A sequence of events looks set to kick off a small stock market rally starting from yesterday - we had Citigroup CEO Vikam Pandit saying Citibank is 'operationally profitable' best 2 months in more than a year and Barney Frank (House Financial Services Chairman) said yesterday that they might reinstate the uptick rule[Link], a rule that disadvantage short sellers especially abusive shortsellers that drive down stock prices. That was enough to cause a massive 300+ points rally on the DOW. But that is not all - yesterday night Tim Geithner gave a pretty confident interview on the Charlie Rose show and described a workable plan to bailout the banks. Tomorrow (Thursday) there will be hearings to consider suspension of MTM (mark to market) accounting rules that force banks to recognise losses on assets based on market prices even when the market for the asset is illiquid and distorted. US stocks have been pounded down almost everyday for 2 months and short positions have build up over this period. However, given the economy is still in bad shape such rallies may not be sustainable. There were 4-5 of these relief rallies in the last recession and the market made new lows after each of these rallies. However, the lows or bottoms were not too far each other and the final bottom for the previous recession - the recession we are seeing is a lot more serious so past patterns may not hold . The real rally that came in the previous recession looked very much like the sucker's rally before it so it is always hard to guess where these rallies will take us.
Tim Geithner has improved tremendously since his disastrous public appearance a few weeks ago that caused the stock market to tank badly.
The other parts can be found here. I generally agree with Geithner's strategy to do as much as possible as soon as possible and not worry about doing too much. The lessons from past crisis such as the Great Depression and Japan in the 90s tells us that taking a measured approach will result in poor outcomes. But the 'doing a lot' strategy has a downside which is the US govt has to cope with a big debt from all the bailout and stimulus packages later. The worse case scenario is failure to get the economy going and getting saddled with huge debts as the GDP shrinks. That is why the European govts refuse to take the risk preferring to take the pain of a recession and hope the US stimulus will also bail them out. Whatever it is nobody can blame the Obama Administration for doing too little, in this 2 months he has been in office, they have done more than what previous administrations did in their first 2 years.