Markets' message: Give us a financial rescue that works

If Wall Street wanted to keep the pressure on world leaders for another huge government-led bailout of the global financial system, maybe the rally in the final hour today wasn’t the right strategy.

Nonetheless, hope for a rescue that will finally turn the tide helped pull stocks up sharply from their lows. Some market sectors even scored significant gains for the day, although they barely made a dent in the week’s losses.

The Dow Jones industrials finished off 128 points, or 1.5%, at 8,451.19, after being down as much as 695 points, or 8.1%, at the start of trading.

So we were on our way to Black Friday -- for about six minutes. That was followed by a rally that briefly lifted the Dow into positive territory (up about 90 points), then another sell-off, then a major rally in the final hour, then another pullback.

Just another day of insane volatility, except this one was even more insane than usual: The Dow’s intraday swing spanned 1,006 points from its low to its high -- the first time that has ever happened.

For the week, the Dow lost 18.2%, the biggest percentage drop in the index’s 112-year history. The New York Stock Exchange composite plunged 19.5%.

"It’s got to end somewhere," said Michael Mainwald, head of trading at Lek Securities in New York.

But whether this was it -- with the Dow, at its low for the day, off 44.3% from its record high one year ago this week -- only the market knows for sure. And it isn't giving many clues.

A rally in bank stocks set the tone for the day’s recovery, traders said: Everybody was expecting the Group of 7 industrialized nations this weekend to put forth some new package of fixes for global credit markets, which remain largely frozen.

Banks could be the major beneficiaries of any new moves. Treasury Secretary Henry M. Paulson said after trading ended today that the U.S. would move ahead with a plan to inject capital directly into banks and other financial institutions, taking non-voting shares in return. This would be part of the $700-billion bailout Congress approved last week.

In regular trading, JPMorgan Chase & Co. jumped $4.96 to $41.64; Citigroup rose $1.18 to $14.11.

Awaiting concrete action by policymakers, financial institutions and other investors continued to hoard cash early today. The annualized yield on three-month Treasury bills sank to 0.19% from 0.52% on Thursday as buyers swarmed.

Many analysts believe that G-7 finance chiefs have gotten the message, after the mammoth losses in stock markets worldwide this week. Yet the statement policymakers put out this afternoon was filled with generalities. Markets will want something more specific -- or else.

"The G-7 has to come up with some really new and profound ideas for lubricating the world’s banking system and restoring the flow of credit to the private sector," said Carl Weinberg, chief economist at High Frequency Economics in Valhalla, N.Y.

"Otherwise, the ensuing liquidity trap will lock up the world economy and throw us into a depression within a matter of days and weeks, not months or years." (UPDATE: Weinberg did use the word "depression." In my original post here I said "recession," but that was my mistype.)

See economist Nouriel Roubini’s proposals for massive government intervention in this earlier post.

Photo: Finance ministers and central bank chiefs from the G-7 countries, in Washington today. Credit: J. Scott Applewhite / Associated Press

Comments

[spinnikerca]

Why isn't 'the rescue that works' just butting out and letting the markets correct so we can invest intelligently going forward? The government by propping up assets with no value not only is ripping off taxpayers, it is perpetuating malinvestment which will make the final crash that much harder and longer. This is exactly what they did that prolonged the Great Depression.

Not to mention the absolute irony of ripping off the poor and middle class to fund the wealthy.

[jeff barron]

This is almost too much crap to even swallow. The feading frenzy continues and they are feeding on us.

[Mike%20Nolley]

People should wake up to the fact that a moderate amount of socialism is good not only for the people of the world, but for commerce as well. We cannot continue to rely on the principle of competition to drive forward progress. Instead, we must begin implimenting the principle of cooperation. If we do not, the whole world will "lose". I work for an organization committed to the principle of Sharing. Click on my name to go to the website.

[The Truth]

Remember that saying about boiling a frog by slowing turning up the temp on the pot? Well, if they gave out all the bailouts in one shot, there would be a complete uproar. But this way, they'll just keep dishing it out for the foreseeable future. Wall Street has another way to make money now. Welcome to the fruition of moral hazard - private profits and socialized losses.

