The markets had a monster day today, with the DJIA up 497 points.
A reader, a self-described “dude involved in capital markets,” wrote in to correct my earlier comment that the markets “liked” the Geithner plan:
The market doesn’t care one whit about TARP and its contents; what it/investors care about is that we now have some official clue, some concrete picture, about what the government is going to do. We all knew they were going to do something, the question was simply, “What?”
To put it another way, billions and billions of investor cash has been sitting on the sidelines for months now. That money was not going back into the market until we knew who the big losers were going to be (banks or taxpayers or other) and who the big winners were going to be. Now we know. With that information, people can now make at least somewhat informed decisions regarding their money.
It’s like everyone huddled at the foot of the water at a beach because someone heard there was a shark in the ocean. Is there a shark in there? Nobody knows, so nobody goes in to swim. Suddenly, the lifeguard yells out, “all clear!” and everyone splashes in.
Geithner’s plan may or may not be optimal, but the mere formulation and announcement of the plan removes a HUGE transaction cost involved in investing. It’s the Coase Theorem (http://en.wikipedia.org/wiki/Coase_theorem). Some people will lose and some people will win, but if the government takes as much mystery out of the process as possible we’ll all be better off.
What’s mind-blowing is what took Obama so long to get his Treasury’s act together.