Money Sage (archive)

All will depend upon two actors: the FED and the Administration/Congress.

The seeds of fear have been deeply planted. While many in the financial and general media have assiduously watered and fertilized these fears, there can be no question of assigning blame to these actors for PLANTING the seeds and allowing them to flower and pollinate to the point where it will require vastly more substantial efforts to douse them than would otherwise have been the case.

The seeds of fear were planted by commercial and investment banks, savings and loans, and mortgage brokers. These seeds, of course, were the issuance of huge quantities of sub-prime mortgages and the securitization and dissemination of same throughout the financial world.

It is critically important to bear in mind that the "landlords" on whose property the subprime monstrosity was planted and harvested were the Federal Reserve and the Administration (Clinton/Bush)/Congress. The landlords wilfully averted their eyes and allowed these "agricultural" activities to go on for a decade, doing nothing until the harvest had been "processed" and the poison spread through the financial body politic to the point where the patient was at risk of losing vital functions.

Now, as the Good Book sayeth, "Ye shall reap what ye have sown."

Certainly, there is a doctor in the house. He has the latest technology and a broad, easily accessible base of knowledge upon which to draw. In order to succeed in containing, and then rolling back the spread of the illness the doctor needs to have several things:
--A basic comprehension of the dangers;
--The willingness to act in the face of mucho criticism and possibly significant current and future costs.

If the doctor does not act the disease will generate multiplying and worsening symptoms. These symptoms will aggravate the most powerful of human emotions: FEAR. This mighty emotion will act negatively upon those factors which determine the health of a modern economy: bank lending, consumer spending, business investment and hiring, significant price movements in financial markets.

Fear feeds upon itself. If it grows too strong in the context of the mountain of household debt and the potential decline in consumer and mortagee ability to continue to service said debt, the possibility of a domino effect in the real economy cannot be ruled out. Consequently, it is essential for both the FED and the Administration/Congress to accept the seriousness of the potential problem and to act PROMPTLY and EFFECTIVELY.

This is not to say that there are not potentially powerful therapeutic and preventive sources extant outside of the public realm. These sources consist primarily of foreign and domestic capital agglomerations which are willing to shoulder risk in order to achieve substantial gains. Indeed, we already see this willingness being translated into buying activity -- from both foreign and domestic investors. Certainly, if equity and low quality debt prices decline further, this will spur foreign and domestic buying, providing a significant cushion for the economy.

HOWEVER, there is a necessary precondition for the continuation and acceleration of these capital flows into risk-sensitive investments. This precondition is simple: the potential purchasers of assets and infusers of money into our economy need to have a sufficient measure of confidence, not only in the economy, but in the minimal wisdom of the FED and the Administration/Congress.

Even slow learners do learn. Our own slow-learning FED is getting the message, as is the lazy-faire (er, we mean laissez-fare)Administration. The sooner they act, the easier it will be to contain fear and the grievous damage which will otherwise eventuate.