Weekend at Bernanke's
The markets mounted an impressive comeback Friday–the likes of which has not been seen since the 1930s–rallying on a financial intervention by the government.
With Adam Smith’s oft-lauded “invisible hand” giving investors the invisible finger and the U.S. mired in one of the worst market crises in recent history, Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke finally decided to act. This morning they announced a sweeping plan to revive the suffering U.S. financial system. Using “hundreds of billions of dollars” in government funds, the Treasury will clear bad home loans from the books of the country’s financial institutions.
“The federal government must implement a program to remove these illiquid assets that are weighing down our financial institutions and threatening our economy,” Paulson explained in remarks to the press. “The financial security of all Americans–their retirement savings, their home values, their ability to borrow for college, and the opportunities for more and higher-paying jobs–depends on our ability to restore our financial institutions to a sound footing.”
Suffice it to say, Paulson’s remarks went over quite well with investors, who’ve clearly had quite enough of the market’s spelunking expedition. The Dow leapt more than 2 percent in the first moments of trading today, the Nasdaq more than 5 percent and soon the markets were well on their way to their biggest 2-day rally since 1929.
“Just like a child wishing for a Wii or an Xbox on Christmas Day, the market was hoping for some sort of RTC-type of arrangement, and there it was underneath the Christmas tree,” said Deutsche Bank’s Owen Fitzpatrick. “It was the booster shot that the market was looking for.” (“RTC” refers to the Resolution Trust Corporation, the entity created by the federal government to address the savings and loan crisis of the late eighties and early nineties.)
Question: Is this enough to heal the nation’s shaky financial system or will the market crisis reappear again like the dead uncle in some “Weekend at Bernie’s” (or, rather, “Bernanke’s”)-style Wall Street sitcom (”Bernie may be dead, but he’s still the life of the party!”)?
[Chart Credit: The Big Picture]