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 the telecommunications bubble of the 1990s 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. The prevailing thinking back then was, "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 9-11, 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. The 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 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 has 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.
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This story was published on January 22, 2008.