It’s quite fitting that markets are trading sharply higher this morning as Fed Chairman Ben Bernanke speaks to economists and policy makers in Jackson Hole Wyoming. The text of the Bernanke’s speech has been released and concentrates on explaining just how dire our financial infrastructure has been, and how forcefully policy makers acted to avert a total collapse.
The Chairman believes that “resulting global downturn could have been extraordinarily deep and protracted.” had the Fed and Treasury not stepped in with aggressive actions. Ironically, the statement pays very little homage to what got our global economy in this mess in the first place. Quite honestly, there are plenty of strong arguments pointing to lax Fed policies which encouraged excessive borrowing and risk taking in the first place.
This strong and unprecedented international policy response proved broadly effective. Critically, it averted the imminent collapse of the global financial system, an outcome that seemed all too possible to the finance ministers and central bankers that gathered in Washington ~Ben Bernanke, Chairman FOMC
While the history of Fed policy rests largely on the shoulders of Alan Greenspan, it is clear by the actions of the current administration that we prefer to use leverage and debt to finance short-term strength instead of allowing the market to wring out excesses in order to set a foundation for solid and lasting economic recovery (albeit at a more constrained pace). The current policies of holding rates extremely low, injecting capital into private industry, encouraging borrowing by both individuals and businesses in order to finance recovery and growth will likely lead to weakness in the future when these debts must be repaid.
Today’s statement also begs the question: Are we really out of the woods yet? While the market forges ahead to a new recovery high, and investors celebrate new found paper wealth, some serious questions remain unresolved. What about the millions who not only find themselves out of work, but also have seen the time elapse to the point where they can no longer collect unemployment benefits. What about housing values which are still significantly below (admittedly inflated) levels from 18 months ago? Or the fact that an icy residential real estate market makes it nearly impossible for families to relocate and find new jobs? While the stock market is a barometer for future expectations for the market, it cannot be used as a thermometer to determine that today the economy is more stable.
I will concede that without the emergency actions by the Fed and Treasury, our economic system could have fallen much harder (although the crash that we endured was by no means pleasant). But my concern is that as we begin to feel that there is some time separation between today and those dark days of the past year – we are all to willing to pat ourselves on the back and congratulate each other for still being alive. What we should be doing at this time is to evaluate what could have been done in the decades (not months) leading up to this collapse – and how we can implement policies that will encourage more stable ans sustainable growth in the future.
So Mr. Bernanke, I congratulate you for acting forcefully and creatively to stem the fall and put us back on our economical feet. But I would also implore you and the current administration to resist the temptation to inflate another bubble by encouraging borrowing and excesses. Instead, please allow the American people and American businesses to conservatively and deliberately rebuild their balance sheets and live within their means.
No more cash for clunkers or expansions to entitlement programs. Don’t take money from those who have built successful businesses and give it to those who have proven to be poor allocators of resources. Instead, let the profitable grow so they can hire many in this vast pool of unemployed. Give tax incentives to those who offer employment and encourage competition in businesses such as energy, health care, and manufacturing. Leave interest rates at reasonable levels, but be careful not to encourage borrowing beyond ability to repay. This is true for Mr. and Mrs. Smith in small town USA as well as for Goldman Sachs in the penthouse over Manhattan.
Let this country grow with the spirit of freedom and competition which made us great. Yes we CAN rise to that entrepreneurial place of strength. But only if we are allowed to try… and fail… and get up and try again. Learning from our failures is the key to success. And that’s true in Washington, in New York, in Michigan, in Silicon Valley, and across the globe.
Enjoy this article? Sign up for the ZachStocks Newsletter,
Your source for Sound Market Commentary, Growth Stock Analysis and Successful Investment Strategies
August 21st, 2009 at 12:22 pm
How far should the Fed be willing to go to prop up the economy (and/or) the market – What are the consequences for going too far?
August 25th, 2009 at 4:58 pm
My message to Ben Bernanke: You’re Fired!
If you have not read Tom Wood’s book “Meltdown” you likely do not understand the huge role the Federal Reserve played in the latest economic collapse we are still experiencing. They are the root of the problem – artifically low interest rates provoked mal-investment, and it came back to haunt us. The economic collapse was a market re-adjustment – houses were not worth nearly what they were selling for – credit was made easy (via Fannie Mae and Freddie Mac).
To answer Zachary, the fed may be willing to go very far in propping up the market, but they shouldn’t be propping up the market at all!