• It has been another crazy week in the financial markets. This time, however, there is a nice balance of good news and bad news. Hey, half and half is a better ratio than we’ve seen in recent days. So let’s get to it.

    Tuesday, March 11th marked the best single-day gain in the Dow Jones Industrial Average in 5 years. This was a result of the Fed introducing a new and innovative financial instrument to the market called the Term Securities Lending Facility. The most noteworthy function of this new facility is that busi­nesses in need of money can post mortgage-backed securities as collateral. The ultimate impact is greater legitimacy in the asset-class and a subsequent increase in perceived value.

    This can be likened to a grocery store accepting sand dollars in addition to regular dollars as payment. Such a move would drive up the value of sand dollars, and a ton more people would be combing the beach for them as demand increased. So, mortgage-backed securities, whose value dictates the level of mortgage rates for consumers, got a big boost by this act and favorably affected rates for the week.

    The Term Securities Lending Facility inception combined with the Term Auction Facility (where busi­nesses can bid for bank loans anonymously and not signal weakness to the markets) are big deals. They stand as creative solutions our government is trying to come up with when traditional monetary policy (via lowering the Discount Rate and Federal Funds Rate) doesn’t do the trick. Go Uncle Sam.

    Now for the flip-side of things. The dollar continues to weaken (just hit an all-time low against the Euro today) and oil, gold and other commodities are continuing to hit all-time highs with no signs of weakening (commodities can be a handsome alternative investment to currency). This all smacks of looming inflation, and inflation worries will stifle any major improvements in mortgage rates.

    However, the biggest story of the moment is about Bear Stearns, one of the leading investment banks in this country. Bear is receiving a joint bailout from JP Morgan Chase Bank and the Fed with other banks possibly helping out. I could bore you with the details of the transaction, but it’s most important to know what this means conceptually.

    The move by Bear to raise capital brings to light an underlying fear investors have for the continued solvency of the financial institutions of this country. This triggered a run on the banks, giving the stock market another decidedly negative trading day. To put things in perspective, Bear Stearns’ stock value represents less than one-tenth of a percentage point of the total market’s value. However, to­day’s activity drove most market benchmarks down by 1-1.5 %. It’s a lot like an action movie scene where everyone has their guns pointed at everyone else and no one’s moving. A moment of extreme tension hangs as everyone waits for everyone else to put their guns away. Then someone sneezes. Raises tension and causes overreaction.

    Consumer wealth decreases have slowed consumer spending, decreased business revenues, and is now having a negative impact on the job market. This will of course decrease consumer spending further (harder to spend freely when you’re unemployed) and the cycle continues. Conversely, Gross Domes­tic Product has maintained positive territory, allaying the cries of the recession-obsessed pessimists.

    Fed Chairman Ben Bernanke spoke at a housing convention today and laid out some suggestions for sustainable homeownership. The general feel of the speech was that “unregulated brokerage busi­nesses” need more regulations imposed upon them. Fine by me, Ben. This increased regulation, he states, is in direct response to the number of mortgages that are ‘seriously delinquent’ (90 days or more late OR in foreclosure) quadrupling since mid-’05. That said, regulation sounds like a good plan. Aside from that, nothing new from Big Ben.

    Lastly, President Bush gave a speech today at the Economic Club of New York. He said that we shouldn’t economically overcorrect and that accepting overseas investments is a good idea for trade (because, according to him, it was our money to begin with). But the speech’s proverbial cherry on top came when Bush was asked about inflation worries through commodity price increases. After ar­bitrarily discussing national security, he said (and I quote this directly because I can’t make stuff like this up), “I’m going to dodge the rest of that question. Thank you.”

    I think I need an Alka-Seltzer after that.

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