Financial Crisis: Beginning of the End?

Lucky Tim: Just as knives were being sharpened in Washington for Treasury Secretary Tim Geithner, his stock rocketed skyward along with the Dow Jones.

The caricaturists were already getting their images ready for Tim Geithner’s departure from Obama’s cabinet when the markets suddenly shouted “Good Luck!” and shot up around 500 points on Monday. That’s slightly less than seven percent, but still the fifth largest advance in Dow Jones history. When the markets opened on Tuesday, the Dow held on to the profits, but by the close the index was back on the downside at 1.5 percent.

What happened on Monday? Geithner announced a program of trillions to buy up toxic investments and mortgages from banks. The Treasury itself threw 75 to 100 billion dollars into the ante. This is intended, along with private investments, to generate up to a trillion dollars (that’s a one followed by twelve zeros).

Of course that caused the usual grumbling, but the stock market reacted enthusiastically and of course it’s never wrong. Nevertheless, it temporarily agreed with the Treasury Secretary who described the move in yesterday’s Wall Street Journal as “part of an overall strategy to resolve the crisis as quickly and effectively as possible at least cost to the taxpayer.” He added, “Simply hoping for banks to work these assets off over time risks prolonging the crisis in a repeat of the Japanese experience.” Geithner was referring to the “lost decade” of stagnation in Japan when banks had neither been forced to restructure nor did they receive government fiscal support.

Were “Lucky Tim” merely a stock market phenomenon, we wouldn’t have to waste time with “Wall Street-on-Monday.” What’s more interesting, because it’s more “real,” is the improving news from the real estate sector. In the United States, land of the private home, that’s an especially reliable early indicator. The most important indicators are new housing starts, the speed of existing home sales and price movements.

The most recent government figures show average prices for existing homes up 1.7 percent in January compared to the previous month. That may not be much, but it’s the first increase in a year. And why is that important? Because rising prices, even if they don’t lead to immediate profit, have a “psychological income” effect.

If the value of one’s home rises, the owner feels “richer” and therefore buys more. Even more important is the effect that has on financial markets. Falling home prices, the end of the housing bubble, were the cause of the current crisis. Trillions of dollars in mortgage-based investments were suddenly turned into shredder-material because the real value behind their face value threatened to plunge into a bottomless pit.

The losses, of course, can still be counted in the trillions. But if home prices continue to rise and Geithner’s program continues to work, the real beginning of the end of the crisis will have been reached.

If. And only if consumption continues to increase, new applications for unemployment benefits decrease and unemployment doesn’t continue its uninterrupted growth.