22. December 2008 by David A. Peterson.

On Tuesday December 16, 2008 the Dow shot up over 350 points. The general thinking is that this gain was due to the Federal Reserve’s action of lowering the Fed Funds rate 0.75% points. We are told that the Fed is looking for a range between 0% to 0.25%.

A 0% to 0.25% rate means that the banks are getting money from the Federal Reserve for basically free. Hopefully they will pass these incredible / historical interest rates on to the consumers. Right now the Fed would be happy if the banks would just start lending.

To be fair if you have good credit then you are probably breezing right through this economic lending mess - at least in terms of getting a note or refinancing your home. Banks are lending to their very best credit risk customers. You can buy a car if you have a 750 credit score. However, if a person has a credit score around 600 then that person is probably experiencing  the credit problem first hand.

Now multiply that first hand problem by millions of people and businesses and you can see why the Feds thought they had to act by lowering the rates.

The Federal Reserve has played it’s last major card in our economic crisis. The interest rate cut is historic. The government in the waining days of the Bush administration is working overtime to make sure it does exactly the opposite of the Hoover administration in 1929.

The Bush administration is flooding the financial markets with money. The Obama administration is expected to continue most of these policies.

In the past few months Bush has allowed the Fed Funds rate to drop to 0.25%, he has created the $700 billion TARP, given the automakers $25 billion to retool, and is feeding the automakers $17 billion as a bridge loan.

The incoming Obama administration is expected to launch a trillion dollar (i.e. $1,000,000,000,000) economic stimulus package. Obama’s stimulus package is going to be nothing short of a “Newer Deal.” The object is to get people back to work using public work’s projects. No doubt the country needs to get people back to work and there are certainly no shortages of roads to be built and bridges to be fixed.

The original New Dealers tried to tax the wealthy and redistribute the wealth. The thinking was that the rich had all the money so tax the rich and give to the needed. Both Hoover and Roosevelt tried this strategy. The result was 10 solid years of depression.

We now know that Bush will not adopt that tax strategy and we are pretty sure that Obama has backed away from his campaign rhetoric on taxation. History tells us that taxing the rich will only prolong the problem.

On the other side of the coin, what about all of the new programs? What about all of this money that Bush and Obama have printed or will print to move the country forward? Isn’t there a chance that all of this meddling in the economy will have the opposite effect?

The opposite effect of a depression is inflation. If you want to know how bad life can be in an inflationary country just look at the countries of Zimbabwe (1,021%) or Argentina (unofficially 20%).

The Federal Reserve’s main mandate is to keep inflation in check not to stimulate lending. Our government is so preoccupied with the current economic mess that it may be actually creating a near-term problem. That problem is rampant inflation.

I agree it is hard to see any inflation at the moment. That is because the housing market, commodities market, and the stock market were all in a deflationary spiral this past year. It currently looks like all of the markets have stabilized at their new levels.

The pop in the Dow Jones of 365 points last week is just a pop. The current Dow Jones trading range is currently between 8,000 and 9,000. When the Obama administration takes over it may see a rally in all the markets. Just as the Roosevelt administration saw its own  post election rally. Don’t confuse the post election rally as a justification of fiscal policies. As an example: Roosevelt’s rally was short lived.

What President Obama must do and Republican must keep reinforcing is to keep the government from meddling too deeply in our economic issues. The government needs to stop the printing presses from creating money out of thin air -immediately.

 All of us over the age of 45 remember the late 70s and early 80s when a mortgage of 10% was considered good and a car loan at 16% was what a young person had to pay to get basic transportation.

Inflation is not hard to imagine. Our most recent instance was $4.00/gallon gasoline. That is inflation in its most basic form. Prices rising with impunity. We all saw this rampant inflation this past Fall with milk prices rising close to $4/gallon, and grocery stores were giving the impression of stable pricing by selling items with less product in the package for the same price.

Inflation is just as bad as deflation. If we see the Dow, S&P, and Commodities markets all stabilize in a narrow trading range then the government needs to back off and let businesses do what they do… that is let businesses hire new workers, produce more product, create innovative designs, and expand the economy naturally.

If the government keeps printing money and doesn’t recognize the stabilization then they have the opportunity to make the economic mess worse. If inflation kicks in (which it could with all of this government money sitting on the sidelines) then we may start begging for $4/gallon milk and gasoline.

Thankfully Bush and Obama have the past to look at to help navigate the current crisis. The lesson they need to take away from this point forward is that the New Dealers kept meddling in the economic issues. This meddling didn’t lessen their economic crisis it kept the country in the grips of the crisis for 10 years.

