Since the onset of the credit crisis over two years ago, available credit to small businesses and consumers has contracted by trillions of dollars, and that phenomenon is reflected in dismal consumer spending trends. Equally worrisome are the trends in small-business credit, which has contracted at one of the fastest paces of any lending category. Small business loans are hard to find, and credit-card lines (a critical funding source to small businesses) have been cut by 25% since last year.

Unfortunately for small businesses, credit-line cuts are only about half way through. Home equity loans, also historically a key funding source for start-up small businesses, are not a source of liquidity anymore because more than 32% of U.S. homes are worth less than their mortgages.

Why do small businesses matter so much? In the U.S., small businesses employ 50% of the country's workforce and contribute 38% of GDP. Without access to credit, small businesses can't grow, can't hire, and too often end up going out of business.

Small businesses primarily fund themselves through credit cards and loans from local lenders. In the past two years, credit-card lines have been cut by over $1.25 trillion. During the same time, 10% of all credit-card accounts have been canceled. According to the most recent Federal Reserve data, small business lending is down 3%, or $113 billion, from fourth-quarter 2008 peak levels—the first contraction since 1993. Credit cards are the most common source of liquidity to small businesses, used by 82% as a vital portion of their overall funding. Thus, it is of merit when 79% of small businesses surveyed tell the Small Business Association that credit-card lending standards have tightened drastically and their access to credit lines has decreased materially.

Courtesy: Meredith Whitney Advisory Group and WSJ.

Two Men with $134 in US Bonds are caught in Italy

Two 50-year old Japanese men being stopped by Italy's Guardia di Finanza - the country's financial guard - on a train passing through Chiasso, a small border town between Italy and Switzerland.

The Italian finance guards ask the pair if they have anything to declare on their way into Switzerland. Both insist they haven't.

But on a hunch, the guards decide to search their suitcase anyway.

In it, under items of personal clothing, they find a concealed area stuffed with documents that look like dollar-denominated US government bonds apparently worth a jaw-dropping $134bn.

That is enough to fund three Beijing Olympics, with some change leftover to boot.

Secret mission?

It clearly is a remarkable tale, but after the "bonds" were seized by the Italian finance police, the men, after some questioning, were let go, sparking a frenzy of conspiracy theories on the internet.

Now questions abound: are the bonds real or counterfeit? And why were the Japanese men not arrested?

Were they, perhaps, actually Japanese government officials on a secret mission to dump US dollar-denominated assets?

And if so, is that just more evidence that a growing number of investors are losing faith in the US economy and the US government's ability to repay is ballooning debt?

Who else is involved, ask the bloggers. Is this the work of the Italian mafia? Take a trip round the web, and there is no shortage of explanations.

'Fake'

Official answers have been coming through though, albeit too slowly to stop the global rumour mill.

Italy's Guardia di Finanza says they didn't arrest the Japanese men because they hadn't committed a crime. Exceeding the 10,000-euro limit on cash or securities allowed to be transported between Italy and Switzerland is an offense punishable with a fine, not jail.

The Guardia di Finanza has now sent the seized "bonds" to Washington, so that the US Treasury can let the Italians know whether they were or fake or not.

But already US Treasury spokesman Steve Meyerhardt, who has seen the photos, has few doubts.

"There's no way on earth these things are real," he says. "From the pictures we've seen of these supposed bonds, they certainly look fake. They don't look like anything the US Treasury has ever issued."

Mafia scam

So if these were clearly fakes of no value, why would anybody be trying to smuggle them into Switzerland?

Banking analysts, say the answer is that the bonds have been used in the past as collateral to open credit lines with banks and other lenders. The borrower takes the money, and then disappears.

Italy's financial guard says that finding hauls of counterfeit money and bonds is not unusual.

Last month the Sicilian mafia was implicated in a $1bn bond scam which was cracked by Italian prosecutors.

But if this latest stash of "bonds" is finally confirmed as fake by the US authorities, nobody should be more disappointed than the Italian authorities.

They stand to make $38bn dollars in fines if the bonds are real - a figure that would greatly benefit the state's coffers.

courtesy: BBC   http://www.bbc.co.uk

"The Federal Open Market Committee also committed to purchasing an additional $100 billion in agency debt, and up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year.

"'Although the near-term economic outlook is weak, the Committee anticipates that policy actions to stabilize financial markets and institutions, together with fiscal and monetary stimulus, will contribute to a gradual resumption of sustainable economic growth,' the statement reads.

"The FOMC said it continues to 'employ all available tools to promote economic recovery and to preserve price stability', a comment identical to the January statement. The statement also mentioned that 'economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period', also unchanged from last month.

"Absent from this month's statement is the assessment that 'conditions in financial markets have improved'.

"The committee said it expects inflation will remain subdued in light of increasing economic slack in the US and abroad. 'Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term,' the statement said.

"The committee also said it will continue to 'carefully monitor the size and composition of the Federal Reserve's balance sheet' in light of evolving financial and economic developments."

Source: CEP News

The outcome of the Federal Open Market Committee (FOMC) meeting on March 17-18 in terms of the federal funds rate is already known, the content of the policy statement is the unknown aspect. Chairman Bernanke’s remarks during the week focused on the nature of financial reform that will promote a stronger financial structure was essentially a medium term project. The Fed’s likely course of action in the weeks ahead to reduce financial market stress is the main issue at hand. The Term Asset-Backed Securities Loan Facility (TALF) will be underway as of next week with the first disbursement of funds on March 25, 2009. The Fed is most likely to watch how this program plays out before engaging in additional support programs.

The Fed’s views about renewed stress in credit markets as seen in the widening of credit market spreads will be of special interest. At the short end, the spread between the 3-Month Libor and 3-month Treasury bill rate has risen about 20 bps since February 9.

At the long and risky end, the spread between junk bond yield and the 10-year Treasury note yield was 17.46% as of March 11, 2009 vs. 14.95% on February 9, 2009. The spread has narrowed about 45 bps since the high of 17.95% on March 9, 2009.

The Fed’s purchases of mortgage securities since January 2009 has succeeded in bringing down mortgage rates (see chart 7).

The policy statement of January 28, 2009 noted that “conditions in some financial markets have improved, in part reflecting government efforts to provide liquidity and strengthen financial institutions; nevertheless, credit conditions for households and firms remain extremely tight.” In light of developments after the January meeting, the modifications of this part of the statement is one of the many aspects we will be tracking closely.

The FOMC also noted it is “also prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets.” The Fed could use the new policy statement as an opportunity to elaborate on this issue.

The statement also mentioned that the Fed “anticipates that a gradual recovery in economic activity will begin later this year, but the downside risks to that outlook are significant.” The FOMC is most likely to leaves the overall outlook unchanged.

Global Commerntary by Northern Trust