Is It Over Yet?

The Dow was down another 280 points today, and so Bill Steigerwald asked Fed historian Allan Meltzer if it’s over yet.

I think it’s too soon to say it’s over. It’s the result of errors on the part of both the regulators but especially the banks and financial institutions. The banks and financial institutions were making loans that they had every reason to know could not possibly survive.

There are, as there always are, two questions here.  The first is liquidity.  Can perfectly sound businesses get credit?  The second is solvency.  Are we going to see a lot of businesses going to the wall in the coming year.

The Fed’s job is to make sure that sound business can get credit.  But as for the future, nobody knows.  Will the mortgage mess cause consumers to stop spending and start saving?

Right now, all the experts except the professional contrarians are saying that the economy is sound.

But then they would say that.  From President Bush to Chairman Bernanke to Wall Street they have to say that everything is all right.

Meltzer thinks that the Fed should make it clear that it won’t be bailing anyone out, that it will support the economy but not the bad actors.

But that is exactly what the Fed cannot afford to say.  Who knows which way the political winds will blow in the next few months?

The Fed can’t say anything about bailouts because it hasn’t a clue what will be coming down the pike.  In the final analysis, the Fed will do what it is told.