Some investors are blaming the current credit crunch and market turmoil on everything from predatory lenders and overly optimistic homebuyers to greedy hedge funds that took on way too much leverage. I think it's a bit too late to play the blame game.
Instead, we should be focusing on a solution.
The Fed's Options
For starters, I think the Fed should seriously consider turning on the spigot and lowering the Fed Funds rate. But isn't that only going to lead to more speculation? Probably to some degree, but the simple fact is that businesses need liquidity to keep paying the bills. They also need funds in order to keep investing and building out new products and to hire new employees.
In addition, the Fed has the option to "jawbone". This means the Fed can speak to investors and consumers and let them know it will be vigilant in helping provide liquidity - again whether its lowering rates or buying back bonds in order to inject money into the system. To its credit, the Fed recently said that it did buy some $19 billion in bonds, but it could to do more. I would argue that Bernanke needs to get on TV and reassure these markets personally.
Beyond the Fed
Our politicians have to do their share, Republican and Democrat alike. I think they need to come out publicly and say that they are either going to lower taxes, either personal or corporate, or provide some incentives for investing in businesses.
Specifically, they could reduce the capital gains tax rate, or providing increased incentives for making charitable deductions, or provide some relief for employers when it comes to payroll taxes. Additionally, they could be encouraging foreign investment either through tax breaks or possibly through the sale of government land at a favorable price.
Finally, the politicians should be seeking a serious alternative to foreign oil and encouraging companies to build refineries and new drilling platforms in the interim. In short, I think our elected officials should stop the political infighting and do something - anything.
The Bottom Line
The Fed, the politicians and the public are all in this mess together. Any solution is going to require cooperation and coordination between all three.
For a one-stop shop on subprime mortgages and the subprime meltdown, check out the Subprime Mortgages Feature.
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