Western governments, and notably the central banks, decided they would not tolerate any of this deleveraging and re-evaluation of risk/reward by the markets. Falling assets and defaulting bonds can cause so much pain!
For institutions such as the U.S. Federal Reserve, which answer to commercial bank stakeholders (not the public... who are denied access to their books) this was clearly the best route to take. The commercial bank stakeholders were kept solvent by having their crap assets swapped for cash; pumped with free money; and other measures that have never been used before in the history of American banking.
The public (investors, workers, and business owners) were sold on the idea of stimulus and rescue on the public bill. It was going to be expensive, but save us from the pain.
Investors and business owners were starting to adjust to the economic slowdown. Across the board, everyone became more conservative. Investors nearing retirement started to appreciate stock risk and wisely reduced their risk exposure. Businesses cut back on large expenses and began to position for a prolonged slowdown.
These were natural adjustments taking place.
The stimulus and rescues (free money, debt swapping, relaxed mark-to-market accounting rules) seriously juiced the system in the short term. Quarter-over-quarter profits soared, especially in finance. Hey – give me $1 trillion, and I can turn a profit too.
The rapidly “improving” economy caught everyone off guard.
Businesses which had (wisely) cut back on spending suddenly became more aggressive. The large public company I work for has extrapolated their 2009 growth and decided to position for aggressive expansion. This is a big gamble that will hurt earnings very badly if sales don't keep up with extrapolated expectations.
Similarly, investors who had just smartened up about risk have gone back into risky asset classes such as corporate bonds, stocks, and financials.
The stimulus has seriously screwed with risk-related decision making. The impact on businesses, their employees, and investors will be catastrophic if the stimulus fails. Everyone has effectively bought-in at an artificial high created by government intervention.
Now at least 20 months into the historically unprecedented stimulus and free money policy, we've got problems:
The jobs picture is horrible. Over $1 trillion has been distributed into bankers' pockets, while most Americans have seen no real improvement in their employment prospects. Over 40 million Americans are on food stamps, up 21% from a year ago.
Total credit is still falling, a heart-stopping observation after so much banking intervention. This is now the longest lasting and largest % decline in credit ever observed in American history.
The money multiplier continues to decline. All the free money pumped into the banks sits in US Treasury bonds, allowing the banksters to profit from juiced debt trading... but ultimately the money is not loaned out and circulated in the economy.
Big problems are appearing in China, with a clear real estate bubble, some RE-linked debt market problems, and banks that were less healthy than we believed.
Europe is screwed, obviously. We will likely see a giant UK crisis or default.
- Perpetual Bull