The week opened with sharp declines on the news that the "real" economy--meaning the cycle of production and consumption--was seriously sprained if not actually broken. The last two days, however, have been a bit cheerier for the markets. Two days ago, Asia time, the Nikkei and Heng Seng posted tremendous rallies, while yesterday saw the Nikkei's rally continue and the Heng Seng basically flat. Domestically, the Dow 30 shot up 900 points, back above the 9,000 mark, and today is floating just above yesterday's surface, almost like it's holding its breath.
Some of this is bargain hunting, of course, but some of it is also a case of "buy on rumour". The Federal Reserve Open Market Committee (which is what we often really mean when we talk about "The Fed") is meeting today to talk about interest rates. There's a strong belief they're going to cut them another quarter or half point. The Federal Funds Rate is currently at 1.5%, so you do the math.
Meanwhile, the LIBOR, the London Inter-Bank Overnight Rate that governs bank-to-bank credit, is still well above that, at 3.47%. That's down quite a bit, though. At the height of the crisis, LIBOR was over 5%. Keep in mind that, when everything is working right, LIBOR tracks the Federal Funds rate fairly closely, so the fact that there's still a 2% gap is troublesome. But the fact that it's now only a 2% gap is also reason to hope that credit markets really are thawing.
Still, this little column of mine isn't really about sunshine and roses, so of course, I have to point out some of the gloomier news. In a move that shocks almost nobody, most of the big banks receiving bailout money this week from the US Treasury are not planning to apply that money as a laxative to their constipated credit departments. Rather, they're going to use it to fund buyouts of smaller, weaker banks, thus consolidating the industry and creating more "too big to fail" institutions.
The problem is that Secretary Paulson failed to include any requirement, when he cut the checks to the banks, that it be used for lending. He just asked them really nicely. And now, the carrot having failed, he's doing nothing to apply the stick.
Now...maybe he honestly doesn't feel he has the authority to do so. Or, maybe he's such a dyed-in-the-wool free-marketeer that he just can't bring himself to really nationalize the banks by giving them orders of this sort. Maybe he thinks it's just as well that our debt-oriented economy is facing massive restructuring and a new paradigm, even if it hurts (and really, if so, I'm not sure I disagree; but then, I'm employed, right now...). Or maybe he's doing his friends favours at the taxpayer's expense--he'd hardly be the first cabinet minister in the history of government to do so.
Whatever the reason, the banks are planning to use the money to ensure their own survival, and to hell with the credit-based economy they spent the last 30 years constructing, and right now, nobody's in a position to do anything about it. The executive branch is stuffed full of Reaganites and neocons still in denial; the legislative branch is useless until January[*]; and the judicial branch really has nothing to do. It's not against the law to hoard one's treasure, nor for a corporation or individual to look out for what they believe is their own best interest.
However, it's doing nothing to improve the confidence of the economy. In addition to "big" credit pulling back, like inter-corporate credit, mortgages, and car loans, now the credit card companies are pulling back, behaving like fresh Born Agains, suddenly avid to preach tighter, more responsible credit after decades of sending credit-card pre-approvals to anyone who can prove they have a pulse. They're cutting credit limits (which automatically lowers credit scores, by the way, even if the cut has nothing to do with you, personally), raising interest rates, and in many cases just refusing to issue cards to new customers.
And all right before the American Winter Compulsory Capitalism Festival and Pine Tree Slaughtering Extravaganza.
Black Friday, the day after Thanksgiving Day in the US, is so nicknamed because it's the day many retail establishments finally make a profit on the year (and hence, are now "in the black"). Many of them spend their entire year running a loss that they expect to make up as the calendar winds down and children start praying to the Arctic toy-giving god.
This year, with money tight, jobs being shed, and credit cards pulling back, it may have a connotation more akin to the day historians attach to that day, exactly 79 years ago, when the stock markets wound up their third day of monumental collapse and set off the era we now call the Great Depression, 29 October 1929: Black Tuesday.
[*] Yes, I know they'll be convening again after the election. It's not impossible they'll get something useful done in their lame-duck session, but I wouldn't bet the farm on it.
The Eternal Pivot
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