Commentary

Credit Markets Still Frigid

I breathed a big sigh of relief this morning as I drank my English
pint-sized iced coffee. Was it that the stock market was rallying
hard to wash away some of yesterday’s bone crushing loses? No.
The reason for my warm and fuzzy feeling was due to the fact
that a check I deposited in my bank account from a money
market fund cleared.

Under sane financial conditions, this would seem to be a crazy thing
to get excited about, and you might ask: do you always react this
way when you don’t bounce a check to yourself?

Well, these are not sane times in the stock market or the more
important credit markets. One only has to look at yesterday’s historic
777 point drop in the Dow, and it’s subsequent 464 point rally today
to see that things are a bit off in the world of high finance.

All of this is being driven by the uncertainty surrounding the bailout
package worming its way around the corridors of Congress. Many
thought a deal would be finalized over the weekend, but Monday
afternoon brought news that the House voted it down. Then, according
to the NY Times, Bush and Senate leaders from both sides
of the fence said they were hustling for quick approval of a new plan-
hopefully by the end of the week. The market liked this announcement, so
stock prices rallied to claw back half of what was lost in Monday’s rout.

But, in another piece the Times explained that the credit markets are still
basically frozen, meaning banks are hoarding cash instead of lending it out.
Conditions in these essential markets actually deteriorated after the U.S. stock
market closed yesterday.

The Times article had this quote from Christoph Rieger, a fixed-income
strategist at Dresdner Kleinwort in Frankfurt:“The money markets have
completely broken down, with no trading taking place at all. There is no
market any more. Central banks are the only providers of cash to the
market; no one else is lending.”

Central banks from around the globe have been pumping money into the
credit markets to fill the void left by skittish bankers. The London interbank
offered rate, or LIBOR, which measures the short-term interest rate banks
charge each other soared to record levels.

This credit crisis means that the cost of doing business for a whole range
of firms is going up because of all the uncertainty centered around the
government’s bailout package. And, investors are shunning all manner of
risky debt securities- some of which may be hidden in money market
accounts- as they scramble for the safety of U.S. Treasury notes.

I’ve read a lot of articles arguing that the financial bailout plan should die a
horrible death. I too am appalled at the prospect of incompetent bankers
being paid millions as they use taxpayer funds to clean up the mess they
made. But, the credit markets need a sign that someone in DC knows
what they’re doing. I think the prolonged uncertainty about the bailout
could smack an already wobbly economy to the ground.

Right now, I’m relieved that my money market check didn’t bounce.
Now I just have to worry that the bank I deposited it in doesn’t fold.

(Please take a moment to subscribe to my RSS feed and I will roll
great cartoons and commentary your way. Or you can send me
a note at splendidmarbles@gmail.com to get on my mailing list.)

© 2008 Splendid Marbles.