Some Things Do Work

I won’t call it a rally – it’s not even close – but there has been some improvement over the last week or so in both the stock markets and the credit markets. How long this will last and how far they will climb, along with the reasons for it, are still in doubt though.

From the NY Times:

It is hard to miss the news: the stock market has been on a bit of a roll lately. But with far less fanfare, the credit markets, where the financial crisis began, are also showing signs of a spring awakening.

Companies with good credit are borrowing more money in the bond markets. Confidence in the banking industry seems to be returning, despite the daily ups and downs of financial shares. Even junk bonds, the high-risk corporate debt instruments, are luring brave souls again.

The revival is tentative and, like the gains in the stock market, which pulled back on Monday, it may well prove fleeting. But analysts say the improvements suggest that investors are starting to get some of their old nerve back, mainly because of sweeping federal efforts to get credit flowing again.

So it’s possible that people may see some slight relief from the economic woes assailing the average American right now.

Yes, I know – the NY Times aka Pravda West aka The Jihadi Journal aka The Dirty Whore Who Was Once a Lady isn’t anywhere near the best source of information, but what can you do?

I’m sure the Liberals will agree with what passes for the NY Times’ analysts’ and “journalists'” assertions that this shows that the sweeping measures by Obama and his Liberals are working – and therefor their intervention and growing control of the American private sector is justified.

Of course it was President Bush who enacted TARP, so anyone who likes it or its supposed benefits should be thanking him, not Obama. Yeah – that’s not going to happen.

Of course this slight rise in the markets may just be an indication that, despite the current crisis, the fundamentals of the American economy are still sound and that we’ve hit the bottom of this recession. This may be – just maybe – the start of the long crawl back out of the pit.

Even the NY Times stated that companies with good credit are borrowing more – i.e. lenders are loaning them money – and that there’s been a small resurgence in the junk bond market, which indicates are certain courage and/or greed on the part of investors is in evidence. So it’s quite possible that this is just a case of the strong surviving while the weak perish.

A Few Points Though…

Where are these gains focused? What segments of the market are showing small signs of recovery? The answer to that question would shed some light on the reasons for the gains. It wouldn’t be conclusive by any means but it would provide some evidence by which one might form an opinion.

The market for securities made from bundles of car loans and student loans — a vital source of credit — has started to stabilize. Prices of these investments have risen in the last month, suggesting government-run programs to buy or guarantee this type of debt are gaining traction.

If the NY Times’ assessment of stabilization and growth in those securities is both accurate and true, this does logically suggest that the government’s actions in either guaranteeing or buying this sort of debt have had a beneficial economic result.

Of course this means the People, in the form of the US taxpayers – somewhere between 50% to 60% of our population – will being paying for any defaults.

Truth be told, that’s not just Economics 101 but Psychology 101 as well. If you remove a substantial amount of the risk without removing a commensurate amount of reward, more people will adopt a behavior – investing in securities guaranteed by the US government in this case.

Home buyers are seeing some benefits of the credit thaw. Interest rates on a fixed 30-year mortgage fell to 4.61 percent for the week ending March 27, the Mortgage Bankers Association reported, their lowest levels on record. Last year, before the government and central bankers intervened to lower borrowing costs, mortgage rates were more than 6 percent.

OK, this makes sense; lower interest rates definitely benefit borrowers and encourage them to borrow money. In this case it encourages them to borrow money to invest in real estate and live “The American Dream” of home ownership.

I’m not sure that “The American Dream” is such a great model for the masses, and I’m very unsure that anything that keeps the securities market based on mortgages is wise.

Of course this has nothing to do with TARP or President Obama’s “Mortgage Bailout Act.” It’s nothing more or less than the Fed manipulating the interest rates in order to influence lending and borrowing behavior in America. It’s a tried and true method of modifying such practices that has been used for many decades in America. It has – within limits – worked in the past and it’ll work in the present.

On Monday, the Federal Reserve and central banks in Britain, Japan and Europe continued to try to chip away at the credit problem. They announced an agreement that could provide about $287 billion in liquidity to the Federal Reserve, in the form of currency swaps.

The Fed could draw on these lines to provide more liquidity to financial institutions, this time using euros, British pounds, Swiss francs and yen. Last fall, the Fed and other central banks set up swap agreements to provide dollars to foreign banks, and some analysts said the pendulum was now swinging the other way.

It fairly obvious, even to those of us without degrees in the art form known as Economics, that the Federal Reserve needs to maintain a certain level of liquidity if it is going to be able to respond to changes in the US markets. A currency swap is a much better – and somewhat unexpected – way of handling the Fed’s “cash flow problems” than just printing more money would be.

It’s sad thing though that America is on the receiving / benefiting end of a currency swap though. The idea that America is turning to euros, British pounds, Swiss francs and Japanese yen to shore up our Federal Reserve is like a punch in the gonads to any real American with any level of love for- and pride in our nation.

Still, Pride and Honor are two very different things, one being based on ego and the other on duty. This currency swap seems to me to be a painful but wise course of action.


So there you have it. The stock market and the credit market look like they might be rebounding somewhat, if only tentatively. This may be due to actions taken by the US government, or it may be just the resiliency of American capitalist system. Most likely it some combination of both. After all, given that confidence and a certain optimism are necessary components of our financial system, just about any set of action – if marketed correctly – could have a positive effect on the markets in the short term.

Are some of them going to cause greater problems in the long term? Possibly. Are derivatives of those actions going to cause havoc or harm later? Probably. That’s the nature of any action of the government that interferes with- or intervenes in the private sector. The actions are rarely based on results in a longer term than the next election cycle and are driven more by political needs and ideology than by sound market practices.

In any event and for whatever reasons, some of the actions taken by the government seem to have been beneficial. That’s probably the most important point in the near term. Some thing do work, at least in the short term, no matter who does them or for what reasons.

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