Questions every American should ask about the economic free-fall of our nation
While the Federal Reserve pumps billions of dollars into ailing financial institutions with the hope of rescuing the economy, Wall Street is engaged in a wave of dumping stocks causing global markets to falter and sending the S&P into a tailspin. The false premise of "Too Big to Fail" has turned into "The Bigger They Are The Harder They Fall."
This stuff is complex. But it's too important not to understand. There are some very basic forces at work that every American must understand.
First, how much does market sentiment affect what is happening in our economy right now?
Much more than you might guess. The market is driven by sentiment and the split-second, opportunistic actions of traders. If the traders weren't going berserk, things might actually not look all that bad. You don't have to be an economist or a psychologist to see that we are in the midst of a fear-driven trading environment. If the fed could analyze the credit crisis without worrying about the crippling affect of a short squeeze on stock prices, perhaps we could all come up for air.
Should trading in financial stocks be halted if the CEOs of every major institution on Wall Street are involved in confidential discussions with the Fed about the viability of these same institutions?
What most people don't realize it that while the analyst's analyze and the traders trade, bank regulators are sitting behind closed doors with Wall Street leaders, making decisions about who stays and who goes. Making these calls requires the Fed to meet with the most respected thinkers on Wall Street, who can help structure the deals required to rescue the institutions worth saving. At the end of the day, it is a policy call with fingers crossed.
Given this scenario, trading in financials should be halted during times of critical decision making so Wall Street traders cannot capitalize on the struggles of its cash strapped brethren.
At what point will the Federal Reserve Bank run out of money to bail out failing banks?
The short answer is that the Fed is not a bottomless pit and can't continue to bail out indefinitely. It's anyone's guess when taxpayer funds will run out. That will happen when efforts to shore up the financial system no longer help or the United States runs out of cash, whichever comes first. That would be your cash, by the way.
The markets are the great equalizer and Fed policy makers realize that it can only do so much to shore up the financial system, instead choosing to assist those institutions that it has deemed both salvageable and critical to the health of the larger market.
By the way, why are Fed meetings cloaked in mystery?
The nature of our bank regulatory system is that it is cloaked in confidentiality to prevent the markets from becoming incredibly volatile. That's actually in our interest. Confidential proceedings are necessary to maintain stability in the markets, but that confidentiality should be balanced against the public's need to understand what is happening.
How worried should we be?
Things have been worse, but not since the President broadcast fireside chats over the radio. While the credit crisis is real and the markets are tanking, there are steps that can be taken to stabilize our economy. The first should be to control the fear driven trading environment under certain circumstances in the short term. Regulators should then let market forces go to work and let the unstable big behemoths fail. Only then will they be able to rescue the remaining banks that are critical to the economy.