The Sky Ain’t Fallin’… yet

Well, we survived Black Tuesday.

Depending on how you look at things, this was either a non-event and just another down day in the markets, or perhaps it was more than that.

  • The main bloodletting was put off due to the Fed’s emergency 75bp rate cut before the markets opened yesterday. This emergency rate cut (the first since just after 9/11) has been billed as a ‘once in a generation event.’
  • Normally, when the Fed cuts rates even by just 25bp (i.e .25%), the markets usually surge ahead. In this case, we have an emergency rate cut of .75% and the markets reward us by ‘only’ losing around 120 points.
  • We got into this mess in part through extreme cuts to the Federal Funds Rate fueling inflation and risky loans and general greed. The rate hikes that were designed to slow the economy down and rein in inflation have helped cause even more problems, and we are now trying to fix them by slashing rates again. This may very well trigger another round of debt expansion, but it will also cause inflation and higher prices for most everything sooner or later.
  • We’ll have more problems over time as the housing market continues to worsen. If we use most of our ‘bullets’ now, what will we do when things really start getting ugly?

Asian markets have responded positively today, but European ones don’t look to be following suit, and the Dow is opening down as well. Yesterday wasn’t a catastrophe, but the US government took drastic measures and only managed to slow down the losses. People can argue about whether the US has entered a recession yet or not. What seems obvious to me is that we have yet to experience any real discomfort, but that’s coming.

Those in power who control finance aren’t all-knowing, but they’re not idiots either. They’ve got to know that the proposed ‘stimulus’ packages are short-term, temporary fixes at best and will do nothing to solve the major problems our economy faces. This makes me wonder if they have long-term plans identified, or if they are simply kicking the can down the line until 2009 when a new president gets to deal with things. Any major fixes to the economy will be accompanied by pain, which most Americans won’t voluntarily accept. In the amoral calculus of high-level politics, maybe some policymakers have already figured things out to one degree or another, figured out that there’s no realistic way to implement things without major upheaval, and are willing to let things collapse in order to make the public amenable to the new ‘solutions’ they will provide?

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3 Responses to The Sky Ain’t Fallin’… yet

  1. d.a. says:

    “willing to let things collapse in order to make the public amenable to the new ’solutions’ they will provide”…

    I think you nailed it right there.

  2. matt says:

    “It has to get worse before it can get better.” With the dynamics of the media and public opinion
    it seems that nothing of substance will happen without serious shocks or distress. As a society
    we’re too fat and happy to care, no matter how much we pretend to care.

    I’d like to believe otherwise; do you see any reason to do so?

  3. Bart says:

    d.a.: Thanks… I’m afraid that might be the case

    matt: No, I don’t believe any serious change will happen until the average American starts getting impacted in a meaningful way. We are indeed too comfortable in our lifestyles to worry about much of anything that doesn’t affect our ability to watch TV.

    What I worry about is what decisions will be made when those shocks come. If you haven’t read Naomi Klein’s “The Shock Doctrine,” I’d recommend finding it in your local library. Some of the evil geniuses like Milton Friedman, etc, tend to use catastrophes as a chance to try out their economic theories, which usually hasn’t worked out too well.

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