So, is it over? Is the Good Friday market holiday marking the coming resurrection of the financial system? Will Easter Monday represent the rebirth of the economy?
That’s what many in the financial markets are asking after Thursday’s rally. The theory is that the Bear Stearns bailout and the actions by the Fed this week represent the bottom of the valley. That’s the worst it will get, that any recession, if there even is one, will be short and mild…and over just in time for the election.
The last three months you see were just a mild hiccup in the Bush Boom, the “greatest untold economic story of all time.” All this talk of doom and gloom is only threatening to make a recession a “self-fulfilling prophecy. Take it from the governor of one of America’s hardest-hit states, Ohio Democrat Ted Strickland.
Gov. Ted Strickland said Thursday that Ohio is not in a recession, blaming President Bush for the perception and urging residents to “hang tough.”
Strickland, a Democrat, said rising fuel costs and the price tag for the ongoing war in Iraq are factors that lead to concerns about the economy. The first-term governor cautioned that pessimism could inspire further economic downturn.
“We continue to have modest growth in our economy,” Strickland told Columbus TV station WCMH. “It’s not as robust as it should be. It’s not as evenly spread across the state as we would like it to be. But in a traditional, statistical sense, we are not in a recession.”
Strickland’s blaming Bush and Ohioans for being too pessimistic, apparently. Ohio’s fine despite those foreclosures all over the Rust Belt states, and the big Wall Street players seem to agree with him, making predictions that the worst is now behind us.
Those predictions are bold indeed.
After the Federal Reserve’s aggressive moves this week to ease the credit crunch, some on Wall Street are starting to wonder if the worst is finally over.
Well-known banking analyst Richard Bove even delivered a report on the financial sector Thursday with the bold heading, “The Financial Crisis Is Over.”
Bove, of Punk Ziegel, admitted in the note that such a proclamation “sounds ridiculous,” but he genuinely believes the crisis is over.
“There will be more negative developments, but they will be meaningless,” Bove wrote.
More negative developments that will be meaningless. Hmm. I suppose that’s possible. Nothing’s set in absolute stone, after all. Maybe I’m just jumping the gun. This guy’s worth a lot more money than I am. He must be smarter than me, financially and economically.
Later, in an interview on CNBC, Bove said: “I’m convinced that all the signs that you would want to see that would tell you that this thing is over are there. And this is over.”
Bove said last weekend’s rescue of Bear Stearns was the watershed event that heralded the end. “This event sent so much fear through the market that action was taken,” Bove wrote, calling the Fed’s actions, “innovative, dramatic, and … brilliant.”
But I do have to ask, just to satisfy my curiosity. Exactly which signs are convincing Mr. Bove that this crisis is “over”? Was it a sign like this?
CIT Group Inc. shares and bonds plunged after the largest independent U.S. commercial finance company fell victim to the freeze in short-term debt markets.
The company drew on its entire $7.3 billion of emergency credit lines today after ratings downgrades left it unable to finance itself with commercial paper, or debt due in nine months or less. Chief Executive Officer Jeffrey Peek said the “protracted disruption” in capital markets may also force the New York-based company to sell assets. CIT has started seeking a “strategic funding partner” he said on a conference call.
CIT’s decision to tap financing shows the credit crunch that claimed Bear Stearns Cos. and Countrywide Financial Corp. is deepening as investors shrug off efforts by the Federal Reserve to encourage them to lend. CIT, which leases airplanes and trains and provides financing to companies, has $2.8 billion of commercial paper due this year and $8.2 billion of other debt.
No? Well, what about more obviously good news like this?
Surging demand for U.S. Treasuries is causing failures to deliver or receive government debt in the $6.3 trillion a day market for borrowing and lending to climb to the highest level in almost four years.
Failures, an indication of scarcity, surged to $1.795 trillion in the week ended March 5, the highest since May 2004, and up from $374 billion the prior week.
They have averaged $493.4 billion a week this year, compared with $359.6 billion over the last five years and $168.8 billion back through July 1990, according to Federal Reserve Bank of New York data.Investors seeking the safety of government debt amid the loss of confidence in credit markets pushed rates on three-month bills today to 0.387 percent, the lowest level since 1954. Institutions worldwide have reported $195 billion in writedowns and losses related to subprime mortgages and collateralized debt obligations since the start of 2007, making firms reluctant to hold anything but Treasuries as collateral on loans.
