This is the list of things we learned after the Fed decided to cut the discount rate by 50 basis points on Friday:
- The Fed isn't oblivious to the crisis that began as "subprime", but now includes highly-rated debt, and is affecting businesses' ability to properly function.
That's it.
Here's the list of things we don't know:
- The scope of the crisis. So far, it has hit several companies in the banking, brokerage, homebuilder, and mortgage lender industries. What other companies within those sectors, or even worse, additional sectors, will be affected in the future?
- The duration of the crisis. Will it take weeks to play out? Months? Years?
- Collateral damage of the crisis. There could potentially be: millions of empty homes and their displaced former owners; many hundreds of thousands of jobs lost in the previously listed industries; and many millions of consumers, and thousands of companies, who will have exhausted their lines of credit. What further problems to the broader U.S. economy will manifest? Will the growth of the global economy be affected?
And most of all:
- The future actions of the Fed. The market is fairly certain that federal loan rate cuts (you know, the substantial kind) are imminent. When will they begin? How far will the Fed go?
That's a lot of unknowns. And the market hates uncertainty.
I'm not bearish though. I haven't sold anything, and history tells us that now are the times that we should be buying (and indeed, the "smart money" is starting to sift through the rubble). If you are thinking about bottom-fishing, just remember that every investment is just a foot in the door...and that the Fed owns the market, whether they want to or not.
The most frustrating part of this crisis is that it basically repeated the S&L bailout of the 1980's: greedy lenders making bad loans to undeserving or uninformed borrowers. It's amazing to me that history repeated itself so quickly. Both parties are to blame: the lenders shouldn't have taken on the risk, and the borrowers shouldn't have entered into a contract which they didn't understand or couldn't fulfill. I think a big part of resolving this current crisis will be finding an agreement satisfactory to both sides, ideally brokered by the government (Fannie Mae/Freddie Mac), allowing most homeowners to stay in their homes.
