DEFCON One & $100 Billion and Change

DEFCON ONE might be the appropriate description of the level of economic defense the Federal Reserve and US Treasury adopted yesterday as the Fed cut interest rates to a target of 0% to .25% (1/4 of one percent). CBS MarketWatch offered the Defcon label Tuesday afternoon in an article discussing the Fed and Treasury’s willingness to do whatever necessary to avoid a depression (see CBS MarketWatch’s First Take article at http://www.marketwatch.com/news/story/The-Fed-goes-Defcon-1/story.aspx?guid=%7B8DA1A356%2D2B0F%2D4C8A%2D9396%2DEFDFAC959357%7D). Coming on the heels of a Consumer Price Index (CPI) decrease of 1.7% last month, the largest decrease since 1932, it is obvious that our nation’s economic policy makers are as committed to reviving business growth as they are staving to off excessive deflationary pressures. The US equities markets rewarded investors with a gain in the DOW of nearly 360 points, to close the day at 8,924.

Most of us recognize that sustained price hikes (inflation) are bad and suppose that falling prices (deflation) is good, but the fact is that a little of either can be economically healthy, while too much can be damaging. Just as unhealthy levels of inflation can only be sustained by wage increases and low unemployment, problematic levels of deflation are attended by decreases in personal income and unacceptable levels of unemployment - a possibility with which we are flirting far too actively. If prices for goods and services fall due to a systemic decrease in demand, profits erode, wages are reduced, businesses close their doors, and jobs are lost.

The Fed’s actions are historic. That’s a term that is all too often used casually, but this is not one of those times. Literally trillions of dollars are being pumped into our economy’s core, the very heart of our financial system, and soon there will be an enormous federal stimulus plan offered by the incoming administration. It can’t come soon enough. Likewise, it is regrettable that the outgoing administration has been unwilling to ‘partner’ with Obama’s team and jointly support a package that could be effected months before the newly seated house and senate will be able to pass post-inauguration legislation.

To be sure, federal intervention in the financial markets is generally unwelcome and should be discouraged, unless of course, it’s the best alternative we’ve got to an onerous set of problems. It’s a lot like democracy; it’s a lousy form of government, ripe for abuse, subject to failure and decent, except when compared to any other form of government understood by man.

The Federal Reserve has massive economic powers and is only now bringing out the biggest of their guns. Some are suggesting that the Fed has used the entirety of its arsenal and there’s nothing left to offer – that’s far from the truth. The Fed has the ability to open up its balance sheet well beyond the actions it has already taken, and it can actually ‘make a market’ if policy makers so choose. The resources of the Federal Reserve, apart from the US Treasury, represent sufficient economic capacity for numerous additional rounds in our current economic battle.

Clearly, the Bush administration is responding to allegations that suggest that they have stopped leading and governing, and are focused on packing up and getting out of town. Today’s initiatives appear to have Obama’s most senior economic appointee’s, Larry Summers and Tim Geitner, fingerprints all over them, along with those of Bernanke and Paulson, and rightfully so. These are the men who will be charged with restoring health to our economy and may help Obama be remembered throughout history in much the same way that we recall ‘the great’ Franklin Delano Roosevelt. Obama’s post-election/pre-inaugural approval rating is running 20-30 points ahead of any of the last three US presidents, and he may need every bit of that ‘good will’ being extended by the US electorate in order to marshal the support he’ll need to make and administer the tough choices that are undoubtedly in front of us all.

What we now refer to as ‘economics’, the study of supply and demand, production, buying and selling, and their relations with law, custom, and government was long referred to as ‘political economy’. It was only in the late 18th century that ‘economics’ began to be taught separate from political philosophy, and both grew out of the concepts of moral philosophies as studied in the 1600’s. Today, we recognize that all of economics is theoretic rather than empirical. We accept various economic theories as imperatives when they suit our particular needs or support favorite philosophies. In truth, economic principals are not as constant as one might suppose and the outcome of a particular course of action, though perhaps highly predictable, is rarely certain.

The Japanese have only recently come out of what has been referred to ‘the lost decade’ - a period of time in which their central bank maintained 0% interest rates, and their economy and population ‘flat lined’ through years of deleveraging. Personal savings rose, but investment did not; jobs were protected but few were created; prices became stable, but the Japanese currency suffered and their economy stagnated – all as a by-product of the government’s lack of willingness to innovate and take risks with economic policy.

The actions of the current US administration’s economic leaders and monetary theorists, principally Ben Bernanke and Henry Paulson, represent great lessons learned from the Japanese experience and our own depression of the 1930’s. As a result, though our economy may face some terribly difficult months, perhaps extending to a period of years, we will do anything but stagnate. Politicians and voters hoisted the banner of ‘change’ in recent campaigning, and the Obama administration is already heralding an era of change and innovation. We are ripe for it. The discomfort we may be experiencing as we endure our economy in recession may be just the fuel we need to usher in an era, not just of change, but of innovation and progress.


$100 Billion and Change

One year ago, The Royal Bank of Scotland (RBS), in a consortium with Fortis and Santander, purchased ABN Amro, a Dutch based commercial and consumer banking enterprise, for approximately $100 billion.

Today, that sum $100 billion could purchase Citigroup for $22.5 billion, Morgan Stanley for $10.5 billion, Merrill Lynch for $12.3 billion, Deutsche Bank for $13 billion, Barclay’s Bank for $12.3 billion, and still have $8.7 billion left over. That $8.7 billion could purchase the entirety of GM, Ford, Chrysler, and Honda’s F1 Racing Team.

Though this may be little solace for investors reeling from a year of nearly unprecedented markets losses, it ought to offer some relief as with the realization that we are all in this together.

Signature Update is offered by Richard Haskell Sr., Managing Director of Signature Wealth Management