A number of dominos have already fallen and it’s now up to policy makers to decide whether the rest of the set will go. Right now, Wall Street is looking to the government for help, and it’s looking for a restoration of confidence in the capital markets.
This doesn’t mean that government intervention is the correct move to make. In my view, if a government bailout package for Wall Street helps restore confidence in the financial markets, then that’s a good thing. I really do wonder, however, if a taxpayer-funded rescue package will have serious unintended consequences.
In the immediate term, the stock market is without direction. It is completely trading on confidence in the system or, should I say, a lack thereof. The market was focused on the price action in oil, but then its attention moved to the financial sector.
In spite of what many people think, Wall Street’s greed is kind of like a necessary evil for the system. Without the availability of capital, Western economies would not be nearly as strong. The entrepreneurial system of doing things cannot thrive in an environment that doesn’t provide ideas with access to investors with money. What happened in very recent history is that the availability of that capital was just too plentiful, and it found its way to entrepreneurs (homeowners) who couldn’t manage their investments.
So, I think we’re left with the prospects of a recession, or near-recession, with a slow, grinding recovery. All you have to do is follow General Electric (NYSE/GE) and its stock price. This company is a great benchmark on the economy and the stock market.
In a sense, the economy has to consolidate its excesses, eat the losses, and begin an entire new cycle once again. Right now, we’re still in the middle of the consolidation period.