[William]

In the near future, there is going to be a time where we all are standing here at the bottom, looking up, looking at where we have been and be in relief it is all over. Sites like these will no longer be impacting economic news http://www.buymyhousebeforethebanktakesit.com . The dust will settle and there will be great deals to be made, great opportunities to invest in and we will all move on. It will be a time for rebuilding, working together hand in hand, and lending a helping hand. Our actions will have become a part of history. You will be able to tell your grandkids you made it through the crash of 2008 and tell them your part. Your character will be determined, did you believe on not, did you hold on or not, did you panic or not, did you ride the course or not, did you contribute or take. What was your role, what did you do to help others, what did you do to help America in it’s time of need? Your decisions and actions today are what are building tomorrow. Make sure they are the right decisions.

[Bob]

Its simple. All Wall Street brokers have are IOU's from everybody else who has nothing but IOU's. Now all they have are pieces of paper that say they have money but it not worth the paper it is printed on. They took out all the real money, blew it or should I say embessled it on thier own personal life styles,bank accounts and corporate parties. So I say the party over go out and get a REAL JOB!!!

[Windfall]

No, the market is telling us that investors don't trust The Marxist Messiah. As Obama goes up in the polls, asset values go down worldwide.

But Armageddon can wait.

I know it’s the stretch run of a presidential election. I know the media has drank the kool-aid and is without question completely in the tank for the Marxist Messiah Barack Obama. I know that it makes sense for them to gin up as much pessimism in capitalism as possible but really. This panic is completely overblown and senseless.

Yes, the government went diversity mad and extorted banks to abandon their traditional lending criteria in favor of affirmative action lending which has left us with millions of mortgages that are not going to be repaid by their makers. Big deal. The underlying properties still have some value. Maybe it’s only 70 percent. Maybe it’s only half but there is a tangible value there. Someone will be more than willing to move into those houses and make the payments provided the valuations aren’t too far off from reality.

Yes, banks and mortgage-backed securities investors are going to have to absorb some losses. But, other than that, our economy still has the same building blocks as it did a year ago. No one has bombed New York City, Washington, D.C., our off shore oilrigs or anywhere else for that matter.

Everything still works. All of the technologies developed over the history of mankind still work. Yes, the infrastructure is a bit worn in places but we still have the greatest system of roads, bridges, canals, railways, airports, power plants, sewer systems, pipelines, electrical transmission lines and communications networks ever devised. Our work force hasn’t been hit by a plague nor have they forgotten how to do what they do. No one has tried to shut off our oil supply or quarantine our exports. All of our farms are still producing at record levels. Manufacturing capacity is still in tact even if demand is questionable.

As any fool knows but no politician has the guts to say these days, the fundamentals of our economy are sound.

The real reason why investors are bailing out of the market has nothing to do with the soundness of the economy. It has to do with the certainty of property rights.

As polls now indicate that we seem to be on the verge of electing a Marxist to the office of President of the United States, investors worldwide interpret that as a lack of faith in free enterprise on the part of the American people. Now, of course, workers all over the world know that Marxism is a miserable failure and they wonder what will happen to the world economy if that bulwark of freedom, The United States of America, suddenly loses its collective mind and abandons the very principles that made it the greatest nation with the highest standard of living and largest economy in history.

That is why the markets are tanking. With the specter of a Marxist taking over as “Leader of the Free World”, no one knows for sure if anybody really owns anything. If the U.S. no longer believes in freedom, who will guarantee, or even threaten to guarantee, the property rights of the Free World?

Walter Williams sums up their sentiment like this, "We might have reached a point where the trend is irreversible and that is a true tragedy for if liberty is lost in America, it will be lost for all times and all places."

http://townhall.com/columnists/WalterEWilliams/2008/10/01/destroying_liberty

It’s not a crisis of economic confidence. It’s a crisis of political confidence.

