Word: banking
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...even if a company were to fail outright, consumers are protected much in the way that routine bank deposits are guaranteed by the FDIC. Under a 40-year-old system, each state has an "Insurance Guarantee Fund" to which companies contribute that guarantees property, casualty, life and health claims if a company is insolvent. The maximum amount per claim varies by state and by the type of insurance, but it is as high as New York State's $1 million on property and casualty claims...
...unable to agree on what moves to make. Worse, it's not just the G-7 that's in the spotlight. The other pillars of 20th century international financial stability are meeting this weekend in Washington, and expectations for action by the International Monetary Fund, the World Bank and the G-20 are also low. The less the international organizations seem likely to do, the louder the cry for help becomes. "This is a financial crisis that is global and needs a global response," says Professor Helge Berger of the Freie Universitat in Berlin. "Piecemeal won't work...
There's absolute agreement that banks have to be recapitalized. Britain, for one, has already done so, offering its big banks $692 billion in capital in return for preference shares. U.S. Treasury Secretary Henry Paulson announced this evening that the U.S. is working on a plan to go this route, saying that it intends to use some of the $700 billion rescue package passed by Congress to pour money (with some strings attached) into any bank that needs funds. But Japan and E.U. countries like Germany have been reticent...
...credit markets moving again, economists have called for governments to guarantee short-term interbank loans. "Recapitalization by itself won't fix the interbank lending market," says Roger Craine, another Berkeley professor and a former Federal Reserve economist. The big problem now is that banks are unwilling to let go of their money because of counterparty risk - the fear that the borrower may go under, sticking the bank with the loss. "If the bank you lend to has assets in a hedge fund that goes under then they are likely to go under," explains Craine. A coordinated interbank debt guarantee...
Lastly, the G-20 central banks need to unveil another coordinated rate cut to increase liquidity. The European Central Bank, for instance, has been resistant to cuts because it focuses on inflation. Nouriel Roubini, an economics professor at New York University and one of the few who predicted the extent of the current crisis, called yesterday for "at least 150 basis points (1.5 percentage points) on average globally." Roubini also backed the idea of deposit guarantees, guaranteeing interbank lending and other measures. "At this point, anything short of these radical and coordinated actions may lead to a market crash...