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October 27, 2008

When the Market Needed Unprecedented Steps, America Had the Biggest Shoes


When the financial crisis started in the United States, it affected the entire global financial system. That’s the bad news.


When unprecedented steps were needed to help stabilize the world financial system, the United States had the biggest shoes. That’s the good news.


Unprecedented steps by the Federal Reserve Bank, the U.S. Treasury and the FDIC were not always pretty but necessary, and they were certainly criticized and politicized to death. But our deep debt pockets, enough confidence in our weak dollar by the rest of the world, and our overall financial framework allowed the U.S. to drop the biggest anchor in these financially troubled waters.


When some banks finally admitted that their balance sheets had gotten out of balance (too many liabilities for too little in assets), they stopped lending to each other. Go figure! Not all banks were in deep trouble, but too many of them had over extended themselves.


If banks are not lending to each other then there’s a slim chance to none that they are going to make loans to you and me and Joe the Plumber. Thus, the flow of credit and cash froze up domestically and around the world.


The credit freeze was not caused totally by the failure of Fannie Mae and Freddie Mac, but they were the catalyst because of the size of their toxic mortgage-related holdings, along with some bad decisions by some banks.


When the credit markets came to a halt, the Federal Reserve Bank injected some liquidity by making some unprecedented loans to banks. This was intended to inspire the banks to start lending again, but that action alone was not enough.


With the authorization of the Economic Rescue Legislation, the Treasury then purchased temporary equity in some banks at a preferred dividend rate. This would provide some additional liquidity to the banks to help thaw the credit markets, which would include direct loans, lines of credit and the short-term commercial paper market.

When consumers got nervous about their bank deposits and money market accounts, the FDIC was able to step up and provide increased limits of insurance on deposits and new coverage of money market accounts. If they had not taken these steps there could have been a “put it under the mattress” run on accounts that would have compounded the problem.


At the same time the domestic and international stock markets were going crazy looking for the bottom and a new equilibrium. We may be near the bottom, but finding a new equilibrium is months away.


It’s called a recession, and it is here.


The financial crisis has caused historic levels of volatility in stock markets around the world. It is also going to cause some financial pain on Main Street with job losses we have not seen in the last 50 years.


The good news is that, in the last 50 years, the economy has been in a growth mode 84 percent of the time, while in a recession 16 percent of the time.


We now need to give all of these unprecedented steps by the Federal Reserve Bank, the Treasury and the FDIC some time to work their way through the financial system.


Not many countries could have taken the steps we have taken to address this crisis to the degree we have. Yes, we should not have gotten into this situation in the first place. And yes, there were some better approaches to the problem. But politics does not always allow the best solution to come to the forefront.


When we have the biggest economy in the world, we have to take the biggest steps in the world to address the problems.


We did.


We now need to take a big chill pill and let it work.


© 2008 North Star Writers Group. May not be republished without permission.


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