Fisher Investments Editorial Staff
US Economy

Seeing Past the Trees

By, 02/12/2009

Story Highlights:

  • Treasury Secretary Timothy Geithner unveiled a financial rescue strategy containing several plans, but few logistical details. The same day, markets tumbled, with the S&P 500 dropping 4.9%.
  • Understandably, investors were frustrated with the Treasury's lack of clarity, but just as important as the details of Geithner's plans is gleaning some idea about the tack he'll take in his new role.
  • Geithner is proposing a rescue that's massive in size and wide in scope, and only time will tell what the details are and how effective the plans prove to be.
  • Importantly, there are meaningful differences between Geithner and outgoing Treasury Secretary Henry Paulson.

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Turns out, Treasury Secretary Timothy Geithner's much-anticipated speech on Tuesday offered more forest than trees. He unveiled a financial rescue strategy containing several big proposals, but few logistical details. The same day, markets tumbled, with the S&P 500 dropping 4.9%.

Geithner's vagueness may have struck a wrong chord, but it's a mistake to get hung up on the missing details. Understandably, investors were frustrated with the Treasury plan's lack of clarity—perhaps more so since previous hints about the rescue plan (including the "bad bank" idea) didn't bear fruit in Geithner's speech, bringing to mind the previous Treasury administration's disastrous inconsistencies.

Though many notable logistics are missing, one thing's certain: Geithner's plans provide a rescue picture that's massive in size and wide in scope. The provisions include increasing the amount available for lending under the Federal Reserve's Term Asset-Backed Liquidity Facility (which provides financing to investors to buy assets backed by consumer debt and commercial real estate) from $200 billion to $1 trillion, creating a "Public-Private Investment Fund" to buy as much as $1 trillion in toxic assets, and further injecting fresh capital into banks passing "stress tests." Time will tell what the details are and how effective the plans prove to be.

Just as important as the details of Geithner's plans, however, is gleaning some idea about the tack he'll take in his new role. Investors will surely be scrutinizing Geithner's every word in the wake of uncertainty created by outgoing Treasury Secretary Henry Paulson. Fortunately, there are meaningful differences between Geithner and Paulson. Notably, Paulson took the Treasury helm after a career as a Wall Street dealmaker—where he dealt with specific, independent transactions and outcomes (hence his different approaches to Bear Stearns, AIG, Lehman Brothers, etc.) and had no public policy or macroeconomic experience at all. By contrast, Geithner's career is grounded in academics and public service, and he is more aware of policies' and actions' system-wide implications. His speech on Tuesday demonstrated his approach may be the turtle to Paulson's hare.

No doubt markets will have more days like Tuesday's sharp drop as investors react to the still un-tested new presidential administration. But these reactions are impossible to predict, and singular big down days won't depress markets long term. Investors with lengthy time horizons need to evaluate the longer-term picture, which is slowly but surely being molded. Right now, the Treasury has shown it's not going to make hasty decisions, instead casting a wider eye to the forest—investors could benefit from a little of the same.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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