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A Framework That Provides Clarity

During periods of “low visibility,” confusion reigns: for every indication of one trend, there seems to be a countertrend. The key is to glean from the collective wisdom of reliable leading indicators a clear signal that the economy is headed for a turn.

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Washington and the Business Cycle


SUSIE GHARIB: Optimism that the Treasury plan will finally stabilize the financial system pushed shares of major banks higher by 20 percent or more. But despite the rally, there are still questions on Wall Street whether this latest rescue program will pay off for banks, private investors and taxpayers. Scott Gurvey reports.

SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: There is no question the plan was a hit with the stock market with the badly battered financial stocks leading the rally. Action was more subdued among bond traders. Treasuries were little changed. Economist Lakshman Achuthan says that's because it will take a lot more than another plan to bring the recession to an end.

LAKSHMAN ACHUTHAN, MANAGING DIR., ECONOMIC CYCLE RESEARCH INSTITUTE: The markets may be lifting, but it's a stretch to say it's because of the plan, OK. The business cycle is much more important to the future direction of the market than any announcement out of Washington.

GURVEY: There are also questions about how the plan will play on Main Street. Some critics are already complaining that hedge funds stand to gain big profits while taxpayers take most of the risk. Charles Gradante, an advisor to hedge funds, says that is not true.

CHARLES GRADANTE, CO-FOUNDER, HENNESSEE GROUP: The hedge funds are not getting a freebee. They're still downside here. The loan they're getting is a non-recourse loan. So if what they're buying turns out to be a bad investment, the hedge fund will have to pay back the loan and plus lose their initial equity.

GURVEY: The goal of all of these plans is to increase lending to business and consumers. A healthy credit market is essential for economic growth and jobs. But it is also a fact that economic cycles come and go, plan or no plan.

ACHUTHAN: If anything, what you've learned from all of these plans that have been announced is that they have very little sway over the economy and over the financial markets. The business cycle will not be dictated to. It will turn when it will turn. And what will happen is when it does turn, whatever plan is in the way will try to take full credit for it.