Saturday, March 21, 2009

Time To Calm Down In D.C.

It seems like every day we learn of a new effort out of Washington to rescue or stimulate the economy.  Being pro-active is good.  But it is possible to have too much of a good thing, and we're about there, or maybe past it.

It started in the waning months of the Bush administration with Bailout I and II.  Then we had Obama Bailout; The Stimulus; and now Obama Bailout, the Sequel and Night of the Walking Fed.

It's time to slow down.  First, these things take time to work, especially economic stimulus.  Second, there are, indeed, signs that the economy has stabilized.  Yes, it still stinks--employment continues to be down and probably will edge down a bit further.  Employment, however, is a trailing indicator of the economy--businesses won't start hiring until they're sure there's a rebound.

Other signs, however, suggest the worst is over.  Banks are reporting some profits; housing prices appear close to a bottom; retail sales have stabilized.  More importantly, inventories are quite low, meaning there's a lot less excess now.  And consumers who have put off purchases will soon begin to make them again.

Another good sign was last week's stock market rally and its ability to hold on to the gains for a few days.  Consumers are starting to realize that, as badly as they've been beaten up, for the most part they still have some investments and they still have their jobs.  They're a little like people who've experienced a really bad storm, like a hurricane--the storm is beginning to move out and they realize they've survived and that the damage, while significant, can be repaired.

That's not to say that there won't be more bad news in the months ahead, but the worst may be behind us.

The bigger danger, now, is that Washington goes too far.  Already, the federal government is racking up a huge deficit.  Congress is spending like drunken mortgage brokers, and we all know that once Congress starts spending on something, it's hard to stop.  (Just look at farm and ethanol subsidies.)

We're going to need 12-step stimulus anonymous programs to remove all kinds of people and businesses from their newfound addiction to government funds.  Banks, insurers, hedge funds, auto manufacturers, auto parts suppliers, etc., etc.

Too much stimulus leads to inflation; and difficult solution to inflation is to raise interest rates, which stifles growth.  At this point, inflation is a significant risk.  Oil prices have recovered from their low and are headed back up; the fed is printing money like mad; and the Obama administration has set the stage for a trillion dollar deficit.  

Given those risks, it's time for Washington to take a break.  Let's see what happens over the next three months, and not react to every new piece of news, good or bad.

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