Stock Market Euphoria Over New TARP Plan Fades
Early today, the stock market continued its two-session rally on the news that the Federal Reserve’s TARP was going to enact measures to encourage more consumer loans. Now, though, hours later, the charm is wearing off and the Dow Jones Industrial Average (^DJI) is down nearly 50 points. Tech stocks aren’t helping the cause, and there is worry that a U.S. recession will be longer and deeper than thought. And, besides, after straight days of rally, there are profits to be taken.
TARP plan and the economy
Since the economy runs on debt, the TARP plan is to “help” consumers get access to more debt. Then, with their slightly larger credit lines and fianancing options for cars, they could spend money — pumping it into the economy. The stock market liked this announcement this morning (shooting up as high as 8600), because the implication is that if consumers are spending money, companies are more likely to make profits. And that usually means higher stock prices.
The only wrench in this plan is this: What if it doesn’t work? There is some evidence that the American consumer is starting to come out of his/her debt-induced haze and realize that what is good for the economy may not actually be good for personal finances. After all, the economy thrives on having the American consumer in debt: Enough credit to keep buying things, too much debt to easily get out so that interested is paid, and not enough debt that the consumer completely crumples.
It’s that last thing that is causing problems right now. Consumers are starting to worry that crumpling may happen. With unemployment rising and other economic concerns, many consumers are cutting back. So the latest TARP plan may do as much good as all the other efforts to throw money at the problem.
Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss. You are responsible for your own investment decisions and any loss that may result from your decisions.
November 28th, 2008 at 5:56 pm
[…] to ensure that the consumer can keep spending — preferably using debt. This is the latest focus of TARP. If consumers can keep getting loans and extended credit, then they will keep spending money, […]