The Breakdown

Explaining Southern California's economy

Markets rally! Have we finally turned a corner on global crisis?

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The markets are rallying big-time today, with the Dow alone up more than 400 points. So what's going on? Elizabeth Harrow at Shaeffer's Research sums it all up rather neatly:

[T]he good news seems to be pouring in from all corners of the globe: Euro-zone leaders finally agreed on ground rules regarding the expansion of the European Financial Stability Facility (EFSF); policymakers in Beijing lowered their reserve requirement ratio for banks; and the Federal Reserve coordinated with the European Central Bank (ECB), Bank of England, Bank of Japan, and other major central banks to lower the cost of emergency dollar loans. And, as if the bulls needed another catalyst, the day's slate of domestic data was surprisingly robust. Payroll giant ADP announced that the private sector added a stronger-than-forecast 206,000 jobs last month, while pending home sales and the Chicago PMI also improved beyond economists' expectations.

That might sound like a bunch of financial gobbledygook, but it's easy enough to translate:

  • The EFSF is the European version of TARP, the program that rescued the U.S. banking system in 2008. One of things that Europe has needed to calm its markets is to signal that it's ready to tackle its problems at the right scale. So the expanded EFSF proves that they're ready to go there.
  • Outside the eurozone, markets have been worrying about China having its own crisis, with its growth rates slowing down. By allowing banks to lend out more money, the Chinese government is showing that it's confident it can sustain growth and fight inflation, which has been on the rise in the country.
  • The coordination of the ECB, the Fed, and the other central banks shows that all the major players are prepared to make sure that the global economy doesn't seize up. Cheap dollar loans means that countries stuck with euros can unload them at minimal cost, thus ensuring that the global economy remains liquid. 
  • The positive employment and home-sales data in the U.S. just means that the risk of a double-dip recession, at worst, and very sluggish GDP growth, is receding.

None of this is really super-duper great news. In the European context, all it means is that the eurozone countries, with the outside aid of the central banking establishment, are finally committing to deal with the crisis and, from the looks of it, preserve the euro. The involvement of other central banks suggests that this isn't just a euro problem anymore, but a global one.

But hey, it could be too much, too late. The major challenge with the eurozone crisis has been that every time a new plan comes out, it's analyzed and found to be insufficiently large. This latest series of moves may change that perception — but then the markets may conclude that patient is already beyond saving and that no measure of action will be enough.

Follow Matthew DeBord and the DeBord Report on Twitter.

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