September 29, 2008

So What's Next?

228-205. Ding dong. But I suspect we haven't seen the last of this bi-partisan attempt at nationalizing Wall Street. If so, what's next?

My guesses:
  • The mother of all runs by foreign and domestics on US banks.
  • US Banks will halt credit issuances. Corporate bond issuances will plummet.
  • Federal Reserve will expand currency swapping with other central banks. So far they've purchased back $620 billion USD at the expense of US-held foreign currencies.
  • The Federal Reserve will expand its emergency loan program by unknown $$$s, and extend its coverage to more and more types of institutions.
  • FDIC will request a bailout.
  • A Liquidity trap, as clueless opportunists clamor for lower interest rates.
A liquidity trap is much, much worse than it sounds. It occurs when the nominal interest rate nears or hits zero and the Fed can no longer wield effective monetary policies to stimulate the economy. In essence, because people and institutions do not expect high long-term rates of return, they sit their assets out in short-term placeholders.

In it's worst-case, a liquidity trap leads to economic stagnation. Exacerbating this recent turn of events are increasing consumer prices.

Economic stagnation + inflation = stagflation.

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