A few thoughts on a weird week:
1. If, for the last 5 days or so, you had been in a coma/ outer space/ wandering through the desert/ etc. you'd look at the Dow today and think nothing new: market is down a few points. In golf, when you play poorly but score well the old saying is "the only thing that counts is how many, not how." For some reason, I think in this case the how matters though.
2. Since last Sunday, the US government added AIG to its growing portfolio (Fannie, Freddie, etc.), agreed to back stop money-market mutual funds, imposed a ban on certain financial institution short sales and expanded the money lending window created in the wake of the Bear Stearns bailout. On top of that, it looks like the government may revive the RTC in order to take over the banks bad mortgage obligations. The market - which typically loathes government intervention and loves de-regulation, responds with tremendous rallies. Ironic.
3. The market/ government relationship reminds me of the teenager/ parent relationship. Teenagers most of the time want to be left alone, are impetuous, tend to over react and are at constant odds with their parents. But when push comes to shove and they get in the car accident and need some help, they always coming running home. The market is filled with people who want government out of their lives, and complain about intervention, but when push comes to shove, they too end up running home for help.
4. Parents usually figure out some sort of punishment for teens who act poorly.
5. For some reason, I'm pretty sure that if Congress feels compelled to "do something" to make sure this doesn't happen again, it'll make things worse.
6. Lehman Brothers must have some serious Jan Brady/ middle child syndrome. AIG and Bear get help and they're left hung out to dry?? Marsha, Marsha, Marsha!
7. I remember learning in my macro-econ class about the money multiplier. How you can put $100 into a bank, who then lends $90 to someone else, who then re-deposits it into the bank, who then lends $80 to someone else, and so on and so on. I guess what's been happening now is a new twist on that.
Money was lent and the paper was then securitized. The resulting securities were then used by their buyers as leverage for more borrowing - which borrowing (of course) was then securitized and collateralized by the now twice removed underlying paper- and on and on and on. Of course to be prudent in each case the risk was hedged with insurance contracts.
I don't remember learning in my macro-econ class what happens when the money multiplier contracts.
8. For some reason I have a feeling this is the first of quite a few wild weeks on wall street. I hope they all end up as well. In that case, it will be a matter of how many, not how.