The Face-Slap Theory
Mar 10th, 2008 at 7:55 pm by Susie
Friday’s employment report — which was so weak that it had many economists declaring that we’re already in a recession — was bad news. But it was actually less disturbing than what’s going on in the financial markets.
The scariest thing I’ve read recently is a speech given last week by Tim Geithner, the president of the Federal Reserve Bank of New York. Mr. Geithner came as close as a Fed official can to saying that we’re in the midst of a financial meltdown.
[...] Some observers worry that the Fed is taking over the banks’ financial risk. But what worries me more is that the move seems trivial compared with the size of the problem: $200 billion may sound like a lot of money, but when you compare it with the size of the markets that are melting down — there are $11 trillion in U.S. mortgages outstanding — it’s a drop in the bucket.
The only way the Fed’s action could work is through the slap-in-the-face effect: by creating a pause in the selling frenzy, the Fed could give hysterical markets a chance to regain their sense of perspective. And to be fair, that has worked in the past.
But slap-in-the-face only works if the market’s problems are mainly a matter of psychology. And given that the Fed has already slapped the market in the face twice, only to see the financial crisis come roaring back, that’s hard to believe.
The third time could be the charm. But I doubt it. Soon, we’ll probably have to do something real about reducing the risks investors face.
A plan to restore the credibility of municipal bond insurance would be a start (how crazy is it that New York State, rather than the federal government, is taking the lead here?). I also suspect that the feds will have to get explicit about guaranteeing the debt of Fannie and Freddie, which really are too big to fail.
Nobody wants to put taxpayers on the hook for the financial industry’s follies; we can all hope that, in the end, a bailout won’t be necessary. But hope is not a plan.
Billionaires are gonna be fleeing the country en masse, when it comes time to pay the piper here. They’ve looted America, ruined the country financially and morally and now they’re gonna take a powder as the public is faced with massive depression as a result of their insane policies. Anyone think the Bush’s Paraguayan rancho is a conspiracy theory anymore?
Hey, Dubya only brought that rancho the size
of Rhode Island so he could clear some brush.
The nice thing about this is that although working people have been getting shafted since before Ronald Reagan, this crisis is so big and so wide that it’s going to actually touch the people who used to be able to float away on the first-class lifeboats. When you think about it, there’s no place they can go and no place they can put their money without losing it. A lot of the signs point to a systematic ravishing of the equities market, (read: huge stock market drop), then an eventual collapse of the commodities market–gold, oil, wheat, etc. If that happens, the value of the dollar will actually go up instead of down, prices of everything collapses, and that spells deflation. In a deflationary economy, the value of a dollar goes up instead of down, so cash is king, but debts and their inflationary interest rates don’t go down. And no one wants to lend to refinance these debts–they’d lose money. Witness the interest rates for credit cards and mortgages–they’re actually going up, even though the banks’ costs to make those loans from the Fed, are actually going down with each of Bernanke’s rate cuts. They’re basically squeezing consumers at the exact worst time. Internationally, it would cause a cascade of economic problems compounding whatever local systemic problems already exist. If you’re an investor, under these conditions, Paraguay doesn’t look too hot. But it does if you’re a war criminal!