Increased confidence contributes to financial improvement

Financial markets' growing confidence that the government is prepared to take action to combat the recession has contributed to the financial system's recent improvement, according to The Washington Post.

Since early May, major banks have raised or said they would raise $56 billion in private capital, which reportedly would signal the financial system is recovering. Another sign of the financial system's health is the premium that banks charge to lend to one another is at its lowest level since 2007. Additionally, the Standard & Poor's 500-stock index has increased 34 percent since March 9.

Federal Reserve leaders have said stabilization and a healthier financial sector could mean the economy could begin to pull out of the recession later this year. However, they say the unemployment rate is expected to remain elevated through at least 2011, people could continue to spend less and businesses could continue to struggle with investments.

"The feeling is that for now we've avoided the Great Depression," says Anil Kashyap, an economist at the University of Chicago's Booth School of Business. "But the real economy is still in pretty bad shape."

Some high-profile government actions to revive the economy have yielded slow progress. The Federal Reserve's $1 trillion program to support consumer and small-business lending has deployed less than one-fiftieth of that amount. A plan to buy troubled assets off the books of banks is about six weeks from being employed. Additionally, money from the economic stimulus plan has not yet flowed in large volumes.

However, some lower-profile efforts seem to be having a more immediate effect on the economy. The Federal Reserve cut short-term interest rates to essentially zero in December, which has made it cheaper for U.S. citizens to borrow money and helped banks replenish their capital. A Federal Deposit Insurance Corp. program to guarantee bank debt allowed banks to continue funding themselves, and Federal Reserve programs have helped decrease interest rates for people buying or refinancing a home.

"They're doing a whole bunch of things in a lot of different markets to provide support," says Desmond Lachman, a resident fellow at the American Enterprise Institute. "And markets look forward and to some degree improve in anticipation of measures that are to come."

Date : 5/27/2009