Confidence in the Economic Recovery

At the present time unemployment is 9.7%, an improvement from the recent past, but still high compared to what we are used to. The financial markets are scared because of Europe and China and our recovery is weak. Is confidence what we need? Confidence in the fact that we have the right people, with the right tools to heal our economy.


When the Troubled Asset Relief Program (TARP) was passed it provided the Fed with the additional authority to pay interest on the excess reserves that banks have on deposit with the Fed. So, if inflation becomes a threat the Fed can absorb this excess reserve cash simply by raising the interest rate it offers on these reserves. Banks will deposit more with the Fed instead of lending it out. This absorption of cash could slow or halt inflationary pressure, but it will also cause interest rates to rise, which will slow economic growth and could keep the unemployment rate high for a long time.

The Fed is also experimenting with; Term Deposits which would allow banks the ability to deposit money at the Fed for a specified term and reverse repurchase agreements, which would allow the Fed to swap assets on its balance sheet ($2.2 Trillion in total assets) for cash. Will these tools be enough or are they too much? What happens when the Fed stops buying mortgage backed securities in March 2010? Who is going to buy them? How and when is the Fed going to sell the ones they already own ($1.25 Trillion worth)? Selling these securities will pull money out of the economy and help avoid inflation, but the sale of these assets will drive up the price of Mortgages, which could hurt the home building industry and the recovery. Will these tools help shrink the Fed’s balance sheet without hurting the economic recovery?

Think in terms of our own physical health. We allowed our elected officials to give our doctors the right to make us sick. After the doctors inflicted the illness, they then convinced us to give them enough money to buy the equipment necessary to make us well. Now that surgery is over we realize the doctor was good, but not perfect and therefore, our recovery is going to be long and painful with the potential for relapse. Is it our fault, the elected officials fault, the doctor’s fault…? And then you hear the doctor say that in order to heal properly you need to have confidence, if it wasn’t so tragic it would be funny.