The macro-economy will continue to be terrible

until the following things are fixed/addressed:

1) Around this time last year (October 2008),

Paul Krugman started to warn about the dangers of the US falling into a Liquidity Trap. In short, a

Liquidity Trap occurs in an economic recession when a monetary policy maker is trying to patch things

up by cutting rates…and cutting rates…and cutting rates…until finally the rate is close to 0

and there is no where else to go! When this happens, the government has tied its hands monetarily

(for the most part). What then? Move to fiscal policy (aka government spending). If that doesn’t

work? Pray. This is basically the situation in the US right now. The official position of the Fed

as of today is rate will be “exceptionally low” for an “extended period of time” (NYT).

2) I

recently went to a presentation by the “Federalist Society” at law school. The speaker, a visiting

professor from Kansas, described the moral hazard of bad lending/ finance as “Heads I win, Tails

someone else gets stuck with the bill.” (meaning the US government). Under these chances, who

wouldn’t take unbelievable risks? THEY COULDN’T LOSE. When understood that way, its not that hard

to grasp. I like to call it the “Win-Whatever” problem.

3) Also attributable to that speaker

is the broken fractional reserve rate. Basically, this rate dictates how much a bank needs to have

on hand in relation to the loans it makes. I believe currently the rate is somewhere around 10%.

Maybe this rate needs to be raised to 25% or 50% to make banking less inherently risky…and tighter

regulations on securitization of loans (aka chopping up my loans into itsy bitsy pieces and selling

them) wouldn’t hurt either.

So…does this mean more regulation is the answer? No, not

necessarily. I am sure there are many ways to fix these problems that require cutting rather than

adding. Either way, the problems have yet to be seriously addressed.