Comments on the Current Financial Crisis (an Abridged Version)

Talking points from the Dallas Fed Chairman, whose eloquent and plain speaking insights are a calm steady hand that gives me hope that we may make it out of this episode alive.

Please read the whole article, it is informative and entertaining

1. Basically the world is screwed, but the U.S. is doing better than most.

Our gross domestic product shrank at an annualized pace of 6.2 percent in the final quarter of 2008. Even here in Texas, we saw our economy shrink in the fourth quarter. Abroad, the European Union's economy declined at an annualized rate of 5.8 percent, England's by 5.9 percent, Japan's by 12.7 percent and Korea's by 20.6 percent. And China's growth tapered down significantly to a reported year-over-year rate of 6.8 percent. Our closest neighbors saw their economies shift into reverse gear: Mexico's economy contracted, as did that of Canada, a net oil exporter with a surplus in its federal budget, low corporate and consumer debt levels, and no apparent subprime mortgage problems.

2. Businesses are shrinking and it is painful.

I will not venture to predict the future of our manic-depressive friend, Mr.Market. But I do know the consequences of his intemperate disposition. Faced with unforgiving stock and credit markets, American businesses are doing what they can to stay profitable: As demand for their products shrinks, they are slashing every cost factor under their control to preserve their profit margins.

They are addressing their cost of labor by aggressively cutting "head count." They are delaying capital expenditures, tightening inventory management and demanding that suppliers cut their prices. They are watching their receivables and stretching out their payables. And they are taking every step they can to clean up their balance sheets. (One of my colleagues recently quipped that when looking at the balance sheets of consumers or banks or many other companies these days, nothing on the left is left and nothing on the right is right.)

3. The Fed is on it.

As I said earlier, in times of crisis many feel that the best position to
take is somewhere between cash and fetal. But it does the economy no good when creditors curl up in a ball and clutch their money. This only reinforces the widening of spreads between risk-free holdings and all-important private sector
yields, further braking commercial activity whose lifeblood is access to affordable credit. We believe that the new facilities we have created will improve the functioning of credit markets and restore the flow of finance to the private sector.

I realize that by straying from our usual business of holding plain vanilla, mostly short-term Treasuries as assets and by shifting policy away from simple titrations of the fed funds rate, we have raised a few eyebrows. One observer has posited that we have migrated from the patron saint of Milton Friedman to enshrining Rube Goldberg.

I assure you the Federal Reserve has not abandoned the wisdom of Professor Friedman or any of the other established patron saints of central banking. But these are complex, trying times. Our economy faces a tough road. We are the nation's central bank and we are duty bound to apply every tool we can to clean up the mess that our financial system has become and get back on the track of sustainable economic growth with price stability. The men and women of the Federal Reserve spend every waking hour doing their level best to perform their duty. Even if we have to deploy a little Rube Goldberg engineering to get the task done.