The Incredible Bottomless Pit or Are We Searching for the Bottom Now?

As the big financial institutions gorge themselves on cheap Federal Reserve loans, smaller local banks are cash-dry as a bone. Even after a $25 billion auto industry bailout, GM is mulling whether to shut down plants and implement massive lay-offs, because people don’t buy big ticket items in unstable times, and its gets worse where there are no car loans to be had anyway. It’s the big example of what’s happening everywhere. Is this a “slow motion crash” as the Wall Street Journal states or have we hit the point where it is obvious that we are “throwing the baby out with the bathwater”? Are we at or near the “bottom”?

As the Treasury Department (the Administration in general) still fights direct consumer assistance, is still unwilling to freeze foreclosures so that mortgage rates can be reset in a sensible time frame, won’t guarantee grassroots receivable financing… what else can they do that does not involve this direct individual, consumer-targeted relief? If we have to play by their “work through the institutions only” rules, can the government still make a difference? While the efforts outlined below most certainly are not the best and most immediate solutions, the answer is “yes, there are steps they can take” that will help.

The Treasury is considering trading equity stakes in smaller banks in exchange for cash infusions; that policy should carry the string of immediate available small business cash to support payrolls. The government can also guarantee inter-bank loans, from the big cash-rich banks to the grassroots local banks that are best suited to distribute capital to local borrowers. Finally, federal officials can start setting mortgage rate caps where teaser rates and ARMs (adjustable rate mortgages) have dramatically increased monthly mortgage costs. Under the terms of the bailout plan, and where banks and financial institutions accept government loans or insurance (virtually every lending institution in this country), the government has rule-making power to implement these strategies very quickly. Not the best solutions, but at least the kind of movement the market needs to see quickly.

And here’s where I am sticking my neck way, way out… If the government takes these steps now (as the beginning of a litany of many more steps), I honestly believe that the market is looking for a bottom. If it happens, a GM reorganization won’t help stop the fall, but we can survive that as well. It shouldn’t take that much to convince Americans that the stock market – a leading psychological indicator of positive growth – is not going to crash much farther. The market will begin to vacillate instead of dropping day after day… and with the right government support… stabilize. But the market “sheep” need some market leaders to change their attitudes.

I’m Peter Dekom, and I approve this message.