I’ve been thinking about regulating. Actually I’ve been thinking about bubbles, the FED, solutions, equity markets, the real State of our Union, and the Titanic. The hot button story on page one for this week and the next will be the US economy and what the Federal Government intends to do to forestall a recession (if we are not already in one) or turn things around (if a recession has already begun). The eyes of the nation and world are now fixed on the administration and its actions.
You see there has been the underlying presumption that the Federal Government can fix anything. What we are seeing now is the direct opposite. When one critically reviews our current crisis of debt, it is not so difficult to realize that Uncle $ugar and his misguided past policies have become not the solution to our ills, but are the driving forces behind them. The assumption that more (and bigger numbers) is always better is simply not true! One must look behind the numbers and ask the questions: Is more of “whatever is under examination” a plus, or a minus? Are we as a nation (or a people) better off with more of this, or less of it? Politics and reality are so often in contradiction.
In recent decades, Federal policies have been driven by the
phobia that any downturns, or corrections to a boom, must be avoided at
all costs. The dot-com bubble, and telecommunications’ bubble of the
1990’s that fed off it, were ill-conceived. The internet was hot - very
hot. The problem was that out of all those great ideas, slogans, and
companies very few had any clue of how to make a profit and capitalize
on the creativity and newness. Lock in your share(s) of these companies
and the profits will follow. Well, they didn’t… and the irrational
exuberance behind those bubbles exploded.
The government’s
solution to defuse that contraction, compounded by the fears following
the attacks of 911, was to (again) promote consumption/ construction by
lowering interest rates below the costs of inflation. This effectively
made “borrowing to consume/ build” seem like some free ride. “When the
going gets tough, the tough go shopping/ building” became the motto of
that engineered soft landing. Well, replacing one bubble with an even
bigger one was NO solution! We are seeing all of the painful
repercussions of such a policy strategy now. Difficulty IS that the
only way “to solve” an all-pervasive debt problem is to pay it down,
restructure it (making it longer term), or write it off!
The
Federal Reserve Bank (the FED) has been the government’s primary force
in regulating the ebb and flow of the nation’s economy. Its arsenal
consists of monetary and fiscal policy. The money supply and credit
availability is either expanded or contracted as called for by the
situation. The secondary means to regulate the economy’s pump comes via
increasing/ decreasing taxation. The problem facing the administration
now is that the long term solution will only aggravate the economy in
the short run. There is no soft landing available for a debt or
over-consumption bubble.
The equity (stock) markets rise and
fall on the perception of the present and the anticipation of the
future. Last week saw a continuation of the downward pricings and
expectations. The Dow Industrials declined 4.02 %, the broader Standard
& Poor's 500 Index dropped 5.41 %, and the tech weighted Nasdaq
Composite Index fell 4.10 %. The first week of 2008 was not much
better. These first two weeks’ pricings were perhaps the worst in
almost thirty years - across all the exchanges!
The current
bubble is more pervasive and larger than anything seen on this planet
for a very long time. The packaging (and marketing) of debt-based
securities have made this a global problem. A bubble conceived and fed
by “liquidity” will not be fixed by more of the same. The solution to
the dilemma faced by the White Star Line’s flagship in April of 1912
was not to provide more water and ice, now was it? I’m Fred Cederholm
and I’ve been thinking. You should be thinking, too.
Writings 
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