2009 has been as rough on the economy as 2008 was, even if not as dramatic. Many still wonder whether we are heading for a "lost decade" of stagnation, like Japan saw after its economic bubble, or whether the jobless recovery will stick. These are questions that will lead us in 2010, but they're not the only ones. In a perfect world, these six resolutions are ones the financial system should be making for the New Year. (When the dust from a recession settles, there are often many opportunities for portfolio growth - both locally and internationally. Learn more in Profiting In A Post-Recession Economy.)
- Eliminate or charge for the explicit U.S. taxpayer protection for large "systematically important companies."
This moral hazard is dangerous for many reasons, the most being that it creates an incentive for shaky/struggling companies to try and grow larger to gain government protection.
- Create a fire sale, clearing house for toxic assets.
These are not off the books despite stock gains, mostly because companies don't want to realize these losses no matter how much capital they have. The Fed is trying to stimulate the market by keeping interest low and encouraging mortgages, but holding off the pain isn't helping to treat the injury.
- Stop the debauchery of the U.S. dollar.
Whether through treasury purchase via the Fed or other methods, the inflation of the U.S. dollar is a problem. Inflation may seem attractive in the short term, especially to producers and sellers, but it will result in a long-term problem that will go beyond national borders.
- Take an honest look at what we want in an auto industry.
We had three large competitors that were drifting increasingly towards being unable to compete with foreign manufacturers. Two have been rescued, bondholders fleeced, and their books scrubbed. In this manner, Ford, the most efficient of the three, has suffered by simply being less inept than the other two. It brings up the old teaching mantra, the behavior you reward is the behavior you get.
- Keep the Fed from becoming (even more) politicized.
That, or simply neutralize it. The idea of a politically neutral Fed is, at best, suspect, so maybe it's time to automate the money supply. If we can tie the Fed's monetary function to something like GDP - far from perfect, but better than nothing – the Fed's questionable ability to balance inflationary and deflationary pressures will be less of an issue.
- Give taxpayers a break.
Deficit spending in the middle of a recession means higher taxes in the future for taxpayers. Again, this short-term focus bodes poorly for the long-term. Spending taxed capital to create jobs is a duct tape solution for a serious problem. It would be far better to allow businesses and people to retain more of their earned capital, out of which new business, investment, and work is created.
A Financial Fitness Regime
Leading up to 2008, the economy was gorging itself on succulent easy money policies and a sweet asset bubble. What we need now is strict regime to bring our financial fitness up to snuff. Unfortunately, following up on resolutions can be difficult – this is why stationary bikes become clothes hangers and gym memberships go unused. Many of these issues will go unresolved far beyond 2010, and some may worsen. In the end, we can only hope for the best and wish each other, and the economy, better luck next year. (From unemployment and inflation to government policy, learn what macroeconomics measures and how it affects everyone, in Macroeconomic Analysis.)