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Wednesday, September 24, 2008

Go ahead and dither...They did during the Great Depression...Watch what happens.

People always ask me whether we are headed toward another Great Depression or not. It seems if real GDP growth even so much as falls from 3% to 2%, folks look at me like Fred Sanford and wail "Oh no, this is the big one, I'm coming Elizabeth!" I guess it comes with the territory.

I have never been one to sound the alarm bell in response to such queries...until now. The key to what makes this different from the Depression is the response we have from our government agencies. If Congress is now going to short circuit that effort to clean up this mess, then all bets are off. Waiting around and dithering is not an option. But that is what Congress does best. Go ahead and ask serious questions about how to structure the deal. Loan financial institutions the money, demand equity positions to protect the taxpayer, or buy up the rotten paper. But do it. Now is not the time to teach people lessons about their imprudence (hint: Fannie and Freddie). We know from the economic history of the Depression that once the government gets religion and tries to do something to help, it is too late. You simply can not rip the financial plumbing from the macro economy one month and then turn around and fix it the next month by lowering the federal funds rate 25 basis points. It would takes years to resurrect. Years of wading through an economic fever swamp. If Congress does not act, and soon, get your waders on and apply bug spray. I have been in swamps chasing ducks many, many times. It ain't no party.

Warning: Ignore Ben Bernanke at your own peril (are you listening Senator DeMint?). Financial crises get messy and go non-linear very quickly. That thing in your hands is not an electric bowling ball and an electric clock that tells you when it is time to bowl. It is a ticking bomb that is looking to go off. So what are you going to do? Go bowling or defuse it?


Andrew_Grodner said...

It seems that everyone agrees that "something" has to be done. The lawmakers may not get the urgency, or they may not understand why there is crisis at all, but do you think it is fair for them to question how the assets will be priced or whether there is an oversight (Section 8 does not seem to leave any room for that)?

I just wonder whether there was similar discussion in Congress during Great Depression, or whether there were policies which were well intentined but only created more problems? To use the health analogy, it is like stopping the bleeding on a patient and closing the wound, but letting infection develop by lack of proper higine (here: lack of oversight). And unfortunately the infection may in the future create even more serious problems which may have no "quick" fix anymore (here: lack of trust in the US market).

FYI, here is Sec. 8, Review (it is only one sentence):

"Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency."
(here is full text:

Bryan Summers said...

It's really a shame Ben has to deal with people like DeMint. Hopefully no one will be visiting Elizabeth due to these asinine delays. You always have to watch those accountants.

Old classic joke about accountants:
Q: What's 2 + 2?

A: Whatever you want it to be!

Derek Pszenny said...

I have just enough economic training to be dangerous (thanks Dr Parker and the gang) and this is far more training than the average senator or congressman. Even I can tell you that if BB begging for help in stabilizing the country’s financial system you give it to him.

Andrew_Grodner said...

Derek, I think you are absolutely right about some ignorance in economic education on the part of the lawmakers. It certainly makes the job for Ben Bernanke and Hank Paulson very difficult.

However, there is also some misunderstanding on the part of BB and HP who have to realize the lawmakers are ELECTED officials and they have SOME RESPONSIBILITY to their constituency, however they may interpret it (like bringing up illogical criticisms of the plan they may not even understand). Therefore, especially Paulson walks a fine line. I think if he were longer in Washington he would probably never proposed the text of "Section 8" (see above). The "Review" provision is great for him doing his job, but it is unacceptable to lawmakers who need to tell the public that they look over his shoulder. The lawmakers would probably let Paulson do his job without much intervention, but politics has its own rules ...

Andrew_Grodner said...

Here is a really interesting analysis of the "Section 8" and the dilemmas the lawmakers face should they let it stand: