When the Dow Jones Industrial Average closed on Friday, 10/October/2008, it was 40% lower than this same time last year.  The US Federal government took that as a sign the $700 billion bailout package was not enough to convince traders the market had hit bottom and would begin a correction upward.  So the next response the US government announced was a step towards what many consider to be the end of free market capitalism in the USA.

The announcement that brought about these opinions was the one which said the US Federal government would begin buying the preferred stock, or equity, of American banks in order to inject capital into the system.  Once that happens it places the government in the unique position of owning shares in banks it is also regulating.

Now why would the market have a problem with that notion?  Hmmmm…let's think this through…

Some people have a real problem with this, because heaven knows the government is partially to blame for the mortgage bubble.  They caused the problem and now are trying to solve the problem.  But at what cost is what proponents of capitalism are asking.  And this is not just a discussion about financial costs.  There continues to be die hard capitalists who claim the markets should be allowed to work themselves out even if it is economically painful.  These are the same people who claim those who lose their homes to foreclosure should take responsibility for accepting mortgages they could not afford, and for many, buying homes that were too expensive for their budgets.

So as the global markets continued their slide to new lows, the G7 agreed to meet over the weekend and come up with more options.  On 11/October/08 the G7 announced it would take "all necessary steps" to make credit market repairs.  In the meantime the Dow Jones Industrial Average slipped below 9,000 and continued to freefall until the closing bell.  In the past two weeks the Tokyo NIKKEI fell 30%.  The Germany DAX Index fell 25%.  The London FTSE fell 20%. 

On Friday the currency markets were responding to the continued crisis.  The US currency fell against the Mexican peso, the Australian dollar, the euro, the Canadian dollar, the British pound, the South Korea won and Brazil's real.  The rise in foreign currencies against the dollar was a positive response to the G7 announcement concerning efforts to stabilize the credit markets. 

But here's the catch for the foreign currency market.  The rise in the currencies may reflect more confidence in the ability of government to prevent the continued freefall of the markets with expensive bailout programs, but it also means the national debts will be rising.  In the near future the currency gains against the US dollar will probably be lost.  

The general opinion is the trader panic is beginning to taper off.  The euro advanced Monday morning 13/October/2008 more than it has since 22/September/2008.  Even the British pound began advancing. 

So what is next in this ongoing saga of economic doom and gloom?  It appears the stock markets are beginning to rally, but no one seems to dare predict how much of a rally to expect.  One thing everyone has seemed to be reminded of as a result of this mess is that traders will protect their investments even when it requires what appears to be irrational trading and despite continued begging by governments to sit still.  

That was like asking someone to sit still on a red ant hill.  It turns out no one was in the mood to get bitten any more by economic surprises.