Economic Update — Markets Yo-Yo Up After Bernanke Pep Talk

The equity markets yo-yoed back upward again after Federal Reserve Chairman Ben Bernanke (pictured) went to great lengths to assure Congress, and indirectly investors (who are traditionally a nervous lot) that the United States isn’t going to nationalize its financial system. He didn’t mention that the government might buy into big banks more extensively than before–40 percent is the figure usually given for Citigroup, for instance–but that isn’t nationalization. Maybe that counts as “sort of” nationalization. Some observers think the government is, despite assorted denials, on track to de facto nationalization. “The Obama administration is on track to nationalize the nation’s largest banks, unless it alters policy and creates a Bad Bank to absorb commercial banks’ mortgage-backed securities,” writes Peter Morici, professor at the Robert H. Smith School of Business of the University of Maryland, in his latest newsletter. “As housing prices fall, the banks will have no place to go but the government for the capital to cover losses, and their ownership will pass into government hands, first Citigroup and then others.” Housing prices are still slip-sliding away. The S&P/Case Shiller Index for December showed that home prices in 20 U.S. cities dropped 18.5 percent from the same month a year earlier, which is up from the 18.2 percent annualized drop in November 2008, and a record drop to boot. “The massive inventory overhang in the market and the surge in foreclosures mean prices will continue to fall rapidly,” Ian Shepherdson, chief U.S. economist at Valhalla, NY-based High Frequency Economic, said today in a note to clients. “The administration’s rescue plan will, in time, slow the rate of decline, but it won’t happen immediately.” Once again, places such as Phoenix led the way with a 34 percent drop, according to the S&P/Case Shiller Index. Las Vegas saw a 33 percent decline year-to-year, and San Francisco a 31 percent decline. Whatever the fate of the banks and the housing market that anchors them down, it could have been that investors were simply tired of the selling impulse that’s moved the markets downward for more than a week, including more than 3 percent on Monday. On Tuesday, the Dow Jones Industrial Average gained back Monday’s loss by rising 236.16 points, or 3.32 percent. The S&P 500 was up 4.01 percent and the Nasdaq was up 3.9 percent. Investors aren’t the only ones feeling a little gloomy at the moment. The Conference Board’s Consumer Confidence Index dropped to 25 in February, down from 37.4 in January and considerably more than expected. Relatively low prices for gas and food aren’t enough to buoy consumer confidence, it seems. That’s all well and good, but even $2/gallon gas is no bargain to the unemployed.