Oh. Well…hmm. Surely then we can find signs that the crisis isn’t spreading and that the big banks are getting up off the mat and standing on their own feet, right?
Big Wall Street investment companies are taking advantage of the Federal Reserve’s unprecedented offer to secure emergency loans, the central bank reported Thursday.
The lending is part of a major effort by the Fed to help a financial system in danger of freezing.
Those large firms averaged $13.4 billion in daily borrowing over the past week from the new lending facility. The report does not identify the borrowers.
Well…I guess those signs tell him differently. What those signs tell me is this: ARE YOU KIDDING ME?
We’re spending more than the daily totals on the Iraq War ($12 billion a day or so by last count) on bailing out investment banks? That’s the only reason why we’re not talking about Black Monday right now. The Fed staved off a disaster with a last ditch effort. They managed to delay the detonation, that’s all. In fact, they made the problem in the future that much worse.
What part of that makes anyone in their right mind believe this crisis is over? On the contrary, it’s just really getting started. All of the other signs, rising unemployment, inflation skyrocketing, diesel fuel prices powering the trucks that move goods across America now at $4.02 a gallon, a near complete lockup in the liquidity markets despite all these “brilliant” Fed maneuvers…
It’s not over. It’s the lull before the storm, the eye of the hurricane. The Fed has merely bought time. Sometimes that is a wonderful thing…if you use the time purchased wisely. That time may be a few months, maybe even a year. It may be only weeks. In the meanwhile, they are taking no real effort to address the massive problems that created the credit crunch in the first place and will continue to ignore it. Again, if the Fed could have fixed the problem with a rate cut and billions tossed at the problem, why not have done these action six months ago? A year ago?
Think about the last eight and a half years since Glass-Steagall was repealed. That act divided banks from investment houses. It prevented massive and rampant market speculation because rampant and massive speculation is what destroyed the economy in 1929. In 1999, that act was repealed.
Think about what has happened since then: the dot-com bubble, the housing bubble, the subprime mess, the worst housing depression in 60 years, and now the liquidity crisis. Think about what’s looming above it all — the $600 trillion derivative wasteland created by the mega-financial banks worldwide that threatens to sink the entire global financial system and cast millions into economic ruin. This is what our free market economy has wrought — an exquisite destruction, — a device of our own creation that will devastate the world and be remembered for ages.
Do you think the Fed’s actions this week put an end to that cycle? That it’s magically stopped? That the dollar is fine, the economy is fine, your mortgage is fine, your paycheck is fine? Do you think the reckoning has been avoided now?
Do YOU think it’s over? I don’t. I don’t believe you do either. The earlier point by Ted Strickland is a silly argument. Yes, the American consumer can be discouraged by signs of bad news and might change their behavior, purchasing less and saving more. Since we live in an economy powered by spending on goods and services, cutting back on spending can cause some problems. But the problems caused by this are minuscule when compared to the hundreds of trillions of dollars in bad derivatives, commercial paper, and mortgage debt.
Once again the politicians are blaming you and me for causing this financial crisis instead of the people who are really responsible…the politicians. The politicians, the Fed, the banks, the CEOs, all these folks should be held accountable. Instead, it’s and me paying the bill for the billions in bailout cash.
What respect I did have for Strickland largely evaporated yesterday when I saw his statements on the economy. Ask your average Ohioan if he or she thinks wishing really hard for people not to talk about the recession will save their mortgages. I expect that kind of happy talk stupidity from Bush, but Strickland owes Ohio the truth.
But in the end, all 50 states are in trouble. Make no mistake: when the Fed runs out of money to inject, when it runs out of rate to cut, when it runs out of time to play games and artificially inflate the bubble…the bubble will detonate. It nearly did this week. Only powers the Fed has not used since the Great Depression and even more frightening, the use of unprecedented actions NEVER before taken, prevented a complete meltdown of the markets on Monday. That is the only thing that prevented the cascading failure across multiple market sectors this week.
This time, the Fed prevented the worst-case scenario.
Next time, will they be able to do it again? And again? And again after that?
What do you think?
Be prepared.
