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Tuesday, November 25, 2008

More unfree(zing) market

Following up saving the allegedly perfectly healthy Citigroup, the Federal Reserve and Treasury unveiled new cash for trash programs targeted at alleviating the pressure on the mortgage backed, credit card backed, student and auto loan backed securities markets. The Fed will buy them. No discussion as to how this would work in terms of valuations that I've seen.

Yesterday Obama edged into the limelight to announce key members of his cabinet. He's a very well prepared man and seems to soothe the markets so far. Sorry if my partisanship is showing.

The most interesting development was mortgage rates dropping hard and fast from 6 pct last night to anywhere from 4.875 - 5.5 pct today. Its a sign that the actions of the Fed and Treasury are finally starting to impact "real" rates that help someone besides flailing financial institutions.

The ted spread ticked up today. 10 year treasury credit default swaps ticked up to 50 basis points, too. It may be a blip. Or it may be doubts about the long-term viability of the government coffers under such substantial financing offers. One concern the interventions raise is that given a choice between trading counter-parties, participants are going to trade with the Fed every time and not with each other. Policy-makers need to layer in a penalty for using these facilities or they run the risk of bifurcating the market further between the haves and have nots.

From an AP article:

The latest federal moves raised U.S. commitments to contain the financial crisis to nearly $7 trillion — though no one thinks the government will actually spend anything like that figure, which would be almost half the nation's total gross domestic product.

Yes, let's hope they don't actually spend anything like that figure. It'll be a billion dollars to the peso if they do.

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