Just a Simple Yes or No Would Do

Posted October 29, 2008

The yen began to hold firm against the US dollar for the first time in 6 days. The confusing information in the marketplace is one of the reasons there are so many big swings right now.


Okay…just a simple yes or no from the big US lenders would be very nice at this point.  Are they or are they not going to begin lending to each other with the bailout money?  The answer might begin to clarify the financial future of the economy and give traders some confidence.

Perhaps a bit of a memory refresher is in order.  In early October the US federal government had said $125 billion was going to be injected into the financial lending markets through stock purchases.  Nine giant companies were chosen to be blessed with this massive amount of money with the goal of easing credit.  In other words the banks were to start lending to each other and begin making money available for consumer loans.

That is not what is happening.  These 9 large lenders are taking the money and are now talking about using it to buy smaller banks.  This will be like a culling of weaker banks.  Using the money for acquisitions was not the original plan, but here is the interesting twist on this story.

By letting these huge financial banks expand their retail operations, they are virtually doing the clean up job the US Treasury would have had to do.  In other words, by buying the weaker banks the federal government will not have to close them by force.  What a deal for everyone involved except for one problem.  No one knows what this means for the little trading guy trying to deal with the loss up to 2/3 of a retirement account.

The stock markets did appear to calm down a bit which was nice for a change.  The Down Jones Industrial Average fell to 8,175.77, but that was a 2.5% reduction which looked small after the huge swings the past 2 weeks.  The FTSE only fell .8% to 3,852.59.  Of course there are the opinions that the stock markets such as the DJIA and the FTSE 100 cannot be used alone as indicators of financial market health.   That is why the stock markets looked so healthy right before the collapse of the housing market.

The US has announced it is going to put another $125 billion into the banking system.  The federal government is also working on a funding plan for a big auto merger between General Motors and Chrysler.  There are talks about cutting the benchmark interest rate again by ¼% too.  The sad part is no one really knows where all of this is heading in terms of bringing real stability to the economy. 

How much money can the government spend?   It’s like asking a riddle.  The answer right now appears to be it can spend as much as it can print.

But the world is much larger than the USA even if the dollar remains the world currency.  The emerging markets are still in lots of trouble.   There are plenty of meetings planned to deal with the continuing global crisis.   Britain Prime Minister Gordon Brown and French President Sarkozy are meeting this week to continue spearheading the European response.  The European meeting of heads of government and their financial advisors is set for November 7.  The world leaders are meeting on November 15.  If nothing else maybe all these meetings will finally convince traders the governments really can deal with this enormous crisis.

The lack of confidence by traders has pummeled currencies other than the US dollar and the yen.  But yesterday, 27/October/2008, the yen stopped its rise against the US dollar which was good news for Japan.  The dollar still continued to strengthen against other major currencies though.  The euro ended the day at $1.2545; British pound closed at $1.5663; the Canadian dollar closed at $.7762; the Australian dollar closed at $.6074; the New Zealand dollar ended the day at $.5415. 

So what is the answer to the question about lending?  Hey…what’s the question?  That is the real problem.  No one still knows exactly what to ask about how to handle the financial markets.