And the Marxist Messiah is at the heart of it.

http://www.mediacircus.com/2008/10/obama-sued-citibank-under-cra-to-force-it-to-make-bad-loans/

[sourkraut]

Wall Street must also battle the public, and politicians who are more than happy to get involved, for a vote. Has Government intervention EVER made anything better? income redistribution has never solved a problem, and likely never will. leave wall street alone and it will heal, and let the capitalists do what they do best- by finding a way to realize a return on their investment.

[wadosy]

the oil acquisition project seems to be stalled, and absent another "catastrophic and catalyzing event... like a new pearl harbor", it seems unlikely to get back on schedule.

crashing the stock market seems counterproductive, unless you're in position to loot like the oligarchs looted the soviet union as it collapsed, but maybe that's all that's left... looting... but there's no doubt that america will suffer a massive readjustment of its way of life even though "the american way of life is not negotiable".

yawn.

it just gets tiresome as the powers-that-be resort to all these shenanigans in an effort to disguise the fact that their "new pearl harbor", a pretext to start the oil acquisition project, was their response to peak oil.

it would have been so much simpler had they told everyone the truth right from the beginning, starting in maybe 1970, when american oil production peaked, despite the best tech, the best experts, and the biggest bankrolls...

...but now it's too late to tell the truth, isnt it...? ...because if the powers-that-be acknowledged the cause of these problems, they'd make it easier for common people to connect the dots... peak oil to 9/11 to the "war on terror".

ho hum

[James M.]

"Why isn't 'the rescue that works' just butting out and letting the markets correct so we can invest intelligently going forward? "

Because what they are not telling you is that the "correction" means 30-40% unemployment, ghost towns, severely limited civil infrastructure, all within a few years, months maybe.

Think about what happens when cities cannot pay their police forces. People volunteer for the job. There's a word for that: Vigilantes.

Are you *sure* you want the government to "just but out" and let the markets "correct" even if the "correction" means the complete failure of the financial system?

Personally, I thrive on chaos, and I think it will be interesting to see unemployment and homelessness become so common as to lose their stigma. And I lost all my money in the market the *last* time it crashed. I had no choice in the matter -- hundreds of thousands of dollars of un-matured stock options became worthless in 1999-2000. I am still struggling with that, and laughing at all the people who are losing today. Yes, laughing at them. And reading Hemingway and Steinbeck the whole time too.

So I agree with you, the government should butt out and let it fail... but for a different reason: My reason is that I find the chaos and irony to be delicious, and I welcome the fall of cities and the elimination of the capitalist system, the destruction of the hypocrites, and any pain that is inflicted on the super-wealthy and their pathetic aristocratic families.

Any questions?

[Peter Namtvedt]

It is interesting to note what the financial powers that be are willing to acknowledge and what they seem to be unable to disclose. There is a crisis in the credit market, made quite visible mostly by the way the equity market is imploding.

Businesses that do not retain earnings to fund future operations rely on new lending all the time (not particularly wise), but are not able to sell commercial paper. Home buyers with the best credit rating are not granted decent-rate mortgages. What has happened? Why are investors dumping bank stocks? Why are people buying gold and silver? People don’t know whether to put their money under the mattress or spend it as fast as it comes in. Does this mean that bankers are becoming wiser and ordinary people becoming more stupid?

No. This means that reputations, or the credibility of the borrowers of the world are in question, and that the fiat currencies are failing. Our money, after all is based on debt. Moreover, the consequences of this leads to a contradictory mix of communications.

What is being disclosed is that it is a bit more difficult to get a loan. Interest rates "suggested" by central banks are being lowered at the very time that actual rates for new loans can hardly be discussed (if you must ask, you cannot afford it). What are we not told?

Among the things that the financial powers seem unable to disclose are the true consumer price index (CPI: is it the mere official 5.9% or the over 14%, to which the growth of the money supply leads?), the true growth of the national debt or the current deficit, the fact that the income tax is a ruse to hide the true legalized theft of monetary debasement, the true GDP (now negative), the effect of past government regulations that caused the bubbles of the last two decades (CRA and Fair Lending).

