With current bailout plans being set into motion, it served as a reminder over the past few weeks what type of credit crunch the United States is in. George Cooper, a strategist at JPMorgan, dilutes the problem by saying that central banks are subscribing to an economic philosophy in an expanding economy and another when the economy is constricting. When things are going well, the central banks leave the market alone, but when the slightest predicament arises central bankers respond by cutting the interest rate to stimulate their economies, preventing asset prices from lowering.
This asymmetric monetary approach asserts a belief that in the efficient-market theory, prices will reflect all available information. Stating that prices will always be right and there are no bubbles, leaves us to think that central banks have no reason to intervene in these circumstances. Indeed, if the markets actually worked this efficient as some believe, why would economies need to have central banks catch them when they fall? Mr. Cooper’s observations about the depressed savings rate leaving the economy riskily positioned forced to deal with the adverse effects, is a no brainer. The United States has been careless in encouraging consumers to support the economy, and all the meddling to keep the banking sector together myopically unaffected by the consequences is now rising havoc. As for the rest of us, we have to put up with incompetent management that ventures on the belief of rewarding risky behaviors and evading the cautious financial management approach. If we remove an incentive to steal and not allow senior executives to bail out with their golden parachutes, problems that Lehman had will not happen.
Clearly, what people seem to forget is that this problem did not arrive yesterday.
Truth be told, it has been like this since 1913 when the FRB came into play. With social programming taking off and Nixon abandoning Bretton Woods, the gold standard gave politicians free range printing all the fiat money they wanted. Therefore, it is catching up to us and we have to pay for our reckless actions from the past 100 years all at once, attempting to make our economy golden once again. So, from a government regulated by capitalistic individualism, why is everyone acting on all of these impulses with a complete disregard of responsibility for their actions?
I believe the most straightforward way to fix this problem is for the Federal Reserve to raise interest rates to fight inflation by 50bp per FOMC. This will lead to a sharp extraction in credit and take money out of the economy. This should command to an increase in deposits in the banking systems, which would lead to an internally developed stability and theoretically lead to a rise in the American Dollar. This would allow all imports to be priced cheaper, leading to more deposits, as the falling price of imports would free up salaries and let people put them towards savings. This would allow the deposit transactional banks to imbue investor confidence by having more stability and a greater monetary value in the American Banking system.
Buttonwood. "Credit and Blame." Economist.com. 11 Sept. 2008. 30 Sept. 2008 http://www.economist.com/finance/displaystory.cfm?story_id=12209655.
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While your recommendation might work in theory, and I'm not criticizing your logic, it seems to counterdict the underlying theme of the article - things rarely work the way they should in theory. Although you make a good point that lack of accountability makes for superficial decisions, the people that do make the high-level decisions usually have a pretty sound idea of what is supposed to happen in theory (or at least their advisors do). But in the end, the market will shift one way or another often because the general public has an involuntary say in the matter - be it in consumer and shareholder confidence or purely in fear-driven purchasing/spending/savings behavior. My opinion is that until a theory can accurately incorporate that ever fickle variable, all other theories will remain just general guidelines that the market may "choose" to disobey.
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