Tuesday, February 5, 2008

After the Fed

This is a concise good editorial by the NYTimes that lays out the problem with a lack of market regulation coupled with the harmful general belief that markets are self regulating. A good question to ask here is where the press stood and how it stood throughout this time period. Truth from every corner needs to be told. -Dra. Valenzuela

After the Fed

Published: January 31, 2008

Whether or not the Federal Reserve’s recent dramatic interest rate cuts are the right medicine for today’s stalling economy — and the jury is very much out on that — it is clear that the Fed has used up a big chunk of its recession-fighting ammunition in a very short span of time. In just over a week, it has slashed its benchmark interest rate by a total of 1.25 percentage points, to 3 percent. That doesn’t leave a lot of room to cut further without opening the door to a potentially nasty upsurge in prices, which are already rising at a worrisome rate, and a possible disorderly decline in the dollar.

For now, however, the Fed has obviously concluded (and we hope it’s right) that it’s more important to try to mitigate current conditions than to worry about hypothetical concerns. Economic growth in the fourth quarter of 2007 slowed to a barely perceptible 0.6 percent. Housing is already in a recession, and manufacturing is headed down. Foreclosures are rising. Lending is constrained. Consumers are pulling back in the face of job uncertainty and a reduced ability to borrow against their homes.

The next employment report, due Friday, will provide more evidence of the extent to which jobs and paychecks — the linchpins of Americans’ economic well-being — are at risk. Last month’s report was grim: Employment in the private sector contracted and the ranks of the unemployed swelled.

With so much going wrong, even aggressive rate cuts are unlikely to turn things around anytime soon. Lower rates won’t loosen lending as long as lenders are preoccupied with mounting losses on securities and existing loans and fearful of more to come. Anxious, debt-burdened and unemployed consumers are unlikely to spend freely.

In short, no matter what the Fed does, it will take time, certainly a period of retrenchment, and quite likely of recession, to work off the excesses of the bubble years. That means foreclosures and financial ruin for some, joblessness and belt-tightening for others and less vibrant and less viable communities for many.

The damage, now becoming apparent, demands that policy makers take stock of how the economy arrived at this place. The bubbles in housing and mortgages would not have been possible were it not for the progressive deterioration in regulation over the past several decades, culminating for all practical purposes in a regulatory collapse during the Bush years. The antiregulatory ethos, in turn, derived its potency from a pervasive ideology that markets are self-regulating and self-correcting and therefore best handled with incentives and voluntary best practices, rather than rules and boundaries.

The task of reinforcing the regulatory apparatus of the nation’s economy is as formidable a challenge as managing the downturn, and ultimately of more lasting importance.

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