Well figured I might as well start with the Big Question I keep getting. How do we stop the financial crisis?
Its pretty simple actually. Go Big and Go early. What the heck does that mean. Well in general it means when a house is on fire (either yours or your neighbors) you want the fire department to show up fast, you want them to put the fire out fast, and you want them to use more than enough water to get the job done. You don’t want the fire department to tell you they can’t come right now because they are waiting on a new boss, you don’t want them to show up and try to figure out what started the fire, you don’t want to have a conference about how to prevent future fires, and you won’t give them bonus points for using just enough water. You want the fire put out FAST. NOW.
The same thing applies to the current financial crisis. Go Big and Go Early. In the simplest terms that means governments should offer to buy toxic assets 10% above current prices (by sticking a bid in the market for 100s of billions of these assets) and provide massive fiscal stimulus ( tax cuts, aid to states, and infrastructure). One-off reactive measures like saving Citibank help to staunch the obvious flames but they don’t put out the fire hidden between the walls. Successful firefighting is proactive and as a result very messy. And open to second guessing the day after the fire is out, but a minimal, reactive policy risks having the whole neighborhood burn down. (As a Chicagoan I cite The Great Chicago Fire http://en.wikipedia.org/wiki/Great_Chicago_Fire
What’s the risk? Governments either can’t borrow the money or borrow it at a reasonable rate. But given the lowest interest rates on record, it’s a risk worth taking. And only after this fire is put out, can we have a post mortem to figure out how to try to prevent this kind of fire in the future and mop up the extra water. But first things first, all resources must focus on putting the fire out. Nothing fancy. Nothing cute. Just massive monetary and fiscal stimulus globally. Right now. And then wait 2-3 quarters to see the results.
Tomorrow causes and solutions.
Tuesday, December 2, 2008
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5 comments:
Wow. I have never heard it expressed so succinctly before but it makes total sense. Does Obama know about you??
Congrats on the new blog! While I agree you have to put out the fires, especially those where the flames can jump to others, some must only be bailed out of bankruptcy (ie the autos) so that they can properly restructure their business models for reality.
humm maybe Cyclone--or not. I would tend towards spraying water everywhere and that includes the autos--couple of points about the auto industry---first letting Lehman go bankrupt clearly added fuel to the fire and with the large financial arms of the autos and how widely held their debt is a bankruptcy could result in more pressure on the CP market and money market funds, and two if any industry is going to get hit hard by credit drying up its the auto industry--with so many independent suppliers when there is no credit its almost impossible to run the supply chain for this kind of business little less have the end consumer find financing to buy the product; and lastly even though the big 3 maybe the worst car companies in the world the credit crisis is hitting them all --even Toyota has turned to their government for aid. Bottom line spray the water keep folks employed and worry about how to be more efficient and profitable after the fire is out.
I love your 'Financial Fire' analogy. Turn the faucets on and dont turn them off til the tub on the floor below you is overflowing!! Best of luck with the blog! I still owe you a dinner.
I am afraid I disagree (strongly) with you. Governments need to enact policies that lead to more stable, sustainable economies. Attempting to return to the paradigm of excessive consumption fueled by cheap credit is a recipe for disaster, and will only lead to bigger (difficult to imagine, but true) problems down the road. Most western countries got into this mess by saving too little and consuming too much. Those imbalances must be addressed before any kind of lasting recovery can begin.
Also, you seem to deliberately ignore (like politicians do) the long term costs of bad policies, and focus only on the (perceived) short term gains, but the long term costs can outweigh the short term gains. If the government sent everyone a check for a million dollars (exactly what they did before, only on a bigger scale) that would certainly have a fantastic short term effect on the economy. I think we all know what would happen in the long term, though.
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