I don’t have a lot to say about the recent US financial upheavals. I’m not a student of the financial markets at the best of times, and for the last few months my focus has been almost exclusively inward. I don’t feel remotely qualified to do even an armchair analysis.
Instead, I thought I’d pass on some articles on the topic that I’ve found interesting.
First, the author of Freakonomics, when asked for his anaylsis, punts and asks two of his economist friends, resulting in the most layman-accessible overview of the situation that I’ve read: Diamond and Kashyap on the Recent Finance Upheavals. Addressing what the events will mean for the man-on-the-street, they say:
One section of their analysis in particular caught my eye, the discussion of the Fed’s experimentation with new powers, and the questions it raises about where they will draw the new line about intervention.
Should the government intervene if it merely postpones an inevitable adjustment? Creditor runs can make adjustment too fast; blanket bailouts can make adjustment too slow. Has the Fed found the speed that is just right?
My impression is that the Fed’s intervention has not yet reached the level of "bold, persistent experimentation". But they’ve already introduced a certain amount of uncertainty by bailing out Bear Sterns, Fanny and Freddie, and A.I.G. while letting Lehman fail. I hope that whatever strategy the Fed settles on, it is well-defined, consistent, and firm. The market, like most games, only works so long as the rules stay the same.
Another take on the subject that caught my eye is this one, from an actual rich person. Mark Cuban addresses the Democratic and Republican presidential candidates:
Dear Sen. Obama […] The trillion plus dollars of market valuation that have been lost in the stock market has come from primarily those you would like to increase taxes for. […] I know many people who have lost much if not all of their networth, and during my trip to NY this past week, met several who have been completely wiped out. Their entire life savings, gone because they owned stock in the several financial institutions that have gone bankrupt or sold at pennies on the dollar and their jobs were lost as a result as well. My hope is that you will completely retract your economic strategy and do the prudent thing, which is to say that your strategy of tax cuts for the middle range of earners, and tax increases for those earning 250k is no longer viable when the government is about to take on what could be anywhere between 500Billion and 1 Trillion dollars in debt to support retaining liquidity in our financial system and in turn keep our economy running smoothly.
Senators McCain and Obama, failure to recognize that what the financial markets went through changed the fabric of our economic model and in turn the impact of your economic policy is completely irresponsible.
Finally, if anyone’s interested, here’s an Austrian analysis that’s a little on the wonky side for my comprehension, but raises some interesting questions about the potential effectiveness of the Fed’s plan:
But why should pumping more money do the trick? It seems that, for most experts, money is an agent for economic growth. Money however is just a medium of exchange and cannot create real wealth as such. On the contrary, monetary expansion results in the squandering of real wealth and economic impoverishment (look at Zimbabwe). If the pool of real savings is declining, then real economic growth will follow suit regardless of how much money the Fed is going to pump.