Throughout the day last Friday, the financial futures were on a roller coaster as rumors of the Fed opening the Fed's discount window to Fannie Mae and Freddie Mac were then exchanged for denials by all three. Friday afternoon and evening, one government official after another appeared with statements to reassure the markets. Just two days ago, we were being told the Fannie Mae and Freddie Mac were sound, and that they had no need for a rescue.
Much has changed in 48 hours! Over the weekend, the Fed has now confirmed that indeed, the discount window has been extended to Fannie and Freddie -- just two days after the Fed told us it wasn't necessary. The stock index futures have reacted positively, with the Dow futures moving 80 points higher within minutes. However, the burden of increased debt load by the Federal government has caused Treasuries to sell off, with interest rates moving higher. Bond investors are showing slight skittishness at the increasingly monstrous burden of more and more U.S. government debt, sending interest rates higher.
These higher interest rates are beginning to reflect the increasing concern of the remote possibility of a U.S. government debt default. Unthinkable, you say? U.S. government debt had always been considered the most riskless investment in the world. Credit default swaps for U.S. government debt have shown a significantly increased cost in recent days and weeks. Credit default swaps are like insurance against the possibility, however remote, of default by a borrower. CDS' rose to 16 points on Friday for U.S. government debt. German government debt CDS's only cost 9 points! The U.S. government is becoming increasingly overextended, and the credit default swaps are beginning to reflect that growing risk.
In addition, the failure of Indymac Bank Friday night sends chills up my spine. Apparently, I'm not the only one. From the Wall Street Journal's website tonight:
Why else would the Fed Chairman, the Treasury Secretary, and the Senate Banking Committee Chairman all make repeated frequent statements over the weekend to attempt to reassure the financial markets, if they didn't see the potential for growing, significant risk? Why else would interest rates on treasuries rise so high, so quickly (see my post from Friday)? Why else would the cost of credit default swaps rise so much in a short period of time?
It sure feels like the financial markets are on a roller coaster of ups and downs -- and the downs are feeling progressively steeper with each new domino that drops!
Much has changed in 48 hours! Over the weekend, the Fed has now confirmed that indeed, the discount window has been extended to Fannie and Freddie -- just two days after the Fed told us it wasn't necessary. The stock index futures have reacted positively, with the Dow futures moving 80 points higher within minutes. However, the burden of increased debt load by the Federal government has caused Treasuries to sell off, with interest rates moving higher. Bond investors are showing slight skittishness at the increasingly monstrous burden of more and more U.S. government debt, sending interest rates higher.
These higher interest rates are beginning to reflect the increasing concern of the remote possibility of a U.S. government debt default. Unthinkable, you say? U.S. government debt had always been considered the most riskless investment in the world. Credit default swaps for U.S. government debt have shown a significantly increased cost in recent days and weeks. Credit default swaps are like insurance against the possibility, however remote, of default by a borrower. CDS' rose to 16 points on Friday for U.S. government debt. German government debt CDS's only cost 9 points! The U.S. government is becoming increasingly overextended, and the credit default swaps are beginning to reflect that growing risk.
In addition, the failure of Indymac Bank Friday night sends chills up my spine. Apparently, I'm not the only one. From the Wall Street Journal's website tonight:
The federal government's seizure of IndyMac Bank is deepening worries among executives, regulators and consumers about the U.S. banking industry, which is in a tightening bind following a long run of prosperity.And in a separate Wall Street Journal article tonight:
One reason the stock market has had trouble rebounding: Investors are beginning to think the U.S. Federal Reserve is running out of the ammunition it has used to support the stock market in past months. Despite repeated intervention by the Fed and central banks and regulators world-wide, no one seems to be able to prevent further damage to banks and other financial institutions.Each of these events (Fannie, Freddie, Indymac) are significant events in themselves. However, with all three occurring at the same time, it seems to highlight the fragility and vulnerability of the financial system, and how stressed it really is. The more bail-outs are needed, the more uneasy I feel. Three dominoes falling in such rapid order within a couple of days begins to make me wonder what's next, and to what extreme the Fed will reach with the next domino to fall. When, I wonder, will the falling dominoes accelerate, and when might they fall so rapidly that there is no stopping them? When a domino falls here and there, once in awhile, faith in the health of the financial system is easy to find. But when the dominoes start to fall several at a time, then the faith starts to falter.
Why else would the Fed Chairman, the Treasury Secretary, and the Senate Banking Committee Chairman all make repeated frequent statements over the weekend to attempt to reassure the financial markets, if they didn't see the potential for growing, significant risk? Why else would interest rates on treasuries rise so high, so quickly (see my post from Friday)? Why else would the cost of credit default swaps rise so much in a short period of time?
It sure feels like the financial markets are on a roller coaster of ups and downs -- and the downs are feeling progressively steeper with each new domino that drops!
