At this point, the federal government should rename their plan for fixing the U.S. economic crisis to -- the “Weekend At Bernie’s” Bailout. Under this system, Fed chairman Ben Bernanke pretends the leading financial giants are still alive by propping them up with a multi-TRILLION-dollar back brace.
Despite the largest concerted financial rescue effort in U.S. history, the stock values of every major lending institution remain D-E-A-D as a dodo. Case in point: 78% drop in Citigroup Inc, a 99% drop in Fannie Mae, a 99% drop in American International Group, a 99% drop in Lehman Brothers, and on.
As for why, here’s the short answer: The government can bail out banks, but it can’t bailout behavior -- specifically, a downturn in mass social mood. In the January 2007 Elliott Wave Financial Forecast, our analysts warned of this very shortcoming and wrote:
“The psychological foundation of liquidity is confidence. We cannot stress this point strongly enough. When this optimism goes away, the spigot will run dry. The wave patterns suggest that point is close at hand.”
Think: Japan. After 20 years of trying to shore up its slumping stock market and economy via rate cuts (6% - to- .75%), $700-plus billion in government buying of bank shares, and new curbs on short selling -- deflation persists and the Nikkei Average remains 70% below its all-time high.
(Bailouts, Bear In: Our October 2008 Financial Forecast Service publications stage a full-frontal attack on the bailout issue. Find out whether the rescue efforts will lead to recovery or recrimination. Click here to begin)
The question isn’t whether the U.S. will follow in the footsteps of Japan. It is already ankle-deep in those footsteps. The more bad loans settled by the U.S. Treasury -- the worse the credit crisis becomes. Case in point:
June 2007 through March 2008: Bailout bandwagon takes off with Bear Stearns’ $3.2 billion rescue to one of its struggling subprime linked hedge funds, and moves on to pick up the following passengers:
Goldman Sachs’ $3 billion bailout, $80 billion structured-investment vehicle (SIV) fund for short-term debt, Citigroup Inc.’s $58 billion SIV bailout, Federal Reserve creates the $20 billion Term Auction Facility,President Bush signs $100 billion “Economic Stimulus” bill, and Fed-engineered $29 billion buyout of Bear Stearns, via JP Morgan.
September 2008 adds a few more: Fannie Mae, Freddie Mac, and the American International Group.
Not to mention a temporary (maybe) ban on short-selling for over 900 companies listed on the NASDAQ stock market, AND Seven rate cuts (325 basis points) by the Federal Reserve to a multi-year low of 2%.
YET -- despite ALL attempts to bring the market back to life, the Dow Jones Industrial Average remains more than 26% BELOW its October 2007 high, landing in official bear market territory.
In the end, the reality is this: The Fed can prop the financial sector up with all the money it can print -- $700 billion, $1 trillion, a googolplex, you name it. BUT nothing will bring about a recovery in the U.S. economy until social mood itself recovers. In the words of the October 2008 Elliott Wave Financial Forecast:
“Bernanke is trying to calm the waves by raising up sunken ships. Any instrument at his disposal still rests upon the sand we call social mood, which is simply too powerful to be nudged in the direction desired by any central banker.”