In case you were on another planet today, the stock market popped the most it has since 2002 after the Fed announced that it is going to bail out bad banking decisions at the expense of the American Taxpayer.
The details are discussed here: Fed’s Loan Rescue Sparks Big Stock Rally: Fed Offers $200 Billion to Prop Up Lenders; Wall Street Responds With Huge Rally
The short answer for what this means is that for the first time, the Fed is going to accept mortgage backed securities as collateral for high quality government assets. In plain english: the government is going to take the risk on mortgage-backed securities that no one else is willing to buy.
I understand there has been some madness in the markets over the last few days, with hedge fund liquidations and the like: Hedge Funds Reel From Margin Calls Even on Treasuries. But does that mean that the American taxpayer should step in and bail these bad decision-makers out?
If we are going to use taxpayer dollars, why not actually restructure individual homeowners loans or do more of the stimulus minded stuff like the recent decision to give all Americans a bit of extra spending money?
The reality is: this is only the beginning of the implicit “put” option that the Federal Government has given banks by allowing them to create any kind of securitized vehicle they like without any oversight.
What today’s announcement says, and what the market seems to have heard is, “Don’t worry, we will do whatever we can to keep everyone afloat”. While this might be good to stave off today’s armageddon, deferring the pain until another day will only make it fall on another party – and this time the American taxpayer is footing the bill.