Market recovery rests in Washington

The government threw more money at the economy this week but the stock market continued to plunge downward. What's wrong with this picture?

First, a recap
The Dow opened the week just above 7,000 and immediately took a nose dive. By Friday morning it was trying to recoup some losses but for most of the week traders seemed to watch its fall in shock. Citigroup, once one of the largest banks, traded at under $1. Markets fell globally. 

Meanwhile, on Capitol Hill, Fed Chair Ben Bernanke, Treasury Secretary Timothy Geithner and the head of the Office of Management and Budget Peter Orszag were busy outlining new government programs and defending existing ones, all of which they hope will save the economy.
The new stuff
The government released details on two economic recovery programs that we’ve already heard about:

1) They announced specifics on who is eligible for the $75 billion loan modification program to help homeowners on the cusp of foreclosure stay in their homes, and outlined how the program will work. The idea here as we've discussed before is to find a floor for home prices by preventing more foreclosures from going on the market, which drags down home prices overall. The details announced this week give incentives for lenders to modify people's existing loans to make them more affordable.

2) The government also released details about TALF (Troubled Asset-Backed Securities Loan Facility), which taps the previously approved $700 billion TARP (Troubled Assets Relief Program) money for loans meant to get credit flowing back into small businesses, car financing and student loans.

More on TALF
Many say TALF is key to getting money flowing again, particularly to small businesses. Because that sounds so wonky, and kind of makes you wonder what it really means in real-people terms, we're thinking about it like water, which needs to flow to keep crops alive. If all the water is being held back by a dam, then the crops suffer and might die. Likewise, if all the money needed to run or start small businesses or help people get college loans is dammed up at the bank, then money isn't flowing in a way that keeps the economy growing. Make sense?  

So, TALF specifically targets this problem, with the intention of providing up to $1 trillion in lending. Basically, the Fed and Treasury will lend money to investors to buy highly rated asset backed securities (securities made from bundled up car and credit-card loans), which in turn provides the money to let more of these loans be made.

The big picture
The markets are all about confidence and right now they have none. They are looking to Washington for guidance and answers that the economy and the world aren't headed into the next Great Depression. It seems unreal, doesn't it? That so many smart people could be at the helm of the country's financials and trying to make a difference and yet the foundation feels like sand, slipping away beneath us. Of course TALF may need some time to get working. The lending is set to start March 25, but the market clearly didn't seem to care. We’ve raised the question “who’s in charge” because it seems with so many top people on the Hill and countless speeches by Obama, there still isn’t enough certainty about these plans to help soothe the markets. Why? Because general sentiment is that things are much worse than people really know.  

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