The Current Crisis

[BrightNoon]

My point is that, short of societal engineering (government organized media coverage e.g.), panic is an inevitable factor. Rather than lament this, I want to determine what action is best in a realm where we can make a difference: such as monetary policy. I didn't mean that wall street, professional traders don't panic; I meant that they don't panic because of the vague,scary-sounding reports on CNN. They panic beause of actual economic data and of the course, once a panic begins, it is autoatalytic. In other words, the fear-mongering tactics of the mainstream media are too simple; wall street dosen't respond to news that the economy is looking 'bad.' They need more detail. The media tends to do alot of human interest stories about foreclosures, job losses, etc., which is also pretty irrelevant to wall street, though it creates a popular sense of doom.

[Pangloss]

I am not saying investors panic due to what they see on the media; though CNBC, Bloomberg, and the WSJ do have a real influence over the market. The panic comes from wall street itself with the instinctive dumping of stocks when the herd of bears is on the run.

My point about the panic is that it is an overblown response (compared to the norm on wall street) to what economic data we do have, which doesn't seem to indicate a "crisis" at the moment.

As for monetary policy, we have already slashed the interest rates and the current policy is undoubtedly expansionary, and probably should be. Fiscal policy is clearly at this point back to excessive borrowing and spending. When Obama gets elected, his various proposed economic restrictions and increased taxes on the wealthy certainly won't help the economy get back on track.

So, as far as monetary and fiscal policy goes, the die has already been cast. The purpose of looking at panic is important, because what it will take to get the market back on track is confidence in the economy. When confidence is restored, these large investors will be taking advantage of the low-interest financing and low market prices to start building their portfolios and businesses back up, and starting new businesses. And so in a couple of years from now we will probably look back at the dip(s) in the market charts that are being caused by the market now, and smile, because times will be better. The markets have to adjust for lenders and homeowners signing off mortgages on the basis of hopes and dreams (the credit bubble), and then adjust again for the investors who hit the panic button and sent prices to artificial lows.

[BrightNoon]

We are in agreement about panic I think, just had some misunderstandings.

Originally Posted by Pangloss

So, as far as monetary and fiscal policy goes, the die has already been cast. The purpose of looking at panic is important, because what it will take to get the market back on track is confidence in the economy. When confidence is restored, these large investors will be taking advantage of the low-interest financing and low market prices to start building their portfolios and businesses back up, and starting new businesses. And so in a couple of years from now we will probably look back at the dip(s) in the market charts that are being caused by the market now, and smile, because times will be better. The markets have to adjust for lenders and homeowners signing off mortgages on the basis of hopes and dreams (the credit bubble), and then adjust again for the investors who hit the panic button and sent prices to artificial lows.

This is much more important and we have some serious disagreements here. Readjustment according to real value, as determined by natural supply and demand, is exactly what the ‘financial rescue package’ is preventing. The government is giving money expressly for the purpose of encouraging either more questionable lending or the refinancing of such loans that already exist. The government is preventing those institutions which acted recklessly (albeit encourage by loose monetary policy) from failing and being replaced by the more prudent; the government is assuming the risks of all this financial business and, therefore, encouraging institutions to take such risks: as there will be no consequences. Any improvement in the stock market, any return of consequence, I am inclined to attribute not to a return of a healthy, robust economy, but to the knowledge that the government will save anyone who is in trouble. In order to prevent the collapse of an untenable debt structure, which it itself encouraged, the government is all but forcing the generation of an even larger debt structure atop the first. This is delaying, not solving the problem; the problem is becoming worse. Now, the markets might well recover, along with the general economy. However, at some point, we will find ourselves in exactly the same position; the government will find it necessary to inject money into the financial system again. The problem is that, in this future, more money will be needed and there will be less credit to had for the government.

It seems obnoxiously evident, extraordinarily obvious to me that at some point, this sort of policy will no longer be possible; the crisis cannot be delayed indefinitely by increasing the bubble which is itself the problem. The question is this; at what point will we choose to allow the bubble to burst? If we wait until there is simply no other option, the result will be depression at best, hyperinflation at worst. Judging by the history of other nations which have been placed in these straits, if the U.S. government is faced with a choice between total economic collapse (credit crisis of today on a massive scale, unemployment, less demand, etc.) and printing enough money to ‘solve’ the problem, it will probably choose printing. What I think is not understood widely, even by those who don’t totally ignore the inflationary costs of the actions the government is currently taking, is that at some point, this process fuels itself and the power to intervene effectively to stop a downward spiral toward that choice I mentioned is lost. I am no economist, so I don’t have any idea how far we may be from that point, hopefully very far indeed. But the basic logic seems pretty irrefutable.

I’m not hopeful because we have set a very important and public precedent; the U.S. government will not allow X and Y to fail. I think we are therefore unlikely to allow A B C D E F and G to fail next time around. In that sense, I think this has been the turning point, short of a Ron Paul victory in the election…

[Pangloss]

Originally Posted by BrightNoon

I’m not hopeful because we have set a very important and public precedent; the U.S. government will not allow X and Y to fail. I think we are therefore unlikely to allow A B C D E F and G to fail next time around. In that sense, I think this has been the turning point, short of a Ron Paul victory in the election…

I agree with your whole post...I think I said much of the same originally in my first big post a couple pages back. The bailout is saving the big banks/firms who should be out on the streets right now, and what should really be happening is an influx of new investors and businesses to get the market going again. But of course the ivy league club saves their own at every chance. A government that robs peter to help paul will always have support from paul...and vice versa. I don't think the bailout will take the economy down from a purely economic perspective...but the one thing it's done is shattered any false ideals that anyone may have had regarding the so-called american "free market"...that never existed.

[BrightNoon]

The G20 is currently meeting to discuss possible solutions to the crisis. I have heard alot of talk about a 'new Brenton-Woods,' which surely can't refer to a return to the gold standard, which would be contrary to everything they have been doing. I wonder if there is a plan to end the reign of the dollar as the world's reserve currency. If so, what do you think might happen as a result?