Is the Krugman rally an overreaction?
When last I checked, the Dow was up 6.9% and the S&P 7.5% in reaction to Paul Krugman getting the economics Nobel before trading began this morning. In London the FTSE ended the trading day up 8.26% and in Frankfurt the DAX was up 11.4%.
What? You say there are other possible reasons for global markets' surge? Something about a trillion-euro bank rescue? Whatever. "Krugman rally" sounds better.
I do worry, though, that this rally may be short-lived. It's partly just that I think the mechanics of rescuing banks in both Europe and the U.S. will turn out to be far more fraught than anyone seems to be considering at the moment. Remember, we still don't have a clear picture of what Treasury plans to do in the U.S.
Mainly, though, my concern is that we can learn very little about the future direction of the market from which direction stocks moved in today. But we can learn a lot about the future volatility of the market from the volatility today. Today's big jump presages more big moves. Which could just as easily be down as up.
Also, I know I really ought to be citing credit market measures rather than stock indices. But bond markets are closed today in the U.S. Plus, I'm starting to wonder whether LIBOR, the much-watched measure of what banks charge to lend to each other, might be totally broken because banks are now just borrowing from the Fed and other central banks rather than from each other.
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1
Rally on! Rally on! Krugman!
LETS DO THE SUBPRIME WARP AGAIN!
(THE END OF MORAL HAZARD)
(Lets Do the TIME WARP, Rocky Horror Picture Show)
WilliamBanzai7It's astounding, markets are fleeting
Greenspan's Madness takes its toll
But listen closely, not for very much longer
We've got to regain controlI remember doing the Subprime Warp
Drinking those moments when
MORAL HAZARD would skip past me and the greed would be calling
Let's do the Subprime Warp again...
Let's do the Subprime Warp again!It's just a AAA CDO to the left
And then a backstop CDS to the right
With your hands on your FLIPS
You bring those TOXIC TRANCHES in tight
But it's the ALT-A thrust that really drives you insane,
Let's do the Subprime Warp again!It's so dreamy, oh fantasy free me
So you can't see me, no not at all
In another dimension, with fraudulent intention
Well-deluded, I see all
With a bit of a mind flip
You're there in the SHADOW BANKING slip
And nothing can ever be the same
You're spaced out on SECURITIZATION, like you're under sedation
Let's do the Subprime Warp again! -
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might be totally broken because banks are now just borrowing from the Fed and other central banks rather than from each other.
this is likely to revert to the status quo ante rather rapidly -- after all, by not loaning each other money at reasonable rates, these banks are losing money, and greed will out.
I think the next crisis is going to come about as a result of these multi-trillion dollar bailout of the financial system, as debt laden third world nations demand the same kind of giveaways in the form of debt forgiveness by industrialized countries. After all, if the wealthy countries of the world can avert financial disaster by printing money, why shouldn't the worlds' poor nations demand that those same nations forgive their debt (in essence, by printing even more money?)
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[...] up 494 points (it was down about 40 when the news broke). The Geithner rally! Can it continue? The Krugman rally [...]
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