Man, this is one scary column by Paul Krugman.
...despite the extraordinary scale of Mr. Bernanke's action - to my knowledge, no advanced-country's central bank has ever exposed itself to this much market risk - the Fed still won't manage to get a grip on the economy. You see, $400 billion sounds like a lot, but it's still small compared with the problem.[...]
What if this initiative fails? I'm sure that Mr. Bernanke and his colleagues are frantically considering other actions that they can take, but there's only so much the Fed - whose resources are limited, and whose mandate doesn't extend to rescuing the whole financial system - can do when faced with what looks increasingly like one of history's great financial crises.
To sum this up: according to Krugman, the Fed has pretty much shot its wad with no particular positive impact, leaving the American economy essentially on a downward course to (possibly) "one of history's great financial crises."
By the way, Krugman ominously mentions the "TED spread" in his article but doesn't explain what it is (he writes, humorously, "don't ask"). Well, I needed to refresh my memory, so I checked. According to Wikipedia, "TED spread" is "a measure of liquidity and shows the flow of dollars into and out of the United States." To put it another, scarier, way: "As the TED spread increases, default risk is considered to be increasing, and investors will have a preference for safe investments." Which is exactly what's happening now. Hence, the flood of money into commodities like gold (over $1,000 an ounce) and oil ($110 per barrel), away from the U.S. dollar (which dipped below 100 Japanese yen yesterday for the first time since 1995), and out of equities (the S&P 500 is now off 10% for the year). Meanwhile, the huge structural imbalances caused in part by the Bush Administration's irresponsible economic policies have contributed to "huge trade and current account deficits...rising U.S. inflation or a loss of confidence in the U.S. economy."
In short, as Krugman warns, we may very well be screwed. All I can say is, good luck to whoever the next president happens to be, including John McCain -- who claims that economics is not his strong suit. In the meantime, this year's elections could very well end up not being about foreign policy after all (Iraq? Oh yeah, almost forgot about that!), but about "the economy stupid." Let's just hope the discussion doesn't devolve into utter stupidity, as is usually the case when politics takes on economics.
I read through the thread yesterday and am not looking for stuff like the sky is falling or stick your money under a mattress. Noone can really time the markey and the best strategy is to continue to dollarcost average. If the volatility is scaring you consider adjusting your risk tolerance levels by.
So anyway I am interested in what should happen now. Thanks
I will close on this quote about the budget yesterday.
http://www.washingtonpost.com/...
Under both Democratic plans, tax rates would increase by 3 percentage points for each of the 25 percent, 28 percent and 33 percent brackets. At present, the 25 percent bracket begins at $31,850 for individuals and $63,700 for married couples (Yes you read that correctly that is a tax increase on the middle class including teachers and social workers). The 35 percent bracket on incomes over $349,700 would jump to 39.6 percent.Senate Republicans countered with an amendment that would extend income tax cuts and current rates on investments, but the move would mean the budget would stay in the red, producing deficits of about $130 billion in 2012 and $160 billion in 2013.
The Democratic plans would provide generous, greater-than-inflation increases for domestic agency budgets. They both endorse Bush's even more generous $36 billion, or 7 percent, increase for the core Pentagon budget.
Once again neither party gets it. Raising taxes and having budget deficits are both equally stupid in our current situation. Turning around and spending more on government on top of this borders on truely asinine. We need more real fiscal conservatives. I expect better from John McCain to get out of economic fairytale land and go back to reducing government. I hope that whoever the D nominee is will level with the American people about how much their programs cost and how they expect to pay for them.
Just being fiscally responsible is not possible due to the coming challenges.
We have an infrastructure that is falling apart, and we need to spend money in it.
We also have to make real investment Americans. We claim that we want to compete with China and India, yet we fail to give our students the free or almost free education that talented Chinese and Indian students receive in their countries.
And we are going to have to rescue the millions of boomers who won't have enough savings to retire when they become too ill to work.
We can be fiscally responsible after that, but we must recognize that we will have to spend a lot of money to rescue the nation.
If you have more than a 5 year timeline there is no reason to change anything you are doing
If losing 10-20% in a year scares people than your risk allocation should be adjusted
But, on the other hand, the American economy's resiliency is the envy of the world, so don't ignore it, either. It's just that Greenspan and Bernanke have put our economy under enormous strain while encouraging severe dislocations, and the pervasive Bush Republican no-ethics philosophy has so tainted the process that, well... how much longer will the Reagan Democrats allow themselves to be bamboozled by Republican lies, smoke and mirrors, and emotional diversions?
Unfortunately, we are not going to get out of deficit spending at the moment. Any attempts to do so would most likely make the problem worse. If the government were all of the sudden in surplus and buying up treasuries, then it would effectively undo any rate cutting by the Fed. In the long term though, I agree we need to get a handle on our fiscal situation. My personal approach would be to:
1. End the war in Iraq to eliminate supplemental defense appropriations.
2. Reduce defense spending (the largest portion of discretionary spending) I'm not saying decimate, just no 5% plus increases and maybe taking back some of those prior year increases.
3. Tackle Medicare and Medicaid first in terms of controlling costs associated with those programs. That could include a lot of things.
4. Expire the Bush Tax Cuts, enact higher marginal rates for upper income brackets (the top 20% of filers). Eliminate a lot of the deductions and exemptions and other garbage in the tax code including the EITC. And by cleaning up and simplifying the code, we could reduce marginal rates for the bottom 80% of filers.
5. Increase the budget for the IRS, expand their audit and collection staff, remove some of the restrictions put in place on collection efforts, and increase funding for DOJ to do more criminal prosecutions of tax evaders.
6. And after we get past all those hurdles, we can tackle Social Security.
As a creative alternative, we could pump Xanax into the water supply of New York City. It would be like fluorinated water only fortifying the mind instead of the teeth. =)
Where's all that straight-talk that we were promised very early in the Presidential campaign? McCain not only is not promising fiscal conservatism, he wants to extend both the tax cuts and the occupation of Iraq. Obama and Clinton also are not giving us much straight-talk either on the strong medicine we are going to have to take.