Originally Posted by coolgeee

"What accounts for the seemingly irrational response of the stock market to this dismal news? In a basic sense, the answer is to be found more in politics than in economics.

"The newfound bullish optimism among major Wall Street players—as transient as it may prove to be—can be traced in large part to the decision by the Fed to rescue Bear Stearns last month and open the Fed discount window for cheap loans to the big investment banks. This move, without precedent since the Great Depression, was taken to avert an imminent collapse of the US and global banking system, and it signaled that the US government would do whatever was necessary—ultimately at taxpayer expense—to bail out Wall Street.

"It is this implicit guarantee from the government that has shifted the mood among big market players and institutions from fear and panic to a measure of confidence, bringing with it a new eruption of risk-taking and greed.

"As Floyd Norris, the economic commentator for the New York Times, wrote on Friday, “... investors are starting to assume that the government stands behind Wall Street. The share prices of investment banks began to recover just after the Fed made it clear the investment banks could borrow from it."


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