It is the perfect storm, a fitting end to the Bush Years, lest we soon forget.
The Credit Bubble’s burst could have been contained, but when Lehman was allowed to fail, the financial system went into a full panic and the economy instantaneously stalled.
This became a self-fulfilling prophecy, and the global carnage still isn’t fully contained. Nor is the economy restarted yet.
But, crazy times defy conventional wisdom, as noted in a great quote from Fed head Ben Bernanke (in an interview with the Financial Times).
Bernanke said, “One of my conclusions from my study of the Great Depression is that people tend to think of orthodoxy as safe. But strategy should depend on the situation. In a severe crisis, orthodoxy can prove to be a very bad strategy.”
Essentially, the federal government is coming in and saying, “We are the banker of last resort and we are stepping up to create liquidity and be the safety net against systemic lending risk (Gaither specifically called it a form of insurance from the government today).
Net-net, I expect the government to lever these two things (liquidity/safety net) to do a one-time “get out of loan free” re-finance offer on a global scale.
If you follow this logic, we see a re-doubling of commitment to diligence but at the same time, a more fluid underwriting and securitization process as potent mechanisms to re-boot the financial system.
It’s akin to de-ionization. Moving from 'virtual' derivative (engineered asset) to ‘direct’ security (proxy) to 'real' asset forces a re-work of the model but it also gets back to basics, offering something that is tangible, transparent and understandable, which is a confidence builder.
Real assets with closer ties to owners and direct investors.
Portfolio Magazine (“Showing the Money”), which has been the single best source in analyzing the big picture of this crisis, looks at the role of monetary policy, such as creating excess liquidity in dollars injected onto the economy, in restarting this new and hopefully improved engine.
Here is an excerpt: Most of the dollars that the Fed has created during the past six months have stayed inside the financial system, where they are propping up such tottering institutions as Citigroup. The rest of the economy shows no sign of excess liquidity or incipient inflation. Current yields on Treasury Inflation Protected Securities indicate that the market expects the inflation rate to be less than 1 percent 10 years from now.
I would call this piece a must read because it is highly educational, anchoring abstract concepts, like what it means to say that the government is "pumping dollars into the economy," and the related tie in with inflation.
Related Posts:
- Getting Real - On Doomsday, the Demise of So-Called Experts and the New Arbitrage: A post on the financial crisis, key takeaways and how to play it to your advantage.
- Financial Tsunamis: A post inspired by an excellent Portfolio Magazine article anticipating the crisis.
- Carve out an hour to watch the PBS FRONTLINE documentary, “Inside the Meltdown” (it’s online HERE).
