Why Stock Markets and Economies Take a While to Bottom, Even with a Government Bailout

The current economic situation is absolutely unprecedented in our financial system. The economy and markets as we know them have changed significantly in the last few weeks. The government bailout, which has been highly criticized by many, is seen by many others as a type of stop gap in the financial downturn. It has been said that without this intervention our financial system would likely have been coming up against a problem not too much unlike the problems of the Great Depression. For the purposes of this article, let's just assume that the bailout by our federal government does indeed help our economy and the financial system as a whole avoid a complete meltdown.

The government stepped in and the meltdown was averted, so now the economy as well as the market can go back to normal and resume a nice and healthy bull market right? Those of you who are thinking that are likely going to be sorely disappointed. History tells us that when there is such a significant crisis in the financial markets it takes a large amount of time to get things turned back around. The most recent example of this was during the savings and loan crisis in the late 1980's and early 1990's. The stock market didn't just take off once the government introduced the RTC solution then, rather it had to see lower lows and digest exactly how the economy could move forward before it ever found its footing.

Why is it that these government bailouts don't typically turn out to be a bottom and the start of a new bull run? Simply because the market absolutely hates uncertainty and a bailout like the current one comes with a huge amount of uncertainty. The ripple effects of the plan will take a while to play out, and the market will have to wait and see exactly what occurs.

The housing market is still a tremendous problem that must be addressed, and none of these plans have addressed it. Government debt is spiraling out of control and the taxpayer is almost certainly going to have to be forced to pay up in the near future. Our banking system as we know it has changed significantly, and no one knows exactly how the new system will work and how profitable it will be.