Wall Street's surge creates optimism

March 12, 2008 11:46:36 AM PDT
It's too early to say whether today will be a turning point for the economy, but not since July 24th, 2002, has Wall Street been so optimistic.

The Dow Jones Industrials shot up 416 points Tuesday -- back above the 12,000 mark. The NASDAQ rose 86 points and the Bloomberg Silicon Valley Index added 17.

The buying spree was triggered when the Federal Reserve agreed to ease the cash crunch by making $200 billion dollars in treasury securities available to banks and brokerages.

The Federal Reserve is often called the bank of last resort. Stepping in is a sign of a need to restore order to the financial markets, and that interest rate cuts alone won't turn things around.

A two-bedroom, two-bath condo in San Francisco just went on the market for $1.1 million. It could be one of the first benefactors of the Fed's action. A buyer is likely to find a lender willing to provide a loan because the Fed will step in and back that loan with treasury bills.

"I think the Fed is saying we have confidence in the real estate marketplace. We're willing to accept some risk that investors are not, and it is going to be providing more liquidity -- that is, more money for home loans," says the former president of the San Francisco Association of Realtors, John Asdourian.

Lenders have tightened credit, making it difficult to get mortgages, even for credit-worthy buyers. That's because investors have been shying away from buying those loans with foreclosures on the rise. Gary Schlossberg, senior economist at Wells Capital Management, says the Fed's intervention should fix that.

"Now you have collateral. Now you have backing. You can go into the market and hopefully borrow more easily or fund more easily."

What the Fed's action doesn't do is stop the slump in home prices.

Les Muranyi is a bank analyst with the Canadian rating agency, DBRS.

"Home prices have to adjust even more downward because the relationship between peoples' earnings and the home prices are still out of kilt," says Muranyi.

The Fed's intervention is not a bailout. It is a major step toward putting home ownership and lending back on their feet.

"A number of lenders have gone out of business. Huge multi-national lending institutions have been dramatically downsized, so there's been a lot of pain. It'll be awhile before they go back to those careless days," says Asdourian.

The Fed's job isn't over. It has to watch for inflation -- a major concern with the price of food, gas and oil rising rapidly. And it has to keep the economy from slowing and even slipping into recession until those stimulus checks arrive in the mail.