So sorry for the lack of posting on my part, especially during the pure and utter mayhem in the markets over the last week or so. I was hiking with my old man all weekend and did not what to ruin a great weekend on Sunday by thinking about finance. My apologies again - let's get back to it...
In my last post, I compared Congress to a bunch of fifth graders. It looks like I was giving them too much credit. They are more like 5 year olds. If a five year old won't do something and your patience is wearing thin, what do you do? You bribe them with candy! If Congress is too stupid to pass an incredibly important and time sensitive bill, what do you do? You bribe them with pork (evidently not too many vegetarians in Congress)! This bill had more pork than Chinese Buffet. Here are a few of my favorites: Tax breaks for a company that makes wooden arrows, tax breaks for alternative energy, tax breaks for Nascar. If you want some good thoughts on this bill, please take a look at the last comment on my last post by "thefreshmen." The post describes a lot of frustration that people are feeling today.
Even though our elected representatives made a once 3 page bill over 100 pages long, they did in fact pass the legislation. I totally disagree with the manner in which it was passed, but what's done is done. After the bill passed, the stock markets and credit markets have continued to come under pressure. Today the Dow closed below 9500 and the S&P closed below 1000. We are about 40% off of the highs hit only 1 year ago. Many people are asking why the market is dropping if this bill is in place. Shouldn't the mortgage problems now be solved?
Ladies and gentleman, these problems do not get fixed overnight. The Treasury now has to figure out which mortgages to buy and at what prices. If you have been following this blog, you already know how complex and difficult these securities are to price. It is going to take a little while for the Treasury to begin purchasing securities. And it is going to take even longer for the effects of these purchases to trickle down into the rest of the mortgage market. After all, Rome wasn't built in a day. We have become a society unwilling to wait for anything. This is a perfect time for Americans to relearn that long lost virtue called patience.
Another plausible explanation for the continued weakness in the market after the passing of the bill is the fact that investors are now focusing on the fundamentals of the economy rather than on whether or not the bill will be passed. On Friday, the Labor Department announced we lost 159,000 jobs in September. That is the worst number in 5 years. Manufacturing and auto sales data have also been extremely week. I do not want to bore you with the numerical details, so I'll just say flat out that the economy is weak and is continuing to slow.
Monday was also a horrific day on Wall Street. The focus on Monday was Europe and the European banks. Fortunately for the U.S., we have one national government and one central bank. The Fed was therefore able to pass legislation that encompasses the entire U.S. mortgage market. As discussed previously, the Fed realized that they could not save the system on a case by case basis. They needed broad-based legislation. Unfortunately, Europe does not have that luxury. The European Central Bank (ECB) carries out the monetary policy for its 15 member countries. That means that 15 very different economies governed by 15 unique governments are all affected by one central bank. This makes it very difficult for the ECB to pass a broad based bail out package for its member nations. It also makes their decisions on monetary policy very complicated. What's good for Germany may not be good for France, what's good for France may not be good for Greece, etc.
Last week, Ireland was nervous about people pulling money from their banks, so they decided to guarantee all deposits:
http://www.smartmoney.com/breaking-news/smw/index.cfm?story=20080930110502
What effect does this have on the rest of Europe? People pull their money out of other banks and deposit them in the Irish banks since the deposits are guaranteed. That means an immense amount of pressure is put on other European banks. After the announcement from Ireland, several other EU members followed suit with their own types of guarantees. I hope this clearly illustrates the problem in Europe right now. To get through this with minimal pain, they need to work together on a solution. The European bankers actually met today for precisely this purpose. I am about financed out for the night, so I'm not sure what kind of progress was made at the meeting today.
Just one more quick note before I go to the gym to see if any other CEOs of financial firms are getting punched in the face on treadmills (Google "Dick Fuld Gets Knocked Out") - Take a look at the following article if you still do not believe the close ties between Main Street and Wall Street:
http://biz.yahoo.com/ap/081007/meltdown_retirement.html
Sorry for the negative sentiment in this post. I will try and focus in on the positive steps that the Fed has taken in my next post and discuss how they may help us out of this mess.
Don't forget to watch Saturday Night Live, I mean the presidential debate, tonight! Until next time.
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2 comments:
This post was excellent, well-written and informative, but once you busted out the main street/wall street cliche, I barfed in the garbage can. But hey, a stone in the hand is worth two dead birds... or something like that.
In all seriousness, you make some good points, and if you believe the bailout was a necessity that will eventually benefit the country, then I'll hold onto that belief as well. I realize that it wasn't going to fix things overnight, but I hope there is a positive upswing some time in the near future.
Makin' sex is like Chinese dinner, it ain't over 'til ya both get ya cookies.
Wall Street and the Fed got their meal at the tune of $700 Billion. But then they got their cookies too with wooden arrows for children, Virgin Island and Puerto Rican Rum, and NASCAR track improvements to the tune of an additional $150 Billion. I wish those assholes would drink all the rum and then get handed the keys to a stock car on a closed track.
I think it'll be a while before the American Taxpayers, who are buying the dinner, get their well-deserved cookies. Although it seems that in this case, the cookies aren't really free...
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