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Friday, November 21, 2008

Can't Wait Until Monday

It's amazing what a little confidence and reduced uncertainty can do.

"Msnbc.com's Al Olson reports that immediately after NBC News' report on Tim Geithner likely to be named Treasury Secretary, stocks rebounded sharply. The Dow Jones Industrial Average was trading in negative territory -- down about 38 points -- before the news. Moments after, the Dow zoomed more than 300 points." (MSNBC source)

I support the pick overall.

Geithner seems to get that traditional Fed policy will not solve this crisis:

"What we were observing in U.S. and global financial markets was similar to the classic pattern in financial crises. Asset price declines—triggered by concern about the outlook for economic performance—led to a reduction in the willingness to bear risk and to margin calls. Borrowers needed to sell assets to meet the calls; some highly leveraged firms were unable to meet their obligations and their counterparties responded by liquidating the collateral they held. This put downward pressure on asset prices and increased price volatility. Dealers raised margins further to compensate for heightened volatility and reduced liquidity. This, in turn, put more pressure on other leveraged investors. A self-reinforcing downward spiral of higher haircuts forced sales, lower prices, higher volatility and still lower prices.

This dynamic poses a number of risks to the functioning of the financial system. It reduces the effectiveness of monetary policy, as the widening in spreads and risk premia worked to offset part of the reduction in the fed funds rate. Contagion spreads, transmitting waves of distress to other markets, from subprime to prime mortgages and even to agency mortgage-backed securities, to commercial mortgage-backed securities and to corporate bonds and loans. In the current situation, effects were felt in the municipal and student loan markets."

-Senate Banking Committee Remarks, T. Geithner

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