The Great Debate

— James Saft is a Reuters columnist. The opinions expressed are his own –

By James Saft

LONDON (Reuters) – President-elect Barack Obama will have to confront the same intractable economic problems with the same inadequate tools.

The banking system remains impaired and will require more taxpayer support. The impact of one percent official interest rates will still be blunted by the congestive failure of banking. There also isn’t much more in interest rate to cut before the United States looks rather, well, Japanese.

House prices are still falling and will continue to wear away at banking solvency.

Stimulative spending by the government will help, but it too can only do so much. Consumers are likely to use a fair part of any new government checks to pay down debt and save for coming difficulties, rather than rushing out to spend. Infrastructure projects, while sorely needed, will take quite a bit of time to get up and running.

- James Saft is a Reuters columnist. The opinions expressed are his own –
By James Saft
LONDON (Reuters) – It has been a bad few weeks for hedge funds, including perhaps the world’s biggest, the United Kingdom.

Like so many hedge funds, Britain as a nation sought to maximize its gains in recent years by borrowing short term money, usually from overseas, and investing in higher risk, supposedly higher yielding assets.

Now the funding is gone, and even government intervention on a massive scale is unlikely to avert a very damaging contraction in credit.

— James Saft is a Reuters columnist. The opinions expressed are his own –

By James Saft
NEW YORK (Reuters) – Some time before the end of the year it is a good bet that stock markets will throw off their gloom and begin a powerful rally of as much as 15 or 20 percent.

Some time one to three months after that it is a good bet that the prospect of a deep global recession and shockingly bad earnings will send them right back down again to make new lows. Rallies in the midst of bear markets can be sustained, powerful and feel very much like the ones that often mark the beginning of a real recovery.

(James Saft is a Reuters columnist. The opinions expressed are his own.)

LONDON (Reuters) – The evaporation of borrowed money has fundamentally changed the way markets function, and what look like crazy anomalies may end up being closer to the new reality.

Across financial markets, especially in fixed income, strange things are happening. Take two examples:

The U.S. government takes Fannie Mae and Freddie Mac into conservatorship, essentially guaranteeing their debts. Investors first narrow the premium they demand to lend to the two mortgage giants, then stage a strike and send these premiums to all-time highs.