While government officials are running around trying to build "confidence", it is likely that their actions are, in fact, doing the opposite. Consider these points made by Robert Robb of the Arizona Republic: [Hat tip MR!]
Governments all over the globe are frenetically trying everything to stop the economic slide and keep interest rates low. Meanwhile, private capital remains on the sidelines.
There may be a connection.With governments trying to figure out how much capital to put into financial institutions and how much equity to take in exchange, why would any private investor commit any capital?
Until government does whatever it is going to do, private investors don’t know what they are buying. And given how the United States government shredded shareholder equity in its early interventions, investors have to weigh both financial and regulatory risk.
And exactly how are lower interest rates supposed to make lenders more willing to lend?
A very good case can be made that recovery won’t begin until governments stop moving around so private capital has a fixed regulatory landscape in which to operate.
For politicians and regulators, however, the most difficult decision when facing tough times is the decision to do nothing.
Which is a shame really, when it seems that doing nothing is what they do best.
The market yesterday had it’s biggest gain on record, but as BusinessWeek pointed out yesterday:
The real test comes tomorrow. Because of Columbus Day, US bond markets had the day off, so bond traders were unable to join the rally. If there’s a sell-off in Treasury’s, as investors pursue other bonds, the TED Spread, the difference between LIBOR and Treasuries should narrow.But the real impact won’t be known for days or even weeks. LIBOR needs to drop more than 7 basis points. Banks need to start lending again. If they do, the rally could be the start of something big. If not, it’s just an opportunity to get short on the way to DOW 7000.
Any bets on which way this thing blows?
This preferred thing blows, too.
Warren Buffett got 10% perpetual preferred, plus tremendously valuable warrants, for investing in the cream of the crop, GE and Goldman Sachs. The taxpayers are getting 5% and no warrants for investing in the stinkier banks. That’s a direct transfer of wealth from current and future taxpayers to Wall Street fatcats.
I suggested last week that the Paulson should lock in today’s ultra-low interest rates on the liability side of the balance sheet by doing a massive 30-year Treasury auction. What he’s doing now is the opposite: locking in ultra-low rates on the asset side of the balance sheet. Yes, the rate purportedly rises to 9% after five years, but that still may not be enough to compensate for one or two bank failures and/or long-run inflation. And can anyone doubt that the 9% rate will be renegotiated when the banks cry poverty and donate to Chris Dodd and Barney Frank’s campaigns? Locking in low rates on assets takes inflation off the table and leaves default as the only solution to unsustainable government debt. Now, $250 billion of low-rate assets isn’t enough to do it, but I suspect this is only the beginning.
(more here)
Well, when the government anounces they are going to purchase bank stocks, and then those very stocks go up big time, you’ve just got to be smelling a rat. I believe mostly financials went up yesterday.
Dead cat bounce. This is just temporary.
Surak-
I think someone tied flubber to that poor, dead cat- he’s up, and he’s down. Unless the PPT has some new bailout planned for tomorrow- I’ll bet he’s down again.
Twist
Exactly
Igors word “wipeout”