Today the US Federal Reserve stepped in with yet another emergency effort to ease a building liquidity crisis in world markets by cutting the discount rate “temporarily” from 6.25% to 5.75%. The markets cheered on the open roaring up with great relief. As the day rolled on the intial exuberance moderated a bit, as averages dropped back from opening heights. And volume on today's rally has been low.
Today several commentators (the same ones who weeks ago said sub-prime was a contained, non-issue) are quick to pronounce that the serious economic consequences caused by the “non-issue” are now behind us thanks to the Fed stepping in.
Facts must be faced. The truth is that there is no extreme-makeover solution to the present problems of over-levered consumers and markets. An emergency cut may help with emergency relief but it is really the equivalent of dropping a bed roll and food rations from the rescue helicopters. It may help the most critical casualties to buy some time, but it does not restore a nation to healthful habits and a robust recovery. This will take a bit more work than that. As Bloodier and Bloodier points out in New York magazine this week, the current imbalances are vast and wide-spread they have come from years of abuse and consumption at all cost. The health of the US ecomony (and thereby feeder-fish like Canada) are all compromised at present. Lipo-suction-like intervention by the Feds may smooth the surface for a bit, but restoring real health will take longer. There will need to be systemic and life-style changes. Consumers will need to stop spending like million-aires just because they could borrow, and start living within their actual means. This means inevitably slower economic growth for a while. We have borrowed a lot of consumption from the future months through goods bought on credit in the past couple of years.
I am hopeful and optimistic that better habits and policies will be the positive outcome of these painful lessons learned about credit-abuse (at least for a while anyway, I acknowledge that people have short memories).
Sorry to be the party-pooper, but at some point it really is not just how things look on the surface that matters. True health requires real work and rehabilitation of the foundation underneath.
Cory’s Chart Corner
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