Posted on 12/18/2008 7:27:53 PM PST by SeekAndFind
In less than three months recently (from August 30 to November 19), the Federal Reserve System increased bank reserves in U.S. banks to more than $650 billion from under $50 billion. To remark that this was both a large and an unprecedented action would be an understatement. Since banks are permitted to lend a multiple of such reserves, it is possible that some day the U.S. money supply will begin to skyrocket amidst a new lending boom. Mr. Bernanke may now longingly dream of that day when he can become the stern central banker who must "take away the punch bowl" while at the same time receiving accolades for having "saved the economy." Between now and then, however, American businesses must overcome the mountain of fear that they have come to know during this past year. Unless their fear is overcome, banks won't lend, and worthy business borrowers won't seek loans. Money supply growth will be stunted, at best, and GDP will continue to languish or fall as it faces the headwind of a drop in the velocity of spending.
What are businesses afraid of? Perhaps they suspect that asset values may continue to drop a lot more or for a longer time than experts predict. This scenario implies a difficult period of indeterminate length for businesses -- i.e., employers -- and for stock and credit markets. The medicine for this? -- to make sure nothing prolongs the agony, that is, to let the free market work.
But a look at certain facts implies there is more to fear than just adapting to lower asset values.
Fact # 1: The Federal government and the Federal Reserve appear determined to use all their power to prevent the downward adjustment of asset values, that is, to prevent price changes that must take place prior to recovery. For example, to the extent they are successful in propping up or, God forbid, reestablishing status quo ante housing prices, real estate markets could be frozen indefinitely. Many buyers, certainly, might avoid the housing market for this reason and any other market they saw as artificially propped up by government. A new round in the effort to prop up the real estate market began Tuesday with the Fed's promise to "provide support."
Fact # 2: The "rescue" program of the Bush (and, prospectively, the Obama) administrations consists in an expansion of the public sector at the expense of the private sector. Allegedly, some of this program (the "bailouts") is to be temporary and will be reversed when recovery comes. Yet, even temporary public sector expansion suppresses the forces for recovery-including both the confidence of the un-bailed-out businesses and their financial means of survival.
Fact # 3: The Federal government and the Federal Reserve have not admitted their roles in producing the economic crisis, much less the implications of such an admission. The theory of Congress and the bureaucracy, it appears, is that "the free market" was to blame for the crisis and that the existing vast reach of business regulation must therefore be increased. This will not encourage recovery. It merely frightens businesses and investors-again, read employers if you are concerned with the unemployment rate. Then there is the Federal government's impressive avoidance of admitting blame for having encouraged the sub-prime mortgage fiasco and the real estate boom in general. But the most amazing evasion of responsibility, surely, is that of the Federal Reserve System, whose provision of the necessary and sufficient conditions for the asset bubble will be studied for decades. The academic debate may eventually be: Was it Fed policy of the last few years only which caused it, or the many decades of easy money that never once allowed the money and credit system to regain a sound footing?
The Fed's attempt to reinflate the economy may "succeed," i.e., it may overwhelm fear with a new round of delusion by providing us with a fresh array of high asset valuations. If it does, we can then wonder about the next frightening downward adjustment. Or perhaps we are now beginning a prolonged economic depression, like the last one impervious to "pragmatic" governmental "stimulus"-macabre government-orchestrated parodies of free market activity. Either way, American business may be forgiven for thinking the inmates are still fully in charge of the asylum. This could be the real fear.
Here's a hint: It's middle name is Hussein.
Why hire when demand is way down?
Wow, that's funny. In this area of the country, that has nothing to do with it!
I really don’t believe the Depression hype.
I went to a mall here in town that 20 years ago was a dump. At noon on a Thursday it took me half an hour to park. People were parked in the grass and up on curbs.
Holiday sales seem to be up and people seem to be buying obscenely expensive stuff. After Thanksgiving sales were up 7% from last year.
Dems just want to trash this economy to the max so Obama can get the maximum rebound.
We haven’t gotten our bail-outs yet.
Not a bad observation.
On the other hand, I think small business is ticked off at how poorly government is managed, and people are not getting any real value out of the taxes they are paying.
Government is not listening to the people when it is the issues that matter to people they are deciding for, with complete disregard to the peoples wishes.
So government is telling people to spend. build, buy like nothing ever happened. And the people are telling the government we no longer have faith in them. They will tell us anything to stay in power. If we pull the plug on their tax collections and reduce the money flow they have less power to manipulate people.
Paid Obama FR apologist? His channellin FDR should frighten anyone who’s read history or seen newsreels of breadlines.
“And the people are telling the government we no longer have faith in them.”
That’s it in one sentance.
I’ve been working 50+ hrs a week for months...
Bankers, Fanciers, and Politicians are a bunch of Crooks who change the rules to fit their needs at any given moment. What businesses are afraid of is that the Crooks are ignorant arrogant pieces of S. and we are stuck with them because the populous believes in theses SOBs.
What businesses are afraid of is ALL of our taxes... everything will be taken from us to feed the troff so that politicians and bankers won't lose their assets. What we are afraid of is our country has miserably failed the populous to support a select few pigs that walk on two legs and are more equal than us.
Thereby proving they are dumber than a coal bucket.. If they would let the market find it's bottom it would self correct, provided they run the illegals out and let the labor market work from supply and demand.
For years the government has pushed cheap labor, cheap money and higher and higher home prices.
American business is afraid that *everyone* spending like a drunken sailor for 50 years is finally catching up with all of us. Everything with the words “credit” or “debt” attached to it is to be avoided at all cost, because to tie your rope to it is to be dragged down with it.
The only way out of this mess is for our economy to be divided in half, with the “real” economy being protected on one side, and the fantasy, leverage economy actively encouraged to go broke on the other side.
This means that every businessman involved in the real economy is boarding up their windows and barring their doors until after the hurricane has hit. And every leverage and margin businessman whose love boat is sinking fast, is banging on the doors of real businesses, hoping to loot them to save his own sorry rear end.
And the government is still trying to save the leverage corporations who got us into this mess. But that’s worse than futile, because they *have* to be eliminated before there is a hope for recovery.
At the individual level it means to slash your debt ASAP as well. Put those credit cards in a safe place and go back to using cash and checks at the store. It is also a good idea to keep cash at home.
The US government is on a binge of spending right now, even though its tax revenues for next year are going to be severely cut. Soon, they may run out of funds as well. They can’t throw around money if nobody will loan them money, or worse, when they call in those debts.
Wild times.
I'm honestly curious: Do you really think that the current economic chaos is all made up because a mall was busy? Addicts get their fixes any way they can before they hit the bottom. Likely a high percentage of the shoppers you see will default on their credit cards in the coming new year.
Good post.
Twp years of Democrats' screaming "The worst economy in history" eroded consumer confidence and caused business to become scared and clam up. They did this to win the election, and it worked.
My thinking is that the price of housing will continue to fall until the average house is affordable by the average family. the govt pumping in money will only prolong the agony and distribute available housing unfairly.
It fits the national data showing higher Christmas sales.
FDR started this country on the road to hell.
I just wonder if they have the cash to pay for their purchases.
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