The G7 is meeting with the ultimate monetary questions of the table. Now no one is safe. You could wake up Monday morning with financial markets closed for days, with a new world currency, linked in some way to precious metals. If you own gold you may not benefit from this. Who knows what these self-designated geniuses will come up with?

We may now expect any of a variety of desperate measures to mask these government failures that are blamed on the market: massive creation of credit through the Federal Reserve, a new war, censorship, martial law, who knows. The banking-government complex insists on ultimate victory. I, my family and you all are just collateral damage.

We were not expecting to get out of this alive or to take it all with us anyway.

[Mike]

Let it burn, let it all burn! I live in a simple house which I can afford. I take what I can pay for and have no credit card debt. There is one for sale sign in my neighborhood. Drive one minute to the next neighborhood over, with homes in the $500,000 range. Why are their 10 times the amount of homes in foreclosure here? The answer is simple. People got greedy and simply bought too much house. These people CHOSE not to live within their means and now the government is going to wipe their tears away by reaching into my pocket. I meanwhile will keep making my payments with no help. That is what I get for making "smart decisions". Perhaps I'll go ahead an make some "bad choices" since following the rules apparently doesn't pay off.

[beedu.bya]

..."ripping off the poor and middle class to fund the wealthy"??

I am a volunteer tax prepreparer for low and moderate income earners - mostly minorities and seniors. They don't pay any taxes, thanks to the Bush tax cuts, so it's not their money that's going to bail out our credit system. In fact, if they're under 65, many of them get the Earned Income Credit, another form of government welfare, which BO wants to expand.

[chris dorf]

We do indeed live in Dickensonian Times...the poor and all my friends are sacrificed to the gods of money - to starve, and slave for a mere pittance.

[Web Smith]

Wall Street goes up and down based on imagination and people make a living imagining what it all means. It's all enough to let your imagination run wild.

$750 billion added to a $10 trillion national debt and the lala land politics that created it is good material for another Golden Compass type movie with Nicole Kidman. Imagine climbing a stack of dollar bills that reaches into space over three times the distance to the moon on your way to magic land.

The only problem is that, this time, imaginations have turned into madness. It's time to pull the plug on this fantasy movie.
http://ewebsmith.com/self/StandUp.html

[airplane]

Four homes around me were sold to them whom could not afford them, I do hope they are lost, as they are being run down, that devalue my home, In a 2003 speech BUSH took full credit for the sale with no down payment of homes, i do not fell well about the bailout. it is like paying to have your home wrecked.

[andy]

Any sane person would realize the markets crashed BECAUSE the bailout passed.

First, it was proposed and the markets went way down. Then the house nixed it and the markets went back up. Then the senate and house passed it and the markets collapsed.

Every sane investor realizes the only thing the government can do is damage, in the form of Paulson ensuring that his buddies at big investment firms are made whole at the expense of the rest of us. So the only sane things to do are sell everything you have right away, or bet on Paulson not being able to actually conduct the rescue due to political harassment.

This reasonable fear that the government is going to save the big institutions at the expense of the rest of us is greatly amplified by the very overt media invovlement in political lobbying to make the bailout happen, and to protect the big institutions that need to be liquidated for the market to recover.

The real way the media can help stabilize the markets is to go over Paulson, his associates, and what he proposes to do with a fine tooth comb so people have some confidence they understand what is going to happen and why. Without confidence based on actual knowledge the only rational presumption is a lot of the stocks I hold are worth zero, because the stocks Paulson's buddies at Goldman Sachs bought are going to pumped up by government intervention.

[Stephen Brackin]

What the markets are saying in response to all the "rescue" plans is that no matter how many hundreds of billions of dollars governments conjure out of thin air to give to the corporations that give them the biggest bribes -- uh, campaign contributions -- that money isn't going to make it to shareholders, and the shareholders have figured that out. The "rescues" just add to the burden of the typical shareholder/taxpayer. They might reduce pain in the short term, but they increase it in the long term.

[jbunniii]

Can we have our $700 billion back?

