The recent dramatic surge of 490 in the stock market over the news regarding the Fed and other central banks to lower the cost of banks outside the US to borrow cheaper dollars from their central banks is a head scratcher. First, the liquidity swaps are only related to European money markets and have absolutely nothing to do with the fundamental causes of the debt crisis - too much government spending. Second, it is a short term patch expiring in February 2013. Third, it is another slap in the face of finance fundamentals as taught in our universities. The price of a stock is supposed to reflect the market's long term assessment of the value of the firm rather than a short term temporary action (unless that action has a long term impact). Certainly it is true that the profitability of American internationals are dependent upon European markets. But I have seen little evidence that the resolution of their current liquidity crunch would have a great impact on firm profitability. It is similar to the volatility in the market that learned observers have attributed to the Greek financial crisis. Nonsense. Greece is a rounding error and its default would have little noticeable impact on US financial firms and internationals. It is as though those learned analysts are grasping at straws to come with an explanation as to what is going on in today's markets. I guess they cannot tell the truth which is "I don't know."
Harold A. Black is professor emeritus in the Department of Finance, University of Tennessee, Knoxville having retired after 24 years of service. He has served on the faculties of American University, Howard University, the University of North Carolina - Chapel Hill and the University of Florida. His government service includes the Office of the Comptroller of the Currency and as a Board Member of the National Credit Union Administration. He also has served on the boards of directors Home Savings of America and its parent company, H. F. Ahmanson & Co., Irwindale, California prior to its merger with Washington Mutual Savings Bank, on the board of New Century Financial Corporation, Irvine, California, then the nation’s largest real estate investment trust and as director and later chairman of the Nashville Branch of the Federal Reserve Bank of Atlanta. He writes an occasional article for the Knoxville News-Sentinel at http://www.knoxnews.com/staff/dr-harold-black/. His web page is haroldablackphd.com