Opinion: Obama's Strategies Will Work

7) The money market will remain stable

Crucial to any end for the financial and economic crisis is stability in the money market. Without it, the banking system will not function in ways that get money to the people and entities that need it. The money market became dysfunctional early in the financial crisis during the summer of 2007, and in recent times it was again at the epicenter of the crisis. A recovery has been underway for several months now, thanks to actions taken by the Federal Reserve, in particular the establishment of its Commercial Paper Funding Facility and its swap arrangements with foreign central banks (the Fed in October offered to supply unlimited amounts of dollars to foreign banks needing dollars). The recovery of the money market is most apparent in the downtrend in LIBOR, which is collapsing and is set to drop further based in part on simple interest rate theory, which states that long-term rates are a bet on where short-term rates will be in the future. For 3-month LIBOR, which is hovering around 1.45%, there should therefore be some convergence with the 1-month rate of about 0.45%. Adding to the favorable backdrop is the excess amount of dollars in the financial system, which is apparent in the commercial banking sector's $1 trillion of cash balances (versus the usual $300 billion) and excess bank reserves, which at $700 billion are about $700 billion above normal (the increase in cash balances and reserves reflect the same condition).

8) The asset-backed securities market will revive

On November 25th, the Federal Reserve announced the creation of the Term Asset-Backed Securities Loan Facility (TALF), a facility the Fed said would "help market participants meet the credit needs of households and small businesses by supporting the issuance of asset-backed securities collateralized by student loans, auto loans, and loans guaranteed by the Small Business Administration." The Fed will lend up to $200 billion to investors for the purchase of asset-backed securities. The facility will become operational in February 2009. The $200 billion facility is large enough to normalize the market for credit card and auto loans. For example, for revolving credit, which stood at $976 billion in October, monthly growth averaged about $3 billion per month over the past 10 years, a growth rate that could easily be met by the TALF. Non-revolving credit, which stood at $1.6 trillion in October and consists of loans for automobiles, mobile homes, education, boats, and trailers, grew $6.5 billion per month over the past 10 years, an amount that can also be met by the TALF. The Treasury Department will provide $20 billion of credit protection to the Fed in connection with the TALF. The Treasury's commitment to reviving the asset-backed market was shown again in December with its investment in General Motors Acceptance Corp (GMAC), which put GMAC under the government's "umbrella," which is to say in a place likely to stay protected until the sun shines again.