Stocks plummet as the House votes for the bail-out plan

The House is going to vote for the $700b bail-out plan today. In contrast to the 3 page proposal Henry Paulson, the Treasury Secretary, started with, the rescue plan is now 110 pages long, and has added numerous provisions demanded by legislators. The changes include allowing the government to modify the terms of the mortgage payments to protect homeowners from foreclosures, authorizing the Fed to pay interest rates on the reserves maintained by banks and thus the power to pump unlimited cash into the money-market. The Troubled Asset Relief Program, or Tarf, will give Mr. Paulson or his successor enough flexibility to buy trouble mortgage-related assets, and anything else necessary, from ailing financial institutions, to stabilize the financial system. Mr. Paulson now will be given only $250b immediately, $100b more at the President's discretion and $350b upon approval by Congress, instead of a $700b lump-sun he initially proposed.

Along with the going-at-light-speed legislative procedures on Capital Hill, the Federal Reserve, together with centrals banks in Europe, continued to pump billions of capital into the financial system in both Continents in an attempt to firebreak the latest stage of the credit crisis. Last week in America saw the collapse of Washington Mutual, the biggest-ever failure of commercial bank. And in the past weekend, several financial institutions in Europe had been bailed out by governments.

Stock markets around the world had rebounded last week in anticipation of the plan. Now with both the Democrats and the Republicans extracted numerous concessions from the bill, the bail-out plan is expected to pass the House today, and the Senate this week. Nevertheless, as investors are worried by the latest eruptions in the past weekend, stock markets plummet again today.

21 Sept 08

The theory of decoupling has lost its popularity from the current credit crisis. Along with plummeting stock prices in developmed markets, share prices in emerging markets have plunged even more in the past week. The main bourses in Russia suspending trading for three days in a row after its market fell by a record 26%. The stockmarket in China, India and Brazil has also dropped by double-digit this week. As investors panicked and confidence were lost, governments were quick in their actions. The central bank of India aggressively sold its foriegn-exchange reserve to support the rupee. And soon after Lehman Brother's collapse the China government cut the benchmark lending rate, by 27 basis points, for the first time in six years, to support its financial sector.

Not until recently, equities in emerging market are deemed as one of the best investments. Supported by high growth rate and massive current-account surpluses, share prices in emergeing countries traded at an even higher multiple of earnings than developed countries last year. Trillions of capital has been poured into the emerging markets since 2000 as global growth remains strong. A bull market in commodities has drawn a lot of hot money into resources rich countries like Russia, India and Brazil. However, the trend seems to have reversed this year. $67 billion of capital has flowed out from emerging countries this year, compared with inflows of hundreds of billions of dollars in the previous five years. Stockmarkets of emerging coutries are also the ones that have falled the most so far this year, with many of them now trading at less than half of the peak.