Economic Darwinism In Action…

I was listening to MPR on the way into work this morning and was able to listen to the weekly Monday morning economics chat, which discusses the upcoming weeks actions in the markets. The conversation this morning revolved around the upcoming Fed meeting, and how it was expected that the Fed would acknowledge that there is a growing problem in the credit markets (thanks to the subprime mortgage fiasco), but that it would take no action and leave interest rates unchanged.

MPR’s economics editor stated that this was a major change in policy compared to the Alan Greenspan era, and that it signaled the end of the ‘Greenspan Put,’ were the Fed would take immediate action when the markets or major players were in trouble. The new Fed chairman, Ben Bernanke, appears to be taking a different tack and is allowing financial companies that get themselves into trouble to take the pain and either get through it or close their doors. Bear Stearns, for example, is a huge market player, and they have managed to get themselves into a pickle with a few hedge funds of theirs melting down in the last month or so. In the past, the Fed might have either lowered interest rates or stoked the market with huge infusions of new money, but now, the Fed appears to be saying “too bad, so sad” and letting the market punish companies for overextending themselves and making poor decisions.

Mr. Bernanke appears to be trying to differentiate himself from the Greenspan era, and so far, I think he’s done a serviceable job. If you look at the real numbers (instead of the happy talk in the media), the economy isn’t doing so hot: the dollar is losing ground against foreign currencies, the housing market is still in the doldrums, and while the stock market is hitting all-time highs, it’s an illusion based on most people not understanding how inflation affects market valuations

The fact that we’re nearing the end of summer and the economy is still functioning normally makes me satisfied with his performance so far. It could have been a lot worse. It’ll be interesting to see how many more companies get voted off the island in coming months, since it appears that the Fed is content to let the market cull the corporate herd a bit more.

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3 Responses to Economic Darwinism In Action…

  1. Rebecca says:

    Bart,
    I don’t think that it’s economic darwinism so much as it’s a case of having painted onself into a corner. If they lower the interest rate it props up the crumbling housing market but the U.S. dollar (which is nearly on life support as it is) drops dead. If they raise interest rates, the housing market and credit crunch deepens but they save the dollar. An interesting dilemma indeed.
    -Rebecca

  2. Bart says:

    Hi Rebecca,

    The ‘Darwinism’ angle comes into play with Bernanke holding back and letting the market do what it will to the various hedge funds and mortgage lenders rather than intervening by injecting additional liquidity into the markets in an attempt to save the threatened business’ bacon like Greenspan had done many times in the past.

    The businesses & the market has painted themselves into a corner, I agree. The difference is that the Fed doesn’t appear willing to bail them out anymore. Sooner or later things will come to a head, and I agree with you that there will be a fundamental choice to be made as to whether we’ll save housing or the market. If things keep going the way they are right now (downward, but not precipitously so), this will be one of the major themes of the 2008 presidential election, IMO.

  3. Rebecca says:

    I think the economy may be THE issue of the presidential election, if we’re in a recession or depression, which is looking increasingly likely.

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