Published November 27, 2008

Washington gets its rescue act together, finally

Analysts positive about the new ambitious measures

By ANDREW MARKS
NEW YORK CORRESPONDENT

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AFTER 10 weeks of a historic financial crisis marked by a string of heart-pumping shocks, failures and last-minute rescues, Washington has finally done what looks to be something different.

'Essentially, they are now saying they're going to print as much money as it takes to turn this disaster around.' - Marc Pado, chief market strategist at Cantor Fitzgerald

In the last two days, it has thrown in measures aimed not just at stabilising the credit markets and keeping investor panic from taking down more major financial institutions, but also at reviving the flagging economy itself.

Tuesday's announcement of two separate lending programmes that will inject another US$800 billion directly to prop up the failing financial system, came less than 24 hours after the Treasury Department and the Fed committed nearly US$350 billion to propping up the embattled Citigroup financial empire.

In addition to the massive commitment by the Fed and Treasury, President-elect Barack Obama began detailing a government stimulus package on Tuesday that he wants ready to sign into law soon after his confirmation on Jan 20, aimed at creating or saving 2.5 million jobs that will cost upwards of US$500 billion.

This has been a hugely important two days for the financial markets and the economy. After two months of this back-and-forth debate within the government of a 'should we or shouldn't we' over how far to go to rescue the banks and the economy, they've finally crossed the Rubicon.

Essentially, they are now saying they're going to print as much money as it takes to turn this disaster around, said Marc Pado, chief market strategist at Cantor Fitzgerald.

The latest measures by the US government to rescue a comatose financial system and forestall an economy already spiralling into what could be the worst contraction in 75 years from becoming the next Great Depression, are historic in themselves, said Wall Street economists.

The impact of the Fed's latest round of moves was felt immediately in the mortgage market. Risk premiums on mortgage bonds and debt issued by Fannie Mae and Freddie Mac tightened significantly in response to the Fed's lending programmes, which will provide US$200 billion in non-recourse loans to holders of asset-backed securities, and will purchase up to US$600 billion in Fannie Mae and Freddie Mac debt and mortgage-backed securities.

'The government has finally come around to the belief that there's no choice but to make an all-out effort, to just open the taps and pump as much money as it can into the system right now. That's what it comes down to,' said Joel Naroff, president of Naroff Economic Advisors. 'There's no way to know how much these actions by the government will help to turn around the credit markets or bring back the economy or how long it will take to do so, but the Fed now believes that unless it takes this course we could face a depression,' he said.

Wall Street has rejoiced as the government has finally taken steps to directly inject money not just to support failing banks but consumers as well, sending the Dow Jones industrials on a rally that has regained about 1,000 points or 12 per cent in just three days.

On Tuesday, the market had a see-saw session that ended positively, as investors weighed a round of gloomy economic reports against the government's latest efforts to stabilise the financial system. The Dow finished up 36 points at 8,480, and the S&P 500 was up 5.58 points at 857.

Stocks appeared to be set up for a day of profit-taking yesterday after the three-day surge, as investors were faced with another round of economic data confirming the growing severity of the recession.

Before the opening bell, the Commerce Department reported that orders to US factories for manufactured goods plunged in October by the largest amount in two years as the economy weakened. The 6.2 per cent drop was more than double the 3 per cent decline economists expected.

The Commerce Department also said that Americans cut back their spending in October by the largest amount since the 2001 terrorist attacks. Consumer spending plunged by one per cent last month, worse than the 0.9 per cent drop that had been expected.

A Labor Department report said that new jobless claims fell more than expected last week from a 16-year high, to a seasonally adjusted 529,000 from the previous week's upwardly revised figure of 543,000.

Stocks nose-dived in early trading yesterday, as the Dow retreated 165 points, or 1.95 per cent in the first minutes of what was expected to be another volatile and choppy day.

Big swings resulting from low trading volumes ahead of the Thanksgiving Day holiday were also expected. At 10 am, the bluechip index was down 111 points, or 1.3 per cent, at 8,368.28.