Monday, March 17, 2008

How bad is it, Ben?

Only that bad? Well, last year, I suppose, the biggest worry was confidence. If you'd told people we were up Shit's Creek and probably would have to paddle out with our tongues, who knows what might have happened to the economy? Hell, people might have thought all those sub-prime mortgage derivitives collapsing were a real problem, and then how could we have -- uh -- paddled our way out?

Okay, I get it. Fine. But just how bad is it?

Oh! A little worse than you told us, huh? Well, those write-downs by Citi sure had the markets nervous, but cutting the federal funds rate and encouraging even those banks having "no problems" to borrow money from the discount window really should have done the trick -- don't you think?

Except it didn't do the trick. Nobody much wanted to be seen bellying up to that discount window, and the federal funds rate doesn't make a damned bit of difference in a liquidity crisis. Okay, it does encourage certain idiot speculators to bid up stock prices, but that's just short-term action. A day or two later, the idiots are losers -- except for those who found even bigger idiots to buy on the bump. (Granted, some bargain hunters who are willing to hang onto their purchases for a few years might do quite nicely down the road. There's some really good value out there if you can separate the grain from the chaff.)

Okay, but I'm waiting for you to tell me -- how bad is it?

Hmm... You know, come to think of it, maybe it wasn't such a good idea to repeal Glass-Steagall after all. It just might have softened -- or even prevented -- the sub-prime mortgage mess. What was Bill Clinton thinking when he signed it? He was a Democrat, wasn't he? (Oops, I forgot! New Democrats are not all that similar to us Old Democrats -- those of us who still think FDR had a few damned good ideas!)

Well, Ben, it's not your fault. You're just out there trying to clean up the mess Greenspan left behind, and I honestly think you're doing pretty well, considering what a hell of a mess it is. I think it's great that you've dusted off the New Deal playbook -- and I don't mind at all that you made it possible for JPMorgan-Chase to pick up Bear-Stearnes at a flea-market price. If there's a "moral hazard" in your action, I don't see it. Those who invested in that nest of vipers were justly screwed, and those who led the company to its demise will plummet along with the value of their stock options.

The opening of a discount window for investment banks leaves me feeling a little queasy, but I guess it had to be done. Sunday's surprise quarter-of-a-percent cut in the discount rate, if we're lucky, might mean no further cut in the federal funds rate tomorrow -- no matter how pitifully Wall Street whines. If the idea is to get banks to use the discount window, keeping the discount rate lower than the federal funds rate seems like the best way to do it. Anyway, the dollar has fallen as low as it ought to go. If the dollar's current devaluation isn't enough to correct our imbalance of trade, the value of the dollar isn't the problem. The people of this country shouldn't have to see the value of their incomes and their savings evaporate so that a few speculators can turn a quick profit.

Maybe I'm deluding myself, but I think that you might be exactly the right person to be Chairman of the Fed in these difficult times. You know your history, you're willing to risk trying some new approaches to our problems, and you've arrived at a point where you can be impervious to political pressure if that's what you want. I think that's what you want -- that, and a strong shot at minimizing the pain of the god-awful mess we're in.

A good ninety-eight percent of America is economically illiterate, and a substantial majority of the remaining two percent is ideologically blinded. I think you must understand that there won't be a hell of a lot of support for doing the right thing, but that doesn't wipe out your obligation to do it.

So do it.

And tell me , how bad is it -- really -- and how bad will it get?

Yeah, I was afraid of that.

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