significant, Trichet offered banks unlimited cash at 3.75% to help them cope with tight credit markets, Reuters reported Thursday. Previously, the ECB had offered funds to the highest bidders, a tactic that pushed average rates as high as 4.99% - - almost 75 basis points above the official rate.

In addition, the ECB cut in half the premium it charges for overnight emergency loans and increased the interest rate it pays on deposits, Reuters reported Thursday.

If overnight interest rates do not fall as a result of the Fed's guarantee for commercial paper and related efforts to create incentives for banks to lend, the leaders of world's central banks and treasury departments may have to try a more creative approach to end the financial crisis: a global distressed asset summit.

As economist David H. Wang told BloggingStocks Wednesday, the major economies may have to hold a global 'out & price' summit to get distressed and bad assets -- the source of so many of the defaults and resultant fear among banks -- out of the financial system.

The problem, Wang said, is not just that the subprime and Alt-A mortgage backed securities represent distressed and bad debt, it's that "banks and other financial institutions can't determine the value or price of many of these securities."

Unknowns about toxic assets driving fear

Wang believes that "lack of certainty about price is the biggest factor in banks' unwillingness to lend."

"Banks can't determine the price of these assets, it represents a big uncertainty, therefore because they're uncertain regarding what their competitor banks hold, they aren't lending, and they're charging higher rates for short-term loans," Wang said. "Both are restricting commerce and will continue to slow economies all over the world if the problem is not addressed."

Overnight interest rate continued to rise Wednesday, despite a decision by the major central banks to cut interest rates, as banks continued to hoard cash and charge very high interest for short-term loans on fears the global financial crisis will worsen.

The London interbank offered rate, or LIBOR -- the rate banks charge each other for overnight dollar loans -- increased 144 basis points to 5.38% early Wednesday morning -- a very high rate for short-term cash. It was the second straight day the LIBOR had risen more than 100 basis points.

Overnight rates are key sources of cash for corporations and other larger institutions that use the cash to pay suppliers, make payroll, roll over debt, etc. Hence, a very high overnight rate will discourage corporations from conducting business, restricting commerce, and thus slow the economy, so says economist Richard Felson.

"We have to force overnight rates lower and encourage banks to lend. High overnight interest rates will discourage companies from conducting typical business and will slow the economy. We've got to stop this bad momentum, eliminate fear, and get the ball rolling in the other direction or GDP will contract more," Felson said.

In an unprecedented, emergency, coordinated move, the Fed and other major central banks cut interest rates Wednesday, in an attempt to prevent the global financial crisis from spreading further and damaging economies.

The Fed, European Central Bank, Bank of England, Bank of Canada, Sveriges Riksbank, and the Swiss National Bank each lowered their benchmark rates by 50 basis points. The Bank of Japan was not involved in this round of rate cuts, but said it fully supported the action.

Separately, China's central bank also lowered its one-year lending rate by 0.27 percentage points.

"`The recent intensification of the financial crisis has augmented the downside risks to growth and thus has diminished further the upside risks to price stability,'' the banks said in joint statement. "Some easing of global monetary conditions is therefore warranted."

The action brought the Fed's benchmark rate to 1.5%; the ECB's main rate is now 3.75%; Canada's declined to 2.5%; the U.K.'s rate fell to 4.5%; Sweden's rate declined to 4.25%. China's rate fell to 6.93%.

To see the impact of credit market strain in the United States one need not travel farther west than The Bay State.

On Tuesday, Massachusetts, which would rank in the top 100 countries in the world in terms of GDP if ranked as a nation, postponed the sale of $750 million in short-term notes for the second time in two weeks, due to a lack of demand.

However, it should be pointed out that Massachusetts's decision occurred before the U.S. Federal Reserve's decision, announced Tuesday at 9 a.m. EDT, to buy all corporate commercial paper to ease tight credit markets.

Further, although the municipal market differs from the corporate commercial paper market, the Fed's action aimed at easing conditions in the credit market overall, via both guaranteeing debt payment and by moral suasion. Many economists see this as the Fed's attempt to change market psychology via the central bank's enormous financial resources, monetary policy stance, and regulatory powers.

Still, economists caution that the Fed's commercial paper guarantee does not end counterparty risk; it simply eliminates a segment of that counterparty risk. According to economist David H. Wang, more actions by the Fed and U.S. Treasury undoubtedly will be needed to get credit flowing more freely and also reduce perhaps the biggest systemic problem: fear. Commercial paper is about a $1.5 trillion market, while states and local governments borrow about $2.8 trillion, Wang said.