[Michael]

How about giving us a plan to become energy independent. Very little is being said about the link of our dependence on foreign oil and it's exorbitant price and the rapid decline of our economy. The high cost of fuel drives up the cost of food and EVERY consumer product. Families are suffering tremendously from filling up the car to paying electric and heating bills to the rising cost of food. There is little to no money left over to save or invest. Jobs and homes are being lost at a record rate with no end in site. We need to utilize natural sources of energy such as wind and solar as well as integrate all modern technology such as hybrid cars, plug in cars, bio fuels etc. We have the technology and knowledge what our nation seems to lack is a plan of action. We are drowning in our dependence on foreign oil. We need to wake up, educate ourselves and be proactive in demanding our elected officials do everything in their power as leaders of our nation to extract us from the iron grip of our dependence on foreign oil. I just read a book called "The Manhattan Project of 2009" by Jeff Wilson. I think maybe we should elect him for president! he is brilliant so is his book

[H.%20Craig%20Bradley]

The Federal Government is likely to own the banks, the domestic auto companies, some hedge funds, and who knows what else. So, in the future you better only pick investments which are likely to receive government guarantees or funds in a pinch. In China, those specific companies which are politically connected get all the long term contracts, amounting to billions and billions of dollars in business. The government allocates capital. This is our future, as well.

[grasspress]

i think the best thing for governments to do is to initiate massive tax increases on those who are able to pay them. this will reduce the 'crazy money' out there and will take some of the speculation out of the market place, where greed has driven this market into what we're seeing now.
with these tax revenues governments should invest in massive public works projects to revitalize nations' infrastructures, education systems and health systems. this will keep people working and will inject money into circulation and from this a new economy will emerge.
then, governments should initiate policies to reduce market place speculation (such as imposing high taxes on investments sold before a defined time period and a minimal tax on all buys and sells).
next, governments should make a big effort to pay down debt, a real drag on all economies. those lately who have claimed the 'fundamentals of the economy are strong' were complete idiots: how can 'fundamentals' be strong when governments don't make an effort to pay their debts.
thanks

[ted%20in%20pdx]

I would argue that the current measures being taken by the Bush administration and the larger group of "finance ministers" from the G7, are demonstrating an underlying truth which would be impossible for any of them to admit: this melt-down is not a crisis of confidence in the US economy, it is a recognition by investors at large that the global financial industry, lead by the major firms on Wall Street, have constructed a rigged game, the rules of which limit the upside potential of all investors. On the downside, the rules are such that the operators of the game can speculate with the assets entrusted to them, and when their schemes go wrong, tacitly hold their governments hostage to the corrosive effects of near-term financial losses, and thereby effect bail-outs of many varieties in order to sustain the canard that the game itself is honest.

What should a President do about it? I believe he should consider an aggressive investigation into the individuals who perpetrated the sub-prime mortgage irregularities, and use whatever legal means available to expose their malfeasance, and recover assets they have acquried with the compensation they have extracted over the entire course of this loosely understood "racket" they have been operating. He should also draw upon expertise from those who are not part of the racket, but who understand how it works. Two good examples: David M. Walker, former Comptroller General of the GAO, and William Isaac, former head of the FDIC under Ronald Reagan.

The current crisis and the measures being taken give the appearance that Secretary Paulson is willing to spend an unlimited amount of money, as long as the solution protects the status quo in terms of who actually holds power on Wall Street, and their cohorts in Congress. The reason so many voters opposed the bailout was precisely because we wanted to see the manipulators and opportunists flushed out of the system. Until that happens, no one with any sense is going to rely upon Wall Street for anything. It's clearly a rigged game, the sub-prime mortgage episode has left a massive e-paper trail which substantiates that.

[Mike]

The middle class is the heartbeat of this great nation. When the middle class can't afford to buy a house, we have real problems. Home values are over inflated in Florida and they SHOULD come way down. I don't think the houseing market is necessarily "crashing". Nor do I think capitalism is broken. On the contrary I believe capitalism is working, driving the prices of homes BACK to where they should have been to begin with.

[comrad]

God bless the USA er...USSR