Friday, October 17, 2008

Seriously Good Commercial News for the Week's End

Photo by *clairity*

It sounds like the U.S. consumer needs some cheer-me-up news. At least as to commerce and finance, this week ends with some seriously good news.

As I suggested earlier (here and here), watching the Dow will likey produce unnecessary pessimism. The "destruction of wealth" that has caused much of the consumer pessimism mentioned in the Bloomberg story, linked above, represents temporary, paper losses. As the wildly volatile Dow this week has demonstrated, a big loss one day can be erased by a big gain the next. Admittedly, folks nearing retirement and those with equity investments locked up in 529 plans that they need to tap in the immediate future may well feel actual pain, but for most of us, we have too much access to information on stock market events that will ultimately have little impact on us. Indeed, remember: as the Bloomberg story mentions, 2/3 of the U.S. economy rests on consumer spending. We are the masters of our own destiny, in a sense. Irrational pessimism will lead us into a downward spiral of tighter spending and market contraction, so let's look on the bright side . . . (now where did I put that bright side . . .)

Oh, yes! Here it is: First, why are people not doing cartwheels in the streets now that oil futures have fallen by half in a few months, finishing today just over $70 a barrel. Gas prices have fallen in turn about 55 cents per gallon in just two weeks! If it weren't for a presidential election in a few weeks and the craziness on Wall Street, this would be front-page news, and consumers (and car dealers) would be giddy.

Even dearer to our hearts here on Commercial Law blog, the bank-to-bank and corporate "commercial paper" lending markets have really eased this week. Rates on one-month commercial paper (short-term loans by investors to corporations) have fallen to a three-week low. That's good news for big business, which employs many of the sour-puss consumers who responded to the Michigan consumer sentiment survey--cheer up! Similarly, LIBOR has continued its downward march. The overnight rate dropped precipitously to 1.67%, down from over 5% last Thursday. This is the lowest overnight rate in four years (!). The critical 3-month rate eased for the fith day in a row, ending at 4.42%. Though this is still abnormally high, the trend is clearly in the right direction. A close observer of the money markets remarked today "[a]n early and tentative judgment is that [world governments] have lubricated the gears and the [financial] engine is beginning to crank again." A lubricated lending machine will power recovery and (dare I say) expansion of small and big business alike. Hang on!

So think about this good news as you enjoy a wonderful fall weekend!


Jennifer Martin said...

Glad that there is some wrinkle of good news in here somewhere. I think you are correct in that the loosening of credit is seriously good news. Without that, things would be much much worse. Also, glad to see that we are not having the President, Paulson and Bernanke speaking every day. I think that is a good economic indicator or sorts.

Doug said...

I'm less optimistic. The bailout does not require the banks to put the money back into the system at any time, and many will simply hoard the money and not lend anything out.

"The deepening red ink underscores a crucial question about the government’s plan: Will lenders deploy their new-found capital quickly, as the Treasury hopes, and unlock the flow of credit through the economy? Or will they hoard the money to protect themselves?

John A. Thain, the chief executive of Merrill Lynch, said on Thursday that banks were unlikely to act swiftly. Executives at other banks privately expressed a similar view."

"Granted, the banks are in a deep hole. For every dollar the banks earned during the industry’s most prosperous years, they have now wiped out $1.06."

In other words, all the gains of prior years are wiped out, and no one will have to give a cent back for all the bonuses etc.

At this point the government is holding debt that no one wants, and has an inactive nonvoting preferred stock in some banks, in a deal far worse than Buffett got from his private investment in a bank (Goldman Sachs). I am pessimistic but hope that you are right.