Something new just happens everyday these days. And these days, they are dominated by economic and financial news. Not that I wanted to focus on them solely, but both my occupation and the economist in me really got me thinking...

The current massive government intervention puts a floor on the stock market and rebuilds the confidence for lending. The Dow went up by 900+ points, the most in 75 years! By the time the next one comes around, say 75 years from now, I will be over 100. That might not be the best time for me (or anyone) to be invested in the market, as getting a heart attack then is the surest way for anyone to go to heaven (or hell... it depends...)

What the British and Europeans have put out for the rescue plans, with the US poised to follow, contain some key elements proposed by economists:

(1) Guarantee some form of bank lending. This is akin to guaranteeing bank deposits, which helps to prevent bank-runs. Similarly, banks are in the business of lending. If banks have the ability to lend but not lending because of a mistrust of counterparties (e.g. other banks), then liquidity (e.g. cash) is trapped inside banks. Guaranteeing bank lending would give lenders the confidence to lend to others protected by the guarantee. Banks are mistrustful of each other because many of them know the tricks of the trade, how CDOs and other assets are put together and sold to others.

Perhaps the guarantees should involve some sort of capital requirement, so that bad banks would not make the risky lending that, if those bets go right, they get a higher return, if not, those banks would fail anyway. The capital requirement is like the margin requirement in trading. In case a trading partner defaults, the margin could still cover the losses, if not partially. In any case, governments carry a big risk with this kind of guarantee, particularly when a bad bank in the program fails.

(2) Recapitalize banks: As values of assets are marked down substantially, depleting banks' capital base, banks need to be recapitalized. Governments would inject capital, perhaps through the issuance of preferred shares with a relatively low interest rate so that it won't become too much of a burden on banks. But it'd be hard (esp. politically) for governments to choose which ones to support and which to fail.

(3) Form asset management companies to buy assets from banks: This is essentially the original intent of first rescue package in the US. By having these banks selling those bad assets to the management company, the balance sheets would hopefully look clearer and better. The process would take longer.

But what is interesting is the latest article on the WSJ on how some of the biggest hedge fund managers have decided to exit the markets and stay on the sideline. Of course, information could be deceptive and decisions made yesterday could be reversed today, given new and important events and information. As such, they might be in the market again.

Yet, how long will this bounce last, especially with the following?
Short term
- the liquidity that helped drove the asset inflation in the past few years has been and is contracting as the shadow banking system shuts down
- the continued deleveraging taking place in the market is probably not complete, especially when some firms that were leveraged up to 20:1 have to get down to 10:1 or so, and when the "1" keeps getting smaller with asset marketdowns, threatening the capital base
- margin calls induced selling
Longer term
- the recession is driven primarily by consumers. Prior recessions in recent years were business-led and consumer spending was able to reenergize the economy to some degree.
- the debt burden of governments will likely give upward pressure on interest rates and crowd out private debt. The US government might be an exception, with the flight of safety to the Dollar perhaps keeping rates low.

I wonder what will happen tomorrow!