Fed and Government Interventions Are the Economy's Wild Card

There are frequent comments in news articles, opinion pieces, and on blogs, that claim:

• The consumer spending increase came from government benefits or the number would have been negative
• Just think what the bank balance sheets would look like if not for the government intervention and rule changes
  
• House prices would be so much lower if they weren't being artificially propped up by the government through Fannie Mae (FNM) /Freddie Mac (FRE), and other programs.

Such comments often try to imply, that things are really much worse than they appear because the government acted unreasonably and unexpectedly. Or, "our previous predictions would have been right if not for the government's intervention."

Well, folks, government and Fed intervention is what we have and what we will continue to have. Yes, the outlook is bleak and the banking casino activity is taking an unfair toll on us non-guilty taxpayers and our next generations. But, you cannot expect an outcome based upon current conditions without factoring in government and Fed wild card interventions.

And, they aren't even wild cards, they are what governments and central banks do. We all know the saying, "Don't fight the Fed." These powers that be have failed miserably in many ways. They were responsible for causing the problems in the first place. They are reacting too slowly. They are corrupted by insiders and industry lobbyists. But, these same powers have succeeded so far in preventing a system meltdown, albeit with some very large giveaways to some very undeserving institutions.

Perhaps future comments along similar lines to the one's cited above will be:

• The unemployment rate would have gone over 12% if the government hadn't created the biggest work program since the Great Depression
  
• The debt load would have been a much greater problem if there hadn't been a coordinated effort on the part of the global central banks to resolve it through monetization and a percentage of permitted default
  
• Consumer spending stabilized because of demographics, (and threat of inflation, or, negative interest rates)
• Derivatives were resolved through write-offs, negotiations, and regulations
  
• The DOW would have bottomed at 3,000 if not for the Fed engineering its higher level

That was just a thought experiment. Anyone without a crystal ball should stay away from making predictions. This economic crisis is an evolving situation and the only way in which to keep a pulse on it is to keep up with the news and current statistics.

We aren't out of the woods, yet, of a complete meltdown, neither do we have proof that there will be one. Like it is said, "there is a lot of momentum in the system." That momentum and an innate desire for this to work out offsets some of the potential doom that could prevail if a herd mentality caused everyone to head for exits at the same time. No economist or analyst is right about everything in predicting outcomes or in proposing solutions. Many have brilliant insights, however, either in analyzing the big picture, or in interpreting aspects of this economic crisis. And, always remember that "it's what you don't worry about that usually ends up happening."

Comments

[Steven Hansen:]

this is a fact:
"The consumer spending increase came from government benefits or the number would have been negative". the evidence is in z1 flow of funds accounts.

this is opinion:
"The unemployment rate would have gone over 12% if the government hadn't created the biggest work program since the Great Depression." not only is this an opinion, but evidence is slowly creeping out that the stimulus may have been the biggest miss-targeting of funds since the vietnam war.

blogs are all about presentation and interpretation of events. both sides of every argument have validity. there is also disinformation which is opinion based on wishful thinking or dogma. the purpose of blogs like seeking alpha is to keep it real.

Jul 06 02:42 AM

[Moon Kil Woong:]

The fact is that there is no gauarantee the fed's actions will prevent unemployment from passing 12% anyway. The government's actions may wind up slowing the decent but it doesn't mean the trough will be any less shallow. Furthermore, the slower the fall is, the more painful it is on the economy and may lead to a slower and slower recovery. So how can anyone really say the government's actions are good. Perhaps positive in the short run doesn't mean they aren't disaterous in the long run.

Japan's experience with QE which is the only actual expiriment in this was disaterous. What makes people think it will be so successful this time?

Indeed the government's actions are the most unpredictable and potentially destabilizing simply because the government itself has no idea what the final consequences of its actions are. If you want uncertainty the government is certainly delivering it even though they say stability and certainty is what the market needs most (at least they are right about that). How convoluted is that? About as convoluted as them thinking that as long as the consumers continues to spend everything anf hold no equity the US economy will do just fine again.

Jul 06 03:16 AM

[Kalpa:]

Stephen & Moon,
Thanks for your comments but I feel you both missed my point. "This is a thought experiment." I wasn't trying to be judgmental or opinioned about what I wrote. The only fact I tried to present was the fact that the Gov and Fed make this crisis outcome unpredictable. Some writers refuse to recognize that. Write your own guesses as to what they will have done five years from now. That was my idea. The possibilities are limitless.

Jul 06 09:26 AM