holy matrimony

Another dismal, doggy Dow day. Two things to talk about today:

• First, the fact that the stock market is starting to reflect the recessionary financial results coming out of businesses is a good thing. Why? Because the financial markets have not reflected actual value for many years – see my post about the solid footing lying underneath all economies as well as the posting about the fact that the level of financial markets does not often reflect the actual value of the underlying assets. The more that the financial markets reflect the inevitable bad news, the faster any prospective recovery.
• The second thing that I wanted to talk about, and which is another piece of evidence that things are shifting is today’s news that the Securities and Exchange Commission’s (SEC) chairman, Christopher Cox strongly supports the merging of the SEC with the Commodities Futures Trading Commission, or CFTC. Cox is actually calling for a merger. And may they be wed.

Why is this important?

Well by now you have heard me talk about the need for a change in the institutions that got us into this mess, and also the need to create new institutions to help reestablish public trust in the financial markets. This is further evidence that the wheels of change have been set in motion.

Lastly, I have long said, professionally and privately that a Great Depression is not really possible anymore. Why is that? Primarily

I believe strongly in two things:

• A much greater understanding of the interlinkings of the economy with human behavior, including business behavior, exists now than in the Great Depression. This greater understanding is exemplified by policy makers knowing that they have a role to play in nursing an economy back to health. It also is exemplified by the fact that policy makers know that they have many tools at their disposal to affect change. Primarily, monetary and fiscal policy. Both of these blunt instruments are being wielded in our current crisis, whereas in the Great Depression these tools were not used until tremendous damage and suffering had occurred.
• Information flows so much better now than in did in 1929. What that means is that decisions (not necessarily good ones) can be made with greater information than was possible all those years ago. Hurray (or at least a mini-whoop)! Because of the increased amount of information it is difficult to mis-gauge the magnitude of a problem for long.

The above two points are large reasons for why I feel that a Great Depression-sized financial earthquake is just about impossible. A deep recession is possible. Why? Because policy makers for too long refused to exercise their powers, as #1 above requires that they do, and because policy makers do not have full transparency into markets, as #2 above suggests that they should. This lack of transparency is a regulatory issue, but it is also a “hear no evil, see no evil” issue as well. Our leadership for too long turned away from the ugliness of lending practices. Consequently, a deep recession is possible…not necessarily likely.

I hope that all of you have a good weekend!

With a big smile!

Jason