The Veridian Blog

This morning, Fed Chairman Bernanke raised the idea of another stimulus package, specifically to “improve access to credit by consumers, home buyers, businesses and other borrowers”.

There is no doubt in our minds that the road to recovery will be a long one. The central issue now, is whether America has even started down that road or even worse, whether we are pointed in the right direction! That is the confusion that belies the market right now – there is no direction, no certainty or feel. Remember the first $168 billion stimulus package this year which sent tax rebates of $600-1200 and temporarily raised the conforming loan limit to as high as $729,750? We’re not sure yet about the long-term effects, but we can certainly attest to the fact that there hasn’t been much stimulus to the economy thus far in 2008. Such large stimulus packages require money that can’t be grown from trees and must be paid for by you and I eventually. And as for the loan limits, they could have made it a $3 million cap, and it still would not have made a significant difference because there aren’t any buyers for these loans. Investors are simply paralyzed.

Sure, applaud the Fed and the Treasury for what they have done within their power. However, how much money can they pump into the system before taking it right back in taxes? Plus, they can only go so low with setting the Fed Funds target rate – now at 1.50% - and possibly lower next week. But if banks simply don’t want to lend to each other, what can they do? For the next 3-8 years, the cold, hard truth will blanket the American people – that Mr. Joe Taxpayer, honest, hard-working and responsible, will foot the bill for the mess that has been created. 

It is certainly hard to find any reasons to feel confident or optimistic in this market.  There are three factors, however, that lead us to believe that the downturn will be no where near depression levels.  One, our Fed is ultra-vigilant and is well prepared to side-step past mistakes during financial crises.  Two, our unemployment rate is comparatively low.  The major cause of skyrocketing unemployment in the early 1930's was deflation - which is always a serious threat that will be watched closely by our Fed governors.  Three, the heart of this crisis lies in houses - not paper stock.  There is intrinsic value in bricks and mortar, sort of like commodities that will always hold value and create opportunities to borrow and lend.  Back then, people were leveraging debt to purchase stock, which became worthless overnight.  These factors lead us to believe that although we will have to tighten our belts a little and collectively regain better financial discipline, it's not going to get a whole lot worse from this point on.