Friday, October 3, 2008
The 700 Billion (plus) Club
If you have even the slightest sense of history and a working brain in your head, the following story could not be a surprise to you.
Credit markets to Washington: Bailout isn't enough
By MADLEN READ, AP Business Writer
The credit markets finally got a bailout bill, but the stranglehold hasn't let up — a troubling sign that lenders and investors believe the package will only be a baby step in the long road to economic recovery.
The credit markets, where companies go to get cash loans, have seized up since the bankruptcy of Lehman Brothers Holdings Inc. and in anticipation of the $700 billion plan initially voted down by the House. The House passed a revised version of it Friday following the Senate's approval earlier this week, but anxiety about its effectiveness kept demand for Treasury bills high and nearly nonexistent for other types of debt.
Overall, market participants have begun regarding the rescue plan as a medicine for what's ailing the financial system, but not a cure-all.
"At best, we can hope that it stems some of the more intense risk from the credit crisis. It prevents things from spiraling out of hand here," said JPMorgan Chase economist Michael Feroli.
Some are worried, though, that the plan will not work at all.
"Nobody knows how it's going to succeed," said Howard Simons, strategist with Bianco Research in Chicago. "It seems the American public had better sense than Wall Street and Washington — the American public said, don't throw good money after bad."
The Treasury will buy banks' risky mortgage-backed assets in an effort to alleviate investors' worries about the institutions' solvency and free them up to do more lending. Even if those efforts succeed, the effects will be far from instantaneous, and borrowing could remain very expensive for some time. With the economy in such a weak state, lending to consumers and businesses will still appear risky until certain factors — particularly employment and the housing market — improve.
To paraphrase an old Carpenter's song (I guess all Carpenter's songs are now old): "We've only just begun, to give." I wish I could offer some sage advice, but I'm fresh out. Just be ready for one hell of a ride over the next few years, or decades.