Treasury Secretary Timothy Geithner needs to get drunk too
Here’s some beliefs that I have that are guiding through this crisis
-Soft landings are rare
-Government is inherently inefficient and unlikely to implement correct policies fast enough or at all
-The rear-view mirror is a misleading guide to the future
The market and the media are constantly looking the politicians and policymakers for ‘solutions’ for the crisis and ‘how to get out’ by implementing XYZ policy.
What they don’t seem to get it that is possible that there is no solution, in an ideal world where government is efficient and intelligent US banks would have all been recapitalized and the US consumer would have been brought to solvency again through debt relief. We do not live in such world, the stimulus package is a great example, it’s a huge piece of legislation which virtually nobody who supported has read and has any idea if the things inside are necessary or are results of lobbyists, so beside a short-term positive impact on Velocity of Money the long-term returns from this 'investment' are likely to be small.
The truth is governments don’t tend to attract smart folks simply because its pays too little for the kind of work and exposure you get, you get what you pay for, people from Pimco recommend policies all day long, they would probably work if implemented, yet how come they don’t give up their millions of dollars in pay to work as a bank regulator? The truth is that governments are under human capitalized, I would be surprised if the average IQ of the US Congress is not lower than the average IQ of the SP500 board of directors
The fed as recently as one day after lehman’s failure was voting no change in the fed funds rate citing concerns about inflation, the fdic and the gses continues to keep trying mortgage modifications that fail more than half the time, trichet is complaining lowering rates more in the fact of massive deflation and banking meltdowns. The current financial system is more complex and globalized than most realize, there are numerous interrelationships that we are not aware of, this makes the world economy in this crisis a passenger in a sinking ship. There is little hope that the unintelligent captain with political motivations who helped and cheer leaded the problem can get us of of it.
I do however accept that the downturn could be smaller than otherwise because SLIGHTLY better public policy that in the 1930’s(at least in the US, a good example is the fed commercial paper facility, aggressive easing or slightly higher tendency against protectionism) in the other hand the financial system is more complex and globalized plus some of fiscal holes that a few countries are in could be enormous, that is out global leverage is, if not bigger, far more dangerous due interrelationships(think of all the trillion in losses that are and will be taken worldwide, what if they keep happening in banks of countries with a higher tendency toward protectionism and a few wrong moves set off a round of tariff wars?) which could negate the slightly better (US, European)public policy factor. There is an worldwide asset, credit, economic implosion and the losses just keep mounting, we went from one of the strongest global growth periods in decades to one of the worst in decades in about a year, so extremes are clearly to be expected from this financial system