Striking a Balance

I can't begin this dispatch without a word about the events of yesterday's (9-29-2008) trading day. What a ride! I've got to tell you it was like watching one of those TV dramas where the star is trying to defuse a bomb. Does he cut the green wire...the red wire...the green wire...the red wire? Holy Hanna...Holy Crap...Holy Hanna...Holy Crap! With fractions of a second left he cuts the orange wire. THE ORANGE WIRE!!! Fade to black with the voice over, "Tune in next time for the explosive conclusion." Wow!

What a day. The DOW Industrials drops over 700 points. A one day decline of approximately 8 percent. If you watched CNBC today you really would have had a hard time catching your breath. In percentage terms today's 8% decline represents the 17th worst market drop. For instance it pales in comparison to the 22% one day drop experienced during the dot com implosion at the beginning of the decade.

Over the past month I've been doing some research on the events that led up to the current state of economic affairs. Next week I intend to begin a series of posts summarizing some of that research. I intend to keep it at the 5000 foot view. Close enough that you can get some understanding but far enough away to keep you from falling asleep at your terminal. I think the value to you will be the ability to stay calm and make rational decisions in the face of chaos. Now, on to the subject of this special dispatch...

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In response to my last post, "The Price of Oil", GF wrote: "I still feel deregulation played a major roll in this recession we are in. Without the checks and balances we get with regulation of critical industries (that can significantly impact the economy as a whole) you get what we got. Banks failing left and right.

"While I agree that competition in industry is good, you must be prepared for the the outcome, when you gamble incorrectly or mismanage your corporation.

"The impact of failure of certain industries in this country can have (has had) a catastrophic impact to the economy as a whole. [Therefore you] need regulation to prevent failure when they gamble and gamble wrong."

This is a great email. I spent a lot of time over the weekend gauging my response from several perspectives. It's no secret that I'm a free market/states rights kinda guy. In my estimation we would be best served by a federal government that stuck to building and maintaining infrastructure, defense of the country and managing the national debt. But, decisions made from that viewpoint or any other extreme viewpoint rarely wins the day. In fact, the art of compromise and finding the middle ground may be counted among our greatest assets in building the economic base that we have today.

I also realize that, at times of crisis, the federal government is in the best position to provide the grease to get the gears moving. It just seems unfortunate that the government - typically due to their own self interests - doesn't seem to know when to stop applying the grease. But I digress...

Yes, to an extent I do agree that there are times when government regulation is necessary. For instance, during WWII the federal government instituted rationing of all necessary materials. They also instituted a windfall profits tax to thwart companies from extorting the supply/demand equation due to that rationing. However, imagine if those regulations had been left in place after the war was over. History tells us that the end of WWII heralded the beginning of a period of tremendous economic growth lead by - drum roll please - housing! Had war-time regulations been left in place, the end result would have been concentrated wealth and stunted economic growth.

Still, the argument over regulation vs. deregulation seems to be a moot one. Since it appears that legislation today is geared more toward regulation on a wholesale basis rather then targeting specific industries. For example, I live in a more rural area where cell-site towers are an unwelcome site. In response local legislators passed laws to thwart their erection. Many of these laws were struck down in court. As a counter-measure new legislation was introduced that restricted the building and use of all towers.

There is also evidence of this on a national scale with legislation governing offshore drilling and EPA regulations regarding the compliance rules for building refineries. While these laws are not "regulatory" per se they are, in effect, targeted at a specific industry.

When I returned to the drawing board of my mind it dawned on me that the real common denominator here is money. More specifically, our money which is merely fiat money! Remember, the Dollar is backed by the full faith and credit of the United States Government - nothing more. That's great when we're in the midst of a boom cycle...not so much at times like we find ourselves in today. We need to return to a currency backed by and pegged to the value of gold (as it was prior to 1975). As the reserve currency of the world, returning to the gold standard would instantly re-establish credibility to the dollar and increase purchasing power of the dollar in the domestic and international arenas. Further, the ability to adjust the peg - i.e. the price of an ounce of gold in U.S. dollars - would give the government another tool in its arsenal to act as a gas and brake pedal for inflating and deflating the economy as events within the cycle warranted.

Finally I wanted to address your comment regarding, "...banks failing left and right." As of August 2008, there were 8,430 FDIC commercial banks in the U.S. Since 2007 there have been sixteen bank failures (the full list can be viewed here).

Yes, there have been several investment bank failures - Bear Sterns, Lehman Brothers, and Merill Lynch among the most notable. But, despite the grandiose headlines, I think it is a bit alarmist to characterize these events as banks failing left and right.

Thanks again for the email. Your comments were thought provoking.

billmazzacca@gmail.com