The Sun Rises on Wall Street Again
Wednesday, March 12th, 2008
By Michael Lombardi, MBA for Profit Confidential
They were celebrating in the bars and restaurants on Wall Street and in Manhattan last night, as Fed Chairman Bernanke came to the rescue of the banking crisis and stock market big-time.
In an unprecedented move, the Fed said that it would lend U.S. Treasuries to banks in exchange for mortgage backed securities. By doing this, the Fed is essentially permitting the banks to switch illiquid debt for very liquid bonds. It’s an ingenious move by the Fed to shore up the banks.
But what’s really happened here?
The Fed is basically taking bad and troubled loans away from the banks and replacing them with solid U.S. bonds. This will help banks with their liquidity problems. But what else it will do, which I haven’t read anywhere else this morning, is slow foreclosures of homes whose owners are in default of their payments. The move helps the banks and homeowners.
Remember last week when Bernanke was asking the banks to forgive some of the principal on home loans to its customers to reduce foreclosures? Well, I think Bernanke has decided to do it himself by buying $200 billion of mortgage backed securities.
The announcement by the Fed, despite oil reaching $109.00 a barrel yesterday, was good enough for a 416-point (3.6%) bounce by the Dow Jones Industrial Average — its biggest single daily gain in five years. The S&P 500 Financials had their biggest pop in eight years!
Again, the intention of the Fed has been made clear: Forget inflation, forget a falling U.S. dollar. At all costs, the name of the game is stopping the economy from entering a recession and/or deflationary phase.
Will it work?
I’m a big believer in letting the natural forces of bull and bear markets, economic expansions and contractions, take their own due course. But the Federal Reserve is of the belief that it can change the course of history with its monetary stimulus. Will it work? After all, Greenspan saved the economy from a recession in the earlier part of this decade. So it can be done.
But today, we are already in a recession. The Fed is trying to make it as mild as possible. Ben Bernanke is a very smart man. He realizes American consumers do not have the money to spend their way out of this recession. The housing bust and banking crisis did not confront Greenspan in the late 1990s, but it is confronting Bernanke today.
Wall Street thinks that Bernanke was the savior again today. For me, it was the same old story. Consumers were lured to buy overpriced houses and the banks made tons of money selling loans consumers should not have qualified for. Wall Street peddled those same loans to investors in the form of securities and Wall Street made tons of money, too. Now the banks and Wall Street are saved again as the Fed bails them out of their problems one more time… but the public… well, it’s damned again.
Next Post: Even Good Stocks Having a Rough TimePrevious Post: Just Because Banks Aren’t Sharing, Doesn’t Mean No One Else Is
Tags: stock market, U.S. dollar, U.S. Treasuries
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Michael bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely, reading every book he could find on the topic and taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Today, Michael only employs the top market analysts and editors. Some of our recommendations have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Along the way to building Lombardi Publishing Corporation, now with over one million customers in 141 countries, Michael became an active investor in real estate, art, precious metals and various businesses. Readers of the daily Profit Confidential e-letter are offered the benefit of the expertise Michael has gained in these sectors. Michael believes in successful stock picking as an important wealth accumulation tool. Married with two children, Michael received his Chartered Financial Planner designation from the Financial Planners Standards Council of Canada and his MBA from the Graduate Business School, Heriot-Watt University, Edinburgh, Scotland.Follow Michael and the latest from Profit Confidential on Twitter