The Dow up 365, that doesn’t mean we are out of the woods that just means that we are still within the trading range. Trading ranges give investors confidence. They give business people the stability to move their businesses forward. If this does turn out to be a lengthy trading range then that is the signal for the government to back off and let business do business and government do government.

If government wants to meddle here’s an idea - how about using your current rules for regulations and go investigate the Enrons and Bernie Madoffs of the country instead of just printing money. Oh yea while you are at it… how about enforcing regulations and actually governing the Feddie Maes and Fannie Macs of the world instead of just spending their petty cash that they have laying around.

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16. December 2008 by David A. Peterson.

The view from the suburbs is that times are tough. Everyone knows that there are too many people chasing too few jobs at the moment.

 The government has stepped in, unemployment benefits are being extended. Medicaid programs at both the State and Federal levels are expected to grow dramatically over the next year. TARP’s and Automaker’s bailouts are all moving forward.

These types of social, jobs, economic, and entitlement programs will continue to balloon in the absence of serious job growth. The American taxpayer along with social and religious organizations will all step up to the plate to help those truly in need.

Suburbanites see the government trying to perform. You may agree with the government or you may hate every action being taken but you must admit there are a lot of people working overtime right now trying to arrest the economic problem.

What don’t suburbanites see in their viewfinders right now? The short answer is… trust. Especially trust in government.

Our stock markets and commodity markets are all built on the truth that economies expand. And if these future earnings and future prices don’t expand then the government has to help by using fiscal policy to keep the economy moving in the right direction.

But what happens if we can no longer trust those who we put in charge of our futures, our elected officials and those that they appoint to run the government? What happens when there is a lack of trust?

Look at Bernard Madoff’s $50,000,000,000 Ponzi scheme. Can investors really trust the SEC to actually regulate one of their own? How about Representative William J Jefferson (D-LA) and the cash in the freezer? Or Senator Ted Stevens (R-AK) receiving gifts and home improvements and not disclosing them.

Alaska has a tainted ex-Republican Governor, Illinois has one in jail. The list of those caught with their hand in the cookie jar just keeps getting longer. Democrats blaming the Bush Administration for the current economic plight while Barney Frank (D-MA) worked hard on getting lending rules loosened at a time when they should have been tightened.

Oh yea, let’s not forget about the ballots being found in a trunk of a car in Minnesota. How does Minnesota Senatorial candidate Al Franken sleep at night?

The McCain/Palin ticket may have missed the economic pitch this past election cycle but they hit the trust factor ball out of the park. Americans and the world as a whole are seeing and feeling the issue first hand with our shaky stock market and our shaky job’s market.

Trust in leadership?

 The American people are looking for a strong leader to get us out of this economic mess yet the President-elect already has strike one against him. Someone from his staff may have been in talks with Governor Blagojevich.  The Governor was just trying to sell the Illinois Senate seat and everyone knows that is no big deal for Chicago politics.

 Even if President-elect Obama and/or his entire staff had nothing to do with the current scandal in Illinois it still smells like they did.

What should the Republican Party do about this?

 Politically -nothing. This is normal Chicago politics. The view from the suburbs is “what do you expect?”  I don’t even live in Illinois but I expect that this is pretty much the way it is.  The FBI did its job and will prosecute to the full extent of the law. Rod Blagojevich will no longer be entitled to his governorship and may actually do jail time. Also, this scandal will dog the Democratic Party without any help from the Republicans.

 What should the Democratic Party do about this?

Politically -everything. Democrats have to realize that this smells. And if they allow it to grow by being secretive or not coming forward early with all of the facts it will dog the newly elected President. The country cannot afford a weak President right now. Democrats only need to look to the recent Republican past to find out what happens when the country doesn’t trust your judgment.

 The view from the suburbs is that times are tough. Suburbanites need to know that the government is capable of forming a plan without putting its individual members ahead of the taxpayers and the people who are truly in need.

 What else should the Republican Party do about this?

 The next national election cycle is only two years away. McCain and Palin correctly pointed out that there is too much corruption in government including the Republican Party. The RNC needs to find trustworthy candidates that are on top of the issues. I mean squeaky clean candidates that can bring a fresh voice to the issues and have innate problem solving abilities.

What else should the Democratic Party do about this?

For starters they could push for a special Senatorial election in Illinois. They could also do themselves a favor by not giving Caroline Kennedy her New York Senatorial birthright and showing the country that no one is entitled to an elected position.

 What will we be viewing from the suburbs?

Will the Democrats do the right thing? Reform government, stop the shady deals, stop political entitlements, and demand that regulators do their jobs? I doubt it, but luckily for the rest of us the next election is only 2 years away. Hopefully the people truly in need can hang on until then.

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