In my office, we’ve been having a number of conversations about the current state of the economy and how it affects our job. Not our jobs – our employment isn’t in jeopardy, but how it affects how our workplace functions. Someone commented the other day that the market appeared to have a bit of schizophrenia and there was no way to predict the effects. This was after the price of gold rose $40 in the morning, and then plummeted $80 in the afternoon for no real logical reason. The week began with investors freaking out and the Dow plummeting, and then, thanks to statements from the government, the markets shot up again.
It’s unpredictable and it’s a little bit scary. It also makes me very glad to have a secure job. I knew when I started working for the government that I wasn’t going to get rich, but as I’m hearing from friends at law firms that represent some of the big banking names in the news over the past week, I’m realizing that not having to worry about being laid off makes it worth it right now.
The government is taking four major steps to try to restore order to the financial markets. You can read about it at the link, but here’s a quick summary.
The government is hoping to create an entity to buy up bad mortgage-related debts, similar to what was done in the late 1980’s. The theory is that the entity would buy the debt at a huge discount, and then the financial institution could, in essence, figure out the loss and move on. This is all still in the works, and I’m interested to see the details as they arrive.
Money Market Fund Protection
This one’s great. We all know that money market funds aren’t guaranteed. Wait, you didn’t know that? Did you read the prospectus of your fund? That’s right, to get some of those great interest rates, you are taking a slight risk. It’s not a huge risk, as money market funds are considered to be incredibly safe. The goal is always to have each share of the fund worth $1, but one of the oldest money market funds reported this week that their shares were only worth 97 cents.
This week, Treasury announced that it will guarantee money market mutual fund deposits. For me, the eye widening point was that the money to guarantee these deposits is coming from the Exchange Stabilization Fund, which was an agency created during the Depression. Sure, it doesn’t mean anything, but that’s a word no one wants to see.
Ban on Short Selling
Short selling is an interesting stock technique, and the basic idea is that you borrow shares and sell them, then buy them back when the price drops a few days later (you’re working on the expectation that they will drop). Apparently, one of the reasons that some of the stocks of the major financial institutions have dropped is because of short selling, and some short sellers have been accused of spreading rumors that caused these stocks to drop.
Short selling has been banned for two weeks and may be banned for another two weeks following. The hope is that this will allow the stock prices of the financial institutions to recover.
Fannie and Freddie Portfolios
Fannie Mae and Freddie Mac are being allowed to increase the size of their loan porfolios so they can buy more mortgages. The theory here is that this will ultimately free up money to loan to new home buyers, thus helping the housing market. One major concern is that puts more risky loans in the government’s pocket, which could ultimately shift the losses to taxpayers.
So what does all this mean? It means the government is trying. And people smarter than I am seem to be very reassured by some of these steps. I like the idea of money market protection. I do have some money in a money market fund, but it was not the one affected by this drop. That said, it made me re-think the idea of having a money market fund at all.
For now, I plan to just keep on doing what I’ve been doing. Spending reasonably, saving as much as I can, investing in my retirement, and trying to not worry about what I can’t control.
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