Historic Week on Wall Street

posted by   Ian Wyatt   |    September 19, 2008

Posted in   Financial Markets   |   Comments

The Dow is up almost 400 points in today's trading, and could make this the fourth day in one week when the Dow posted moves of greater than 400 points, with two up days, and two down days. The volatility has been simply amazing.

The rally today was sparked by the action taken by the U.S. government including the Treasury and Securities and Exchange Commission. The Treasury committed $50 billion to insure money market accounts, and increased lending to banks. Additionally, the SEC announced a ban on short selling of 799 financial stocks, limiting the ability of investors to place bets on a company's stock price decline.

This will go down as a historical week in the history of financial markets, with the Lehman Brothers bankruptcy, government bailout of AIG, and today's monumental actions to stabilize the financial markets and banking system.

The government clearly was reading the writing on the wall, and saw the US financial system collapse unfolding right before our eyes. One could make the argument that the events of the last week could have led to another financial system collapse on par with that of 1929, one that I believe everyone would want to avoid at any and all costs. From a personal standpoint, I'm pleased to see some green in my investments today and an end to the bleeding.

However, I think it is good to ask whether or not this action was in fact needed. Is it the job of the US taxpayer to bail out the banks? I would like to think in our free markets, this is not the job of the feds. If my business hits hard times, will the government be there for me and my employees (I seriously doubt it). However, I believe many taxpayers would be happy to trade a bailout in exchange for avoiding a failure of the financial systems and a deep and long recession.

As one of my financial advisors said to me on the phone this morning regarding the short selling restriction, "its as though the free market system wasn't working, and so the government decided to change the rules."

Short term, the government's historical actions appear to have calmed the financial markets. And this will be good for businesses both large and small that depend on access to capital in order to fund operations and fuel future growth. However, longer term, I am uncertain whether the actions this week were the right ones for the long term success, stability, and independence of our financial markets.

Bloomberg: Paulson, Bernanke Expand U.S. Power to Rescue Markets
AP: Stocks soar as officials confirm gov't rescue plan

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