Wednesday, October 29, 2008

Rebuilding Our Economy

The Federal Reserve Bank is expected to lower the Feds Fund rate to 1% today. The question is: will this help? Yes and no is my answer.

Years ago, when I was managing bond portfolios and trading bonds for bank trust departments, we had an expression, “pushing on a string.” What does it mean to push on a string? Well, if you think about a piece of string on a table and you push on it at one end, what happens? The string just folds up as the far end of the piece of string does not move. That expression best described the bond market when the market had no buyers. The Federal Reserve Bank raised interest rates, but the conditions were such that even with higher interest rates people were not buying bonds.

Today, the situation is slightly different in that it is now the banks that don’t want to lend to the borrowers. Trust and confidence are two pieces of an economy that can not be regulated or enforced. When fear takes a grip over the markets most players take there money to the sidelines, and banks are no exception. The banking regulations that rebuilt the trust and confidence in our banking system from the period of the Great Depression forward has been damaged by people that were just plain stupid. Stupid in that they did not understand how markets work, or how easy it is to upset the delicate balance upon which every market depends.

With the Federal Reserve Bank making interest rates low and very attractive, and the U. S. Treasury backing up the banks every step of the way, and with a little spending by the government here at home on our infrastructure, perhaps trust and confidence that our domestic economy will get back on track and start growing again, and, then “the smartest men in the room” our commercial bankers, will start making loans to ordinary people, so our economy will repair itself. Because, it is the ordinary people that borrow and spend and repay their loans that make our economy grow. I have said this before and I will say it again, economics is not brain surgery or rocket science. Economics is trust in the medium of exchange, our money, our savings and our demand deposits, the banks’ confidence in the willingness of borrowers to repay loans in a timely manner, and a little not so common sense that we are all in this together.

It is so easy to destroy an economy with thoughtless stupid actions, and it is so hard to rebuild that which has been destroyed. A building can be brought down in a matter of seconds, but building a great structure takes months if not years.

Stay tuned.

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