Not So Dismal

Making Economics a Little Easier to Understand

Posts Tagged ‘fear

The Power Vacuum

leave a comment »

In response to today’s Politico Arena question:

Is there a potentially disastrous economic policy power vacuum, as Paul Krugman suggests this morning? What can be done about it?

What’s disastrous is the lack of transparency in the Treasury Department as led my Hank Paulson. What confidence remained in his office evaporated when he announced recently that he had known “all along” that simply buying distressed assets wouldn’t help the current situation. This means that either he deceived the Congress and the American people when asking for the massive emergency bailout bill or that he was trying to cover for an error of judgment after the fact. Neither spurs confidence in Treasury’s operation.

The reality is that there is a perception issue that is gripping us all at the moment. I firmly believe that we’re nearing the bottom and, as I predicted in early October on Arena, the Dow will settle somewhere between 7000 and 7500. Meanwhile, fear has swept away any sense of logic in the pricing of securities and the perverse effects of tax laws and various mutual fund regulations can only serve to further distort the market picture. This isn’t to say that there aren’t true issues with the economy. Rather, people turn to leaders in times of challenge. The Bush administration has gone on permanent holiday and Obama is reluctant to fill the gap. One is left to hope that the market can simply take care of itself.

Advertisements

Written by caseyayers

21 November, 2008 at 9:44 am

Government’s Role in Stability

leave a comment »

My answer to today’s Politico Arena question, “What can government do right now to stabilize markets or reassure the public? Bonus question: How low will the Dow go?”

The best thing government can do to stabilize the market is to declare fully, and with the greatest finality possible for such a tenuous situation, the level to which they intend to continue meddling in the markets. The reason we keep seeing day after day of multi-hundred swings this way and that is that noone can price the market. There are too many shadowy variables for traders to really get their hands around this thing.

Protect all deposits to an unlimited value. This should help to stop any runs on banks in their tracks. Provide short-term liquidity to businesses that prove both creditworthy under normal circumstances and unable to obtain credit in these troubled times. Don’t buy stakes in banks, don’t keep throwing money blindly at the sector. Doing this does very little to truly help break the credit logjam; rather, the money is simply being brought in by the truckload to any destination that might have given the slightest hint of illiquidity. This will lead to massive inflation later when we finally figure out that smaller, far more targeted sets of money, such as those the Fed auctions using its term lending facilities, were the smarter solution.

The Dow will go as low as fear can take it. But salvation here lies in greed: already valuations on some companies are absurdly low. Many companies with no exposure whatsoever to housing and with more than enough cash on hand to survive any credit freeze have been trashed. Somewhere between 7000 and 7500, the bargains will become too great to ignore for the savvy investors.

Written by caseyayers

10 October, 2008 at 8:48 am

The New Sound Money

leave a comment »

There’s a great article on the Wall Street Journal’s opinion page today that can be found here.  Excerpt below, but I highly recommend you read the whole thing if you’re willing to swim in some moderately-deep economic waters.  Maybe I’ll cover the subject at a more elementary level in a few days.

The whimpering is real, and justified, because it hurts to have your world come crashing down. And global financial markets are definitely crashing, even when the impact is momentarily softened through massive injections of artificial money — “artificial” because the fiat money does not represent a store of genuine value but rather an airy government claim to future wealth yet to be created.

In the aftermath of this financial catastrophe, as we sort out causes and assign blame, with experts offering various solutions — More regulation! Less complex financial instruments! — let’s not lose sight of the most fundamental component of finance. No credit-default swap, no exotic derivative, can be structured without stipulating the monetary unit of account in which its value is calculated. Money is the medium of exchange — the measure, the standard, the store of value — which defines the very substance of the economic contract between buyer and seller. It is the basic element, the atom of financial matter.

It is the money that is broken.

Written by caseyayers

30 September, 2008 at 1:02 pm