You are Fed Chairman Ben Bernanke. It is 6:00 pm on a Thursday. You get a phone call from Bear Stearns, a major investment bank, saying that they are experiencing a lack of liquid funds and will have to declare bankruptcy unless something is done by the opening of markets tomorrow. Taxpayers are already furious with the economy, and bailing the bank out would incite even more rage. HowÂever, letting the behemoth fall would begin an unstoppable unwinding in the already fragile financial system backing our whole economy.
So what do you do? You put on a pot of coffee and get to work.
This week, Ben and his friends had the pleasure of being subjected to a witch-trial style of inquisition where their actions in bailing out Bear Stearns were picked apart and scrutinized. Our senate gave us a fine example of what “armchair critic” really means as they hammered the deciding parties for deciÂsions made in a thin window of time. Ultimately, the Fed defended their actions. When asked if they would do it again should another major firm fall, Ben cited market interconnectedness and stated firmly that they would take whatever actions are necessary to preserve the solvency of the economy.
Therefore, the precedent has been set: failure by the big guys in the financial system is completely unacceptable. And when failure isn’t an option, the only thing left is a sharp and permanent increase in market regulation which could effectively choke out the entrepreneurial spirit from our economy. It’s a real snafu, if I do say so myself.
Given the fact that we lost 80,000 jobs last month (by preliminary measures) and our unemployment rate ticked up to 5.1% (up from 4.8% last month), I would say the bailout was the lesser of the two evils. You can’t kick an ailing economy while it’s down and expect good things to happen.
Mr. Bernanke also opened the floodgates of speculation in a speech given this week. To quote him directly, “Overall, the near-term economic outlook has weakened relative to the projections released by the Federal Open Market Committee (FOMC) at the end of January. It now appears likely that real gross domestic product (GDP) will not grow much, if at all, over the first half of 2008 and could even contract slightly.” A Fed Chairman directly alleging a potential recession? That’s pretty depressing.
I can’t say I’m sold on the gloom and doom, though. And even if we do hit a recession, the Fed’s acÂtions have shown that they will cushion us from any sudden financial impacts, so it’ll be a smooth downturn with an equally smooth recovery. Indicators in housing are doing notably better than they have in recent months, which shows a good leading indicator of a light at the end of this dark ecoÂnomic tunnel. Single-family residence sales are up, available home inventories are leveling off nationÂally, and the homebuilder sentiment index seems to be flattening out, as an increase in foot-traffic to model homes is noted. Recession? Maybe. Sky is falling? Probably not.