The Psychology of Panic

If there is a lesson in the soaring stock prices, it’s about just how much of the market is psychological. The traders were looking for a sign that responsible government action would guarantee the financial viability of the credit markets – an excuse to take advantage of overly discounted stocks, to take the first steps that launched a stampede. They didn’t get that reassurance from the American government. Instead, they got their comfort overseas this past weekend, as European countries (both the pound sterling-based British markets and the Euro-based European markets) guaranteed, at least on a temporary basis, that their banks would not fail, and that the European governments would be the guarantors.

Look at the results, even as the U.S. seemed caught like a deer in the headlights! The markets sky-rocketed on Monday, a process that might even continue on Tuesday… but without American solutions to our localized credit freeze on small businesses and with nothing to stop the free fall of mortgage foreclosures from subprime mortgages (and the continued imploding of housing values as a result), Americans could find themselves back at the bottom of the feeding pile in the very near term.

That there are great buys out there, with stocks trading well below their normal average 12-13 times earnings, is without any doubt. But if trust and confidence are not rebuilt quickly in the hearts and minds of homeowners and those holding down the basic jobs that support our economy, that market surge will, at least from an American perspective, be short-lived as the markets vacillate up and down searching to find the bottom again. We really need more than Europeans' solving the problems; we actually need some American action!

We know that the Federal Reserve has joined a number of international central banks to help insure that there is more “liquidity” in the market, but inter-bank lending rates are still rising around the world. If the central bank efforts were working, that trend should be reversing (rising inter-bank rates are an indicator of lending banks’ fears, of a basic distrust in the solidity of the credit markets in general). And Mr. Paulson’s folks have said that they intend to use over 1/3 of the $700 billion to fund local banks and unfreeze local credit markets. Stop talking about it, and “get her done”! And please don’t forget about the homeowners themselves!

If our government addresses those foreclosures at a consumer level (a moratorium on foreclosures, as I have repeatedly noted, would be a great step pending sorting out the good from the bad and resetting viable home ownership with livable interest rates) and recharges the small business credit market sooner rather than later, I believe that we have already seen the bottom, and while I do not expect a spectacular recovery in the near term, I also think we can keep from falling through the floor. But if trust and confidence do not return and stay with the basic American consumer/homeowner groups, well… we’ve already seen where that can lead.

Maybe, before it really takes action, the government has to make sure that Treasury’s cronies are on board with fat retainers for the big law firms and major financial advisory fees for the bankers – all for a group of folks who found and exploited the loopholes that got us here in the first place. Come on… the middle class and those at the bottom of the economic ladder need some representation too. Trickle down seems to mean trickle up into the pockets at the top.

We’re not out of the woods by any means… we just found a clearing – let’s not mistake that for “mission accomplished.”

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