The Everyman Economist

The financial storm has been raging for more than a year and has recently grown into a category 5+ hurricane. It has blown the roof off housing, tossed companies to the wind, and drowned many of our safest investments. But like all storms, this too shall pass and a calm will settle in. The damage will have been done and the recovery efforts will go on for quite some time, but the calm will return. How can I be so sure? Because never in the history of the modern day global financial system have so many resources been unleashed by so many. Trillions are being spent around the world to shore up institutions and national economies and it’s not over yet. That is no small matter and the world WILL see results, albeit slowly, and normalcy will return. The landscape will change and history will look back on these days and call it our great Depression. Not the same as in 1929, to be sure, but a game-changer nonetheless, as we see a transformation of rules, regulations and corporate and Everyman habits. They say “old habits die hard” and we are now living proof.  

We were On The Brink…and now we’re Back From The Brink…But…We are not alone. The financial crisis is not just a problem on our shores, it’s a problem on European and Asian shores as well. We were first to deal with the problem and now it’s their turn. Fortunately, we showed our friends and enemies what democaracy is all about, warts and all, and Europe and Asia will follow. But this is not going to be a pretty picture. Markets will fall, rise and fall again, and economies will be hurt badly. The credit squeeze will ease back from the brink of despair, but economic conditions will remain weak. This week the world will need even more encouragement and bold initiatives and I believe the Fed will supply some help. Interest rates will be lowered, but now is the time for some VERY bold action. With US interest rates already at 2%, what can the Fed do? What they MUST do now is remove the guesswork from the markets and stop pegging the Fed Funds rate to a specific target. Instead of lowering rates by 1/4 point or 1/2 point or even a full point, the Fed should formally announce that they will allow the Fed Funds rate to float freely, which is approximately what’s already happening in the markets anyway. Let natural market forces continue to dictate the overnight Fed Funds rate and let the pundits all go home. After all, they are no help with their predictions that often leave the markets disappointed, even when the policy is right. In addition, the Fed should officially lower bank reserve requirements and ease some more of the pressure that’s built up in the financial system. Now that we have $810 billion of fiscal policy relief on the way, we need to adjust the monetary policy spigot so that market psychology begins to believe that this is all for real. We all need to know that the financial system will not be abandoned and we need to be sure that it will get through this incredible mess. When we have a crisis of such immense proportion, leadership is the most important component to getting us back on track. That’s what FDR did in the 30s and 40s, that’s what JFK did in the 60s and that’s what Rudy did on 9/11, and we now need that same kind of bold leadership. We may be Back From The Brink…But…It’s Now Time To Reverse Course.