In times like these investors/readers turn to the likes of Warren Buffett or George Soros to analyze the financial and economic state of things.
However, today we turn to another trusted source, for time-tested counsel, advice, and wisdom: Lawrence Peter 'Yogi' Berra, retired Hall of Fame catcher for the New York Yankees, owner of 10 World Series championship rings and author of 'yogiisms' - - incisive malapropisms that reveal eternal truths.
Those who know Yogi know that his northern New Jersey home is accessible via two different routes, starting from a fork in the road. Hence, when Yogi gives directions to his house he says, "When you come to the fork in the road, take it."
Yogi's adage applies to economics, as well. When you come to the (economic) fork in the road, take it.
The United States is coming to an economic fork in the road, of sorts: it can get to its destination - - economic recovery - - by one of two paths.
The first would involve primarily using the Federal Reserve and quantitative easing. The Fed has already said it will purchase more than $600 billion of private debt, including commercial paper, mortgage-backed securities, and other asset-baked securities. (In order to cover potential losses associated with the Fed's purchases, the U.S. Treasury has set aside $20 billion in TARP funds authorized by Congress.) However, while additional quantitative easing in the aforementioned commercial segments (especially mortgage-backed securities) may trigger an increase in economic activity, such as an increase in mortgaged-based home purchases, it may not represent the segment where the Fed wants the extra growth to be.
Should the Fed agree to fund another sector, i.e. expand the balance sheets of companies/institutions in other segments, investors need to keep another important point in mind: unlike fiscal stimulus, there's no guarantee that these institutions will use the money to expand operations, undertake business deals, hire workers etc. The Treasury's TARP provides evidence of this: TARP loans/investments in banks have averted the collapse of the financial system (so far), but they have done almost nothing to encourage banks to lend money. Hence, should the Fed 'go super-quantitative,' it has to provide some mechanism to ensure that the money puts business activity in motion, and doesn't just sit on corporate balance sheets.
The second route involves fiscal policy. Here, the downside is a slower, positive impact - - no matter how 'shovel ready' infrastructure projects are - - on GDP. But longer-term, six months out and farther, we know that with a large fiscal stimulus there will be a noticeable improvement in GDP. Economist David H. Wang argues that the fiscal stimulus package needs to be at least $500 billion to move the GDP needle significantly. He would pass a fiscal package upwards of $700 billion, then hit the economy with another $500-700 billion stimulus in 3-5 months, if leading economic indicators do not improve substantially.
One downside of fiscal stimulus is that these programs tend to be less-efficient than private sector operations. But this is true of almost all government spending - - defense and civilian - - and the goal today is not supreme efficiency, but investments in infrastructure, public goods, and systems that will generate commerce, and get the U.S. economy moving again. Think of the fiscal stimulus package as a Congressional order to fund and build a nuclear-class aircraft carrier for the U.S. Navy. When the Congress orders that a carrier be built, it wants efficiency to come into play, but it foremost wants a modern, battle-ready vessel that will meet the Navy's needs. Similarly, if the civilian fiscal stimulus achieves the goal of getting the economy headed in the correct direction, it will tolerate some inefficiency, because the ship will be headed to sea.
In sum, both the monetary quantitative and legislative fiscal 'forks in the road' can get the United States where it needs to go - - toward sustainable economic growth.
Economic Analysis: Yogi is right: When you come to the (economic) fork in the road, take it.
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Reader Comments (Page 1 of 1)
12-11-2008 @ 4:16PM
BHarrison said...
Well, as we approach the "fork in the road" of economics, how about if we jettison the INEPT, INCOMPETENT, and/or CORRUPT CEOs, CFOs, and Congressmen who have lead our nation to the point of bankruptcy.
If we are going to make a "fresh start" let's do it with fresh individuals who have not been tainted by the corruption of the past, and the old mentaities that are PROVEN to be WRONG.
That might help, regardless of which side of the "fork in the road" that we might take.