The state of the U.S. economy today is perilous. It is teetering on the brink of a long fall into night. The saddest part is that it is correctible quickly and relatively painlessly if there were someone in charge at the Treasury Department who has an understanding of the markets and the underlying cause of the problem.
We were sold a bill of goods last week with the ‘bailout’ plan that needed to allocate 700+ trillion dollars to buy up government backed mortgage securities. What they didn’t tell you is that they wouldn’t get around to actually buy ANYTHING until mid-November or thereabouts. What is going to happen in the meantime? Fear, uncertainty and doubt. That path will shake the world economic system to its roots and may bring us to the point of no return in credit markets.
I won’t go into the long history of how we got here, that discussion would take entirely too long and would have me fending off charges of partisanship until the cows came home.
Here is the action plan that would put a stop to the panic immediately and give the economy and markets breathing space to adjust asset valuations.
- Immediately modify mark to the market accounting rules. A five year window with a decreasing allowance eventually returning to current levels will immediately bolster the balance sheets of institutions with large holdings of mortgage instruments which are now illiquid and of unknown value. This will reduce further failures in the financial industry until market valuations of those instruments can stabilize.
- Cut the Fed Funds rate to 1%. That is half the current rate and will pump money into the economy. This should remain in effect for a minimum of six months.
- Immediately announce plans to auction oil drilling leases. These leases should be for areas off both coasts of the United States and in the Florida Straits between Florida and Cuba. Oil price shock was the primary trigger of the economic downturn, immediately putting forth these plans will drop futures prices in oil and decrease current prices further and faster than any other conceivable government action.
This is an action plan that will work using market forces to do the heavy lifting without large infusions of government money. The bailout plan that we were sold will probably not work in time to prevent a major recession.