...in this market. Despite the Federal Reserve's 3/4-percent rate cut, the highest since 1982, the Dow is more than 100 points lower as of this writing.
Prices are collapsing not because interest rates are too high but because a much higher discount for risk is being priced into financial assets. Put another way, if you were a bank lending officer, would it matter much if you charged 6%, 8%, or 10% on a loan if you thought the borrower had a good chance of defaulting? You can ask for more collateral, but those values are dropping as well.
From the comfort of my easy chair, it's obvious what the government can do to stop this market free-fall. It could prop up prices by buying assets, ignoring cries of socialism and moral hazard. Or, less directly, it can make loans on a nonrecourse basis (the lender can take the collateral but not come after the borrower for any further deficiency to the loan amount)to buyers of financial assets. The government would be (and is) the risk-absorber of last resort, but because the game would be changed permanently such steps should be taken only if we were worried about a collapse of the international financial system.
Every ten years or so there's a financial "crisis" to remind us that good times don't last. Fear, uncertainty, and doubt are good for the soul. Enjoy! © 2008 Stephen Yuen
[Addendum: Why have markets tumbled? The Economist says it appears to be an old-fashioned case of risk aversion.]
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