Patience best policy response for stock crash

WASHINGTON/NEW YORK (Reuters) - Despite continuing steep stock market losses, policy-makers will likely give the $4 trillion-plus already thrown at the global crisis a chance to work before they take any more emergency steps.

Brutal declines in Asian bourses triggered another battering of European and U.S. stocks on Friday as investors resigned themselves to a painful global recession, sending European shares to their lowest close in five years.

It wasn't just heightened fears of recession that accelerated this week's market meltdown, however.

"There has been continued forced selling on the part of loss-making hedge funds facing actual and potential redemptions and margin calls as well as selling by healthier hedge funds seeking to maintain their cash cushions," Mohamed El-Erian, the chief executive of top bond fund manager Pimco, told Reuters.

El-Erian, as with other high-profile executives and officials, believes enough drastic measures have already been put in place.

What's needed now is time. "We expect this unclogging (of credit markets) to accelerate in the days and weeks ahead as previously announced government policies come on stream," El-Erian said.

And Alfred Broaddus, who retired as president of the Federal Reserve Bank of Richmond in 2004, said: "We've lined up our ducks to take the action that we need to take."

Truth be told, the U.S. government's $700 billion Troubled Asset Relief Program, which will essentially separate bad assets from good ones, along with an asset-backed commercial paper buyback program have not yet been implemented.

Even the interest rate cuts already made by the major global central banks take at least six to 12 months to filter their way through economies.

"We are undergoing massive financial deleveraging and the process doesn't take weeks to play out," said Tad Rivelle, chief investment officer of Metropolitan West Asset Management.

Fed Chairman Ben Bernanke and other policy-makers can only buffer the blow from the monstrous unwinds, not stop them from occurring.

Indeed, further interest rate cuts are expected after the European Central Bank, and central banks of Britain, Switzerland, Canada and Sweden took part in a coordinated global action on October 8 alongside the U.S. Federal Reserve to all lower their key rates a half percentage point to 1.5 percent.

Investors are betting that the Fed will trim rates again at its scheduled policy meeting on Tuesday and Wednesday, with the ECB and Bank of England expected to ease as well in early November.

Governments and central banks have taken unprecedented measures to unfreeze credit markets, shore up banks and restore confidence. Many of these steps will only become operational in the weeks ahead, and policy-makers must just hold fire until they start to make themselves felt.

There were rumblings Friday morning of possible closings of stock exchanges. "That's counterproductive. ... It will inspire panic," said MetWest's Rivelle.

El-Erian also rejected making markets take a time-out: "Closing the markets would not be advisable today as there are clear indications that, after weeks of disruptions, the plumbing of the system is gradually unclogging."

WORLDWIDE WOE

The United States alone has pledged over $3 trillion to prop up the commercial paper market and money market mutual funds, lend to banks via the Federal Reserve's discount window, make dollars available to foreign central banks via swap lines, inject $250 billion of fresh capital into banks, and buy toxic loans.

In addition, Britain has put up over 400 billion pounds ($632 billion), including guarantees on short- and medium-term bank borrowing. Germany has committed 500 billion euros ($634 billion); France 360 billion euros ($456 billion); the Netherlands 200 billion euros ($253 billion), and Austria 100 billion ($126 billion).

"The bulk of what we are going to do in the United States has been done," said Fed-watcher David Jones of DMJ Advisers in Colorado Springs, Colorado, who thinks the United States is already in recession but will pull out by the middle of next year.

In a sign that they were keeping their powder dry for now, the U.S. Treasury said on Friday that it was canvassing primary dealers in U.S. Treasury securities on how government action was impacting credit markets.

"The next level of leveraged players forced to unwind positions are now the hedge funds and they are working through their problems as we speak," said Rivelle.

Further official measures were not needed at this point, he said. But if more extreme action was called for, policy-makers have plenty of other cards to play, including buying the bonds of financial institutions and directly lending.

"There is almost an unlimited number of policy options and you've actually seen the more sane measures in recent weeks," Rivelle said.

(Editing by Leslie Adler)