Uncommon Wisdom

Nov 24 2008   3:20PM GMT

Obama economic moves strengthen financial markets

Tom Nolle Tom Nolle Profile: Tom Nolle

The Obama economic plan, and economic team, are both taking shape and the Street likes what it has seen. Obama is set to name NY Fed chairman Tim Geithner as Secretary of the Treasury and Lawrence Summers as chief economic advisor. The former set up a major gain in the Dow on Friday.

The Obama camp has announced it will pursue a broad infrastructure-modernization and works program stimulus that could involve more than $600 billion and take two years. Over the weekend, the government decided to rescue CitiBank, removing the risk of a major bank failure from the market and signaling the end of the apparent policy of non-intervention that allowed speculators to hammer stocks without fear of being trapped by good news. The deal will involve U.S. guarantee of certain mortgage-backed assets, totaling over $300 billion and including some commercial mortgage-backed securities that appeared to be the new problem with Citi. The government will also get $7B in new preferred stock.

Many believe that the move was generated by Obama administration intervention, and in particular Geithner’s relationship with Paulson, and this was the strongest signal that there might not be a period of inaction between administrations. The auto industry, reluctant to agree to sweeping changes that Congress was likely to demand in return for a loan, is now lobbying for a loan program to automakers’ finance arms to spur demand again. The Fed is reviewing measures that would pump up the money supply via direct lending, and also lower long-term rates; these would presumably supplement the traditional rate cuts that are now nearly at an end as rates hit 1%. All this has made the markets happy; U.S. futures were higher this morning, Europe was strong and Asia mixed with Japan higher.

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