The SEC has banned short-selling on financial stocks. The Treasury has guaranteed money market funds and is cooking up plans to spend hundreds of billions of dollars to buy distressed assets and save troubled banks. The market has rebounded huge, taking back all of this month’s losses.
So are we all clear??
Hardly.
I think in the short-term, the moves have bought the financial system time to gather its senses, to take a breath. That’s a good thing, and clearly the ban on short selling is doing a lot to move prices higher (I’m going to write about the numerous, potentially devastating long-term ramifications of all these decisions in a following post).
Something needed to be done. We took out our previous lows and got that panicky sell-off I talked about in an earlier post. The potential for blood on the streets (Main Street as well as Wall Street) was very real. A functioning economy ultimately rests on people’s confidence in it, and widespread panic can cripple the health of such a system to the point where it takes years to recover.
But even if you stabilize the system with these moves, you’re still going to be faced with most of the same issues: A moribund housing market, a stretched-to-the-limit consumer, a weakening job market, a credit crunch, a global slowdown. It will take time and a lot of pain to resolve these issues. Anything we do will at best ease some of that pain, while there’s a very real risk we end up doing something to make the problems last longer than they otherwise would.
In sum, the government may have just put a floor in the market with these moves, and at least temporarily prevented a disastrous widespread panic that could have led to another Great Depression.
But I also think we’ve seen most of the short-term stock price gains we’re going to see (maybe we see another 5-10%).
And the medium-term future for the economy AND the market still doesn’t look particularly bright. We’re going to be stuck in this economic morass for some time to come, and the market will continue to reflect that reality.
The current Wall Street crisis can be traced back to greed and profit-motivation, as exemplified in the GOP push toward de-regulation. Phil Gramm was a primary architect of CHANGING the regulations that kept banks solvent. Yes, the same Phil Gramm is now economic adviser to John McCain.
From:
http://www.chron.com/disp/story.mpl/headline/nation/5850226.html
“As chairman of the Senate Banking Committee, Gramm was instrumental in pushing major banking deregulation in 1999 that critics say has contributed to the current mortgage crisis.”
“The bank deregulation law, known as the Gramm-Leach-Bliley Act, was the most important update in banking laws since the New Deal. Its most important feature: breaking down walls between commercial banks, investment banks and insurance companies.”
“Gramm’s critics say the deregulation of commercial banks contained in the law made it easier for banks to push risky subprime mortgages on lower-income customers.”
That’s true that GOP-led deregulation of the financial industry had a lot to do with getting us into the current mess. I hope that any bailout out plan the government devises includes at least the framework for increased regulation to make sure this doesn’t happen again.
However, I’m an Obama supporter, but I think it’s disingenuous to blame one party here. The government under Bill Clinton expanded the Community Reinvestment Act, which required banks to lend credit to distressed areas and by extension unqualified borrowers. Democrat Barney Frank, chairman of the House Financial Services committee, once blithely dismissed concerns about the health of Fannie Mae and Freddie Mac, killing potential reform.
Politicians on both sides of the aisle share the blame in our current mess. Let’s just hope they now don’t make it worse.