Instead Fed policymakers, in conjunction with the U.S. Treasury, and major central banks in industrialized economies, should and will focus on the huge task at hand: using traditional and new tools to stabilize the financial system. Investors/traders should concentrate on that, as well, the economists say.
'Fight the fire, now; worry about water costs, later'
"Questions regarding the ultimate size of the Fed's resources are not appropriate at this juncture, in my view," Economist David H. Wang said. "The immediate task is to prevent a panic, a panic that could cause this financial crisis to turn into a financial calamity."
"The Fed, ECB [European Central Bank], Bank of England, Bank of Japan, and others must fight the fire that's pretty big right now, and determine the water costs later," Wang added. "They have to maintain liquidity and create new tools and mechanisms that keep overnight credit available to banks, companies and institutions, Otherwise commerce is going to slow down like a car with an oil leak."
Economist Richard Felson agreed with Wang, adding that the Fed and or the U.S Treasury have to make sure corporations and other key institutions - - including state governments - - have adequate overnight and related short-term capital. "They have to prevent the financial crisis from choking off credit to sound companies and of course to the states. The crisis can not be allowed to prevent companies from conducting typical business or states from paying suppliers, making payroll, rolling over debt etc. or the economy will contract further," Felson said. "We've got to stop the momentum and get the ball rolling in the other direction."
New tools/techniques that may have to be tried, in Felson's view, include: the U.S. Treasury making emergency loans to states/counties if private financing dries up; additional increases in the Fed's term auction facility(ies); allowing corporations to borrow cash from subsidiaries abroad tax-free; and/or direct Fed loans to corporations.
Monetary Policy/Economic Analysis: The Fed has the authority to extend credit to any company under "unusual and exigent circumstances." The U.S. Treasury, as a result of the recently-passed rescue legislation, has broad authority and resources (up to $700 billion, with another Congressional o.k.) to buy assets, invest funds, and/or create other vehicles as needed (such as an agency to insure assets or mortgages) to address the crisis.
One ray of light for the U.S. Treasury - - it can borrow money for short-term periods at a very low rate: a flight-to-safety has increased cash flows to the most preferred investment, U.S. Government bonds, lowering borrowing costs.
Still, as noted, the spreading crisis will require more resources, and that requires a coordinated intervention involving the central banks of Europe, Britain, Switzerland, and Japan, and appropriate fiscal policy measures from these governments, as well.
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