Real Wealth Society

Thursday, January 24, 2008

Thinking about regulating By Fred Cederholm

Column for on/after January 20th, 2008

I’ve been thinking about regulating. Actually I’ve been thinking about bubbles, the FED, solutions, equity markets, the real State of our Union, and the Titanic. The hot button story on page one for this week and the next will be the US economy and what the Federal Government intends to do to forestall a recession (if we are not already in one) or turn things around (if a recession has already begun). The eyes of the nation and world are now fixed on the administration and its actions.

You see there has been the underlying presumption that the Federal Government can fix anything. What we are seeing now is the direct opposite. When one critically reviews our current crisis of debt, it is not so difficult to realize that Uncle $ugar and his misguided past policies have become not the solution to our ills, but are the driving forces behind them. The assumption that more (and bigger numbers) is always better is simply not true! One must look behind the numbers and ask the questions: Is more of “whatever is under examination” a plus, or a minus? Are we as a nation (or a people) better off with more of this, or less of it? Politics and reality are so often in contradiction.

In recent decades, Federal policies have been driven by the phobia that any downturns, or corrections to a boom, must be avoided at all costs. The dot-com bubble, and telecommunications’ bubble of the 1990’s that fed off it, were ill-conceived. The internet was hot - very hot. The problem was that out of all those great ideas, slogans, and companies very few had any clue of how to make a profit and capitalize on the creativity and newness. Lock in your share(s) of these companies and the profits will follow. Well, they didn’t… and the irrational exuberance behind those bubbles exploded.

The government’s solution to defuse that contraction, compounded by the fears following the attacks of 911, was to (again) promote consumption/ construction by lowering interest rates below the costs of inflation. This effectively made “borrowing to consume/ build” seem like some free ride. “When the going gets tough, the tough go shopping/ building” became the motto of that engineered soft landing. Well, replacing one bubble with an even bigger one was NO solution! We are seeing all of the painful repercussions of such a policy strategy now. Difficulty IS that the only way “to solve” an all-pervasive debt problem is to pay it down, restructure it (making it longer term), or write it off!

The Federal Reserve Bank (the FED) has been the government’s primary force in regulating the ebb and flow of the nation’s economy. Its arsenal consists of monetary and fiscal policy. The money supply and credit availability is either expanded or contracted as called for by the situation. The secondary means to regulate the economy’s pump comes via increasing/ decreasing taxation. The problem facing the administration now is that the long term solution will only aggravate the economy in the short run. There is no soft landing available for a debt or over-consumption bubble.

The equity (stock) markets rise and fall on the perception of the present and the anticipation of the future. Last week saw a continuation of the downward pricings and expectations. The Dow Industrials declined 4.02 %, the broader Standard & Poor's 500 Index dropped 5.41 %, and the tech weighted Nasdaq Composite Index fell 4.10 %. The first week of 2008 was not much better. These first two weeks’ pricings were perhaps the worst in almost thirty years - across all the exchanges!

The current bubble is more pervasive and larger than anything seen on this planet for a very long time. The packaging (and marketing) of debt-based securities have made this a global problem. A bubble conceived and fed by “liquidity” will not be fixed by more of the same. The solution to the dilemma faced by the White Star Line’s flagship in April of 1912 was not to provide more water and ice, now was it? I’m Fred Cederholm and I’ve been thinking. You should be thinking, too.

Copyright 2008 Questions, Inc. All rights reserved.


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