whichwayup.org

10/10/08 11:05 AM: Race to the Bottom

So it looks like the stock market is currently free falling. There is seemingly no end in sight for the current drops, amid all sorts of fear and worry. The credit markets are still not functioning, and it appears as though it’s going to take a lot of effort to get them back on track.

A few thoughts, even though I’m by no means any sort of expert.

While the current situation shares some features of the Great Depression, a lot of things are different. First off, the FDIC has raised insurance limits, and is discussing possibly removing limits all together. It’s not so much whether or not the FDIC could actually pay out if every bank failed (they couldn’t), but to encourage people to keep their money in the bank. Secondly, in the event of massive bank failures, it would be better for the Treasury to simply “print money” (not exactly how it would work, but the idea) to cover losses. It’s better to inflate the currency than to have people completely lose all of their money. I’d take my money even with a 20-25% devaluation than have 0% of it.

Second, the world appears to be working together to find some sort of solution. There is talk of a possible worldwide suspension of trading while specifics of new regulation are hammered out. I worry that this might cause markets to plunge right before this happens, but it might not be the worst idea in the world. Close all the major stock markets to allow people to figure some things out.

My major concern is the fact that Congress has recessed until after the election, and we have a lame duck President. When the election is over, it will be very important to get the new person’s economic team in place ASAP. This will require all sorts of cooperation with the Bush administration. I hope they will agree.