Tuesday, March 18, 2008

When the Dust Settles

I interrupt this Civil 3D Reminders blog with an irrelevant post on current financial conditions.

I've often thought what it would be like to live through the early days of the great depression. Would one recognize what was coming? Or would it be something that one wouldn't realize the implications till after the fact? With the recent purchase of Bear Stearns by JPMorgan Chase it reminds me of a book a read a few years back called the "House of Morgan". The "House of Morgan" is a historical look at the history of Morgan Bank from it's inception up to when it was broken apart into two entities, the commercial bank side, which became the modern day JPMorgan Chase and the investment bank side which became Morgan Stanley, in the wake of the market reforms after the crash of 1929.

In the beginning of the Great Depression Mr. Morgan and his bank led a consortium of banks to inject money in the financial markets in an attempt to stabilize the financial markets. Mr. Morgan and the other banks where unsuccessful in stabilizing the markets, in the aftermath the country fell into a Great Depression that my Grandparents lived through. One reason they failed was the lack of enough capital to stabilize the markets. Other factors contributed to the depression including the dust bowl and changes an increase of tariffs on imports.

Today a similar attempt is being made by the Federal Reserve Bank. While most people hear the news on the bank, the news doesn't seem to convey the possible historical ramifications of the actions. If the Fed succeeds at what it was doing it will be a footnote in history, much like the bailout of Long Term Capital Management (LTCM) a few years back. If the Fed fails the market will fall into a tailspin preventing the free flow of capital from investors to companies. If companies don't have free access to capital, the country is likely to fall into a recession.

While I don't feel a collapse is enough to drive the country into a depression, other factors could. One possible policy change is a turning away from free trade to one of trade restrictions. In a recession jobs are usually lost (or not replaced at a clip necessary to keep pace with young workers entering the workforce) and a knee jerk reaction is to blame other countries imports. While the vocal public sentiment may believe that free trade has harmed the country, we shouldn't forget that the United States is the largest exporter in the world (as well as the largest importer). Any restrictions of trade with our trading partners will likely result in retaliatory restrictions on our exports. This will would come at an inopportune time due to the falling dollar. As the dollar falls our exports become cheaper and imports more expensive, ultimately changing people's and companies buying habits. This realigning of the trade would help the US avert a depression.

While I could go on, I think I am going to stop here and hope the Fed is successful and inflation doesn't go out of control.

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