Promoted by Steven D
So what’s the next step in the economy? Having apparently “slayed” the twin demons of the subprime meltdown and the liquidity crisis, what is Sir Helicopter Ben going to do for a encore this week?
Why, give Wall Street everything it wants of course.
Forget lower interest rates. For the Federal Reserve to keep the financial markets from imploding it needs to buy troubled mortgage bonds from banks and securities firms, say the world’s biggest Treasury investors.
Even after cutting rates by 3 percentage points since September, expanding the range of securities it accepts as collateral for loans and giving dealers access to its discount window, the Fed has been unable to promote confidence. The difference between what the government and banks pay for three- month loans doubled in the past month to 1.92 percentage points.
The only tool left may be for the Fed to help facilitate a Resolution Trust Corp.-type agency that would buy bonds backed by home loans, said Bill Gross, manager of the world’s biggest bond fund at Pacific Investment Management Co. While purchasing some of the $6 trillion mortgage securities outstanding would take problem debt off the balance sheets of banks and alleviate the cause of the credit crunch, it would put taxpayers at risk.
“An RTC-type structure is interesting, and it may not be that much of a burden on taxpayers in the long run,” said Barr Segal, a managing director at Los Angeles-based TCW Group Inc. who helps oversee $80 billion in fixed-income assets. The government should purchase the mortgages and reissue “debt that’s backed by the U.S. government and there you go, you’ve unclogged the drain,” he said.
According to Wall Street, it really is that simple: Have the government simply buy up as much of the six trillion dollars in bad debt as possible and leave the bill with the American public. It’s a bailout, pure and simple. They way they figure it, the American taxpayer is going to get stuck with the bill no matter what, so the Fed might as well make it official, making a trust corporation like Fannie Mae or Freddie Mac that’s dedicated to buying trillions in bad mortgage debt. The company’s apparently called Penny Mac, and will start by buying up billions in mortgages…then reselling them at higher prices later on. After all, housing prices have to go back up soon right…and what’s a few trillion here or there to the government?
Wall Street has made up its mind on what the Fed will have to do, and they are expecting the markets to start pricing in that bailout this week.
“This will be the bottom,” said Mark Zandi, chief economist and co-founder of Moody’s Economy.com. “We got an incredibly aggressive Fed and three to five years from now, we will realize that this was the start of a bottoming process.”
Stock investors already have been quick to sniff that out. For the holiday-shortened week, the Dow jumped 3.43 percent, the S&P 500 rose 3.21 percent and the tech-heavy Nasdaq Composite gained 2.06 percent.
Next week’s barrage of economic indicators will include home sales, durable goods orders, consumer confidence and spending, GDP and some widely watched gauges of inflation. But investors are likely to shake off these readings.
“There’s a lot of bearishness built into expectations, so the markets could respond positively if we get any better-than-expected news from these economic reports,” said Keith Wirtz, president and chief investment officer of Fifth Third Asset Management, which manages $22.5 billion.
Overall, it was the Fed’s aggressive moves that have made investors increasingly confident about the stability of the markets.
“What the Fed did on multiple fronts will be an important moment in time for equity investors,” Wirtz said. “The Fed was trying to blunt what could have been a snowballing effect of a lack of faith in the financial system,” he said.
Wall Street is increasingly counting on that bailout to send prices back up and for the good times to start rolling again. It doesn’t matter what the taxpayers have to come up with, it’s an election year anyway.
Wall Street is now in complete denial of the facts at hand, and the market will continue to try to re-inflate those bubbles as soon as possible. Is further regulation needed to prevent this kind of crisis in the future?
But industry groups warn that heavy-handed regulation could dry up investment capital just when the economy needs it most.
“If we don’t tread very carefully on restructuring a very complex financial system, we might stifle the necessary animal instincts of a free market,” said Mark A. Bloomfield, president of the American Council for Capital Formation, a business advocacy group. “Every day, the cries of populism grow stronger and could trample good economic policy.”
Wall Street firms have also been major contributors to both political parties, and they are certain to oppose tough new restrictions. The Treasury Department appears torn.
On the one hand, Treasury officials say they are convinced that today’s regulatory system is fragmented and out of date. The Treasury secretary, Henry M. Paulson Jr., has talked about the need to re-examine capital requirements for financial institutions.
But both President Bush and Mr. Paulson, a former chief executive of Goldman Sachs, remain philosophically opposed to restrictions and requirements that might hamper economic activity.
“What we’re looking at in our blueprint is how to make our regulatory structure more efficient, less duplicative and more in line with today’s capital markets,” said David G. Nason, assistant secretary of the Treasury for financial institutions. “We’ve got five regulatory agencies focused on depository institutions. We’re one of the only countries in the world that separates securities from futures, and our regulation of insurance is solely at the state level.”
The problem was clearly too much regulation. After all, if the Fed hadn’t relaxed the rules on loaning directly to investment banks, it would have been a disaster, not the “short and mild cyclical downturn” we have today.
So, the Fed, Wall Street, and the Bush Administration continues to act like everything’s perfectly fine, that the crisis is over, that the Dow will be at 15,000 by the end of the year and that Ben Bernanke is the most brilliant man in the history of the Fed. Too Big To Fail has triumphed over doom and gloom.
Willing to bet your job, your home, your family, your car, your lifestyle on that supposition?
You already have.
Be prepared.
