So here we sit on November 1st, 2008, having lived through one of the worst stock market collapses in history and definitely the biggest Wall Street bailout in the history of the financial system. Will the Governments $700 billion bailout work?
The stock market began its decline in mid-September just after the government decided that Lehman Brothers wasn’t worth bailing out. They didn’t make that mistake again. By the end of September the market had seen a record making one day decline of 777 points. Most on Wall Street thought that was the day of capitulation, the day with huge volume that anyone who wanted out of the market was now out and the market could begin its recovery. No one expected what was about to come.
By October 10th the Dow hit an intraday bottom of 7,882.52 points, closing just above 8,400. Then on Monday a record rally of over 900 points excited investors that the end of the decline may have occurred. But then the decline began again and the Dow eventually would hit a closing low of 8,175.77. Since that low the market has rallied to over 9,000, but are the declines over or just taking a breather and how long will the breather last?
Everyone is asking ‘Will the Governments $700 billion dollar bailout work?’ And how about the actions of the Federal Reserve? The idea behind the bailout and the Fed’s actions of lowering the Fed Funds rate to 1{421b746ef4f4588dfd87c8acf16c9c4b10a4a0127eaff1927a04f4091b6d6d60} is to stimulate lending. That is, stimulate the lending that occurs between banks.
So far, it is not working. And what if it does? Will banks lending money to each other stimulate the economy? Doesn’t the consumer need to begin borrowing again? Bank rules for borrowing have tightened considerably and well they should. But will consumers begin borrowing again?
For 7.5 million homeowners who have large mortgages and have tapped into the equity lines of credit on their homes, borrowing is out of the question. You see their homes are now worth less than the mortgages they have on them. Many of these people will just walk away from their homes, further increasing the supply of housing and pushing back the end of the housing slump.
But here is the real kicker. The Fed is loaning banks money for 1{421b746ef4f4588dfd87c8acf16c9c4b10a4a0127eaff1927a04f4091b6d6d60} – and may go even lower at their next meeting. The Treasury has given the largest banks $250 billion – hard cold cash in exchange for an equity position and the banks still aren’t lending.
On top of that, it’s the consumer that really needs to begin borrowing to jump start the economy, but mortgage interest rates to the consumer are higher today than they were 1 year ago and higher today than they were 1 month ago. So, I ask again, will consumers begin borrowing again? I’m not seeing the incentive.
