He plans to potentially cut rates to 0%, creating a liquidity trap, much like our friends in Japan did in the late 90s. This is an absurd solution to a problem that originated with too much cheap credit availability. It is also naive to speculate with trillions of dollars, mortgaging our next generation’s future for the mistakes of bankers and regulators.
What if it doesn’t work?
There is a strong likelihood that this “fix” will create stability (not necessarily growth) in other asset classes by sacrificing the dollar. If it doesn’t work, however, we could see a protracted global depression with many central banks already having expended their monetary policy ammunition prematurely. Japan’s crisis never technically ended. Their stock markets never regained their 1990 highs. Since then they have been in a deflationary environment for 18 years.
Won’t the bail outs help the country?
Probably not. Capitalism was built on the philosophy of letting the strong prosper and the weak fail. If a company can not make a profit or has made terrible investment decisions, the tax payer should never be held accountable. Bailing out the weak also stifles real growth and innovation. Other companies are usually poised to fill the gaps left behind by the weak companies failing with better products or services.
If it won’t help, why try?
Central planning rarely works, but is often utilized in times of crisis to provide moral support. We are going down a dangerous road that could end in the socialization of corporate America while leaving the middle class to decay. The favoritism employed by Treasury and Federal Reserve officials to arbitrarily choose what lives and what dies is the polar opposite of free market capitalism. It undermines the very framework that could have been the solution to our credit woes.
How do you make money in this environment?
So far short term trading, while risky, seems to be more reliable than any buy and hold approach. Some folks are playing the double and triple leveraged ETFs based entirely off of technical indicators and having good success. Others are accumulating positions in commodities for what they expect to be an extremely inflationary environment. My take is that both strategies are applicable, depending on your risk tolerance, time horizon and availability to watch this volatile market.
