IS IT WORKING YET?

Unless you were on a deserted island in the middle of the Pacific Ocean last week, I’m sure you’re aware of what transpired in the stock market last week. Just when you might have thought it had hit bottom and it was safe to come out again, another drop occurred. I would daily proclaim that it just couldn’t go any lower, and then it would! It’s estimated that in the past year, $8.4 trillion in wealth has been lost. That’s a lot of zeros! Evidently, an unprecedented $2.4 trillion was lost just last week. It’s said to be the worst week in Wall Street history.

Why all the fear? The credit markets have frozen. These are the markets that fuel our economic engine. And these markets froze despite all of the actions by the world banks. This in turn generated all kinds of negative news regarding unemployment, durable goods, consumer spending and factory orders. The world economy is in a credit crunch, as well, because other countries hold some toxic mortgages in their investment portfolios.

But there was a little good news, too. This should force interest rates down. And the price of oil is dropping. Oil prices of $140/barrel are ridiculous and not warranted, as far as I’m concerned. The speculators are being driven out of the market, and it seems a more realistic price of $45-$65/barrel is coming back. (At the time of this writing, the price is around $75/barrel.).

The present administration and Mr. Paulson are working to put the new Bailout Plan into action. But rather than purchasing mortgage assets right now, they are taking steps to inject more cash into the banks through purchases of capital, which will quickly provide money for the banks. The Federal Funds rate has been cut by half a percentage point to a ten-year low of 1.5%. Some will argue that this low rate was partly responsible for the sub-prime frenzy in the first place; banks were allowed to borrow money cheaply and then turn around and lend them to riskier borrowers at much higher rates. While some are betting on another quarter-percent drop by the end of the month, others are fearful that this will cause the dollar to devaluate even further. The central banks of other countries are getting in the act, too, and are cutting their key interest rates.

The FDIC has increased its deposit insurance to $250,000 in an effort to stop the run on the banks that was occurring. Psychologically at least, that step seems to have calmed things down a bit.

Despite the uncertainty in the markets today, something needed to be done in an attempt to fix them. No one knows for sure what the outcome will be; but one can only hope that these efforts will help battle a world-wide recession. The roller-coaster ride isn’t over yet, though. Corporate-earnings reports are due to be released soon.
Watch for my next blog about the Federal Reserve and commercial “paper”. And as that famous ‘70’s poster used to proclaim…

HANG IN THERE, BABY!!
Herb