Sunday, September 28, 2008

Will Failure to Bailout Wall Street Cause a Stock Market Crash?

According to the UK Telegraph, here's what some US Treasury officials are saying:

The US stock market could suffer a devastating crash with shares losing a third of their value this week if Hank Paulson’s financial bailout plan fails, US Treasury officials have warned.

The financial system could face a meltdown of 1929 proportions unless US politicians succeed in their efforts for a $700bn rescue scheme, experts added.
The warning came as Republicans and Democrats met in Washington for a rare weekend debating session to attempt to seal agreement on the contentious plan, aimed at preventing a long-lasting recession in the US.
Officials close to Paulson are privately painting a far bleaker portrait of the fragility of the global economy than that advanced by President George W Bush in his televised address last week.
One Republican said that the message from government officials is that “the economy is dropping into the john.” He added: “We could see falls of 3,000 or 4,000 points on the Dow [the New York market that currently trades at around 11,000]. That could happen in just a couple of days.
“What’s being put around behind the scenes is that we’re looking at 1930s stuff. We’re looking at catastrophe, huge, amazing catastrophe. Everybody is extraordinarily scared. It’s going to be really, really nasty.”

Predicting the future course of stock prices is difficult. If it were easy we would all be millionaires. But I don't see any evidence that people who invest and trade in stocks believe that a major decline in prices is imminent nor even likely.

The US S&P 500 closed at 1213.01 on Friday, September 26. It has been in the same price range for the last four months:

June 30, 2008 1280.00
July 31, 2008 1267.38
August 31, 2008 1282.83

The current Congress has shown a remarkable inability to pass any legislation of any type. If stock traders felt that there was a strong probability that the proposed bailout will not happen, resulting in a crash, they would have already bid down the prices of stocks by a significant amount.

Actions speak louder than words.

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