14 Apr 2008 Government – the White Knight?

Government to the rescue is becoming more widely accepted and even encouraged by Wall Street lately. The credit crisis hit another crescendo today as the nation’s fifth largest broker, Bear Stearns, obtained emergency funding from J.P. Morgan Chase and the New York Federal Reserve saying its cash position had “significantly deteriorated.” Traders in global currency markets are openly speculating that central banks will soon announce a concerted effort to support the value of the dollar. Earlier in the week central banks announced a concerted plan to buy troubled mortgages. On the heels of that news Ben Bernanke announced plans to lend up to $200 billion in Treasury securities in exchange for debt including private mortgage-backed securities that have slumped in value as homeowners defaulted on their payments.

These government efforts have largely been applauded by investors who typically worry about government intervention in the markets. It provides insight into just how worried officials are. The house of cards that was the collateralized debt market was supported by bond insurers with flimsy foundations and auction markets with no foundations. The credit rating companies Fitch, S&P, and Moody’s threatened to pull the AAA ratings, the banks abandoned markets they created for the bonds, values dropped like rocks and the house came tumbling down. Unfortunately, as the Bear Stearns announcement shows today, we are not yet at the point that all the bad news is known in the credit markets.

There was some good news this morning at the market opening as the government reported inflation stalled in February. The consumer price index was unchanged following a 0.4% gain in January, according to the Labor Department. Excluding food and energy costs, the core CPI was also flat in February after a 0.3% gain in the previous month. Economists forecast the CPI would rise 0.3% in February and 0.2% less food and energy. Energy prices declined in the month, while food prices rose 0.4%.

Oil reached new heights this week as analysts blame the weakness in the dollar. The dollar is made weaker as the Fed reduces rates below those ofEuropeand other trading partners. It is widely expected that the Fed will drop rates up to a full percent next Tuesday at their regularly scheduled monetary policy meeting.

Since the market peak on October 10, 2007 the Dow Jones index has fallen over 14% and the Nasdaq 21%. With continued illiquidity in the credit markets, the potential for more bank write-downs, a shrinking dollar, and declining consumer confidence, few investors think we will avoid recession. But aggressive fiscal and monetary stimuli already in place may minimize the damage. And if this week is any gage, there is more government help to come. Please, bring it on.