Bankruptcy

More Trusted Salespeople Needed

By Christian E. Weller

There is a serious danger that the economy will fall into the dreaded "liquidity trap" -- no matter how cheap money is, companies and families will not borrow since they are too freaked out about the future. Worldwide financial rescue packages, central bank liquidity injections, and government equity stakes in private banks are all intended to provide the desperately needed liquidity. Now, it is important to get businesses and households to borrow this money. One important step in this effort will be for trusted spokespeople to calm the fears of businesses and families over their economic futures. If the recent past is any indication, we will need a different set of spokespeople for the econmoy, though, to accomplish this.

I have tremendous respect for the secretary of the U.S. Treasury, Henry Paulson, and the chairman of the Federal Reserve, Ben Bernanke. They are financial and economic experts with decades of experience between them.

Unfortunately, they missed their opportunity to show the necessary soft touch and leadership in this crisis. How else could one explain that the U.S. Congress initially failed to meet their urgent request for a $700 billion rescue package? Congressman George Miller (D-CA) likened the appearance of Paulson and Bernanke to "Butch Cassidy and the Sundance Kid" who were demanding $700 billion "no questions asked" -- capturing much of the mood in the U.S. Congress.

Paulson and Bernanke failed to understand that the U.S. Congress and voters will have three fundamental, easily answered questions: why do you need $700 billion? Why should Wall Street get a bailout and not Main Street? And, how can the taxpayers' liabilities be limited? These questions were ultimately answered, but the delay had hampered Paulson's and Bernanke's reputation as crisis managers.

Others aren't good candidates, either. President Bush, for instance, has a reputation of painting too rosy a picture in dire circumstances and Senators Obama and McCain will be seen as trying to play electoral politics with the current crisis. This doesn't mean that they shouldn't continue to discuss their solutions and engage with the public on calming their legitimate fears about the U.S. economy. Every bit will help. It just means that we will need additional, trusted spokespeople to let businesses and families know that there is a light at the end of the tunnel and that investing makes sense.

These additional spokespeople could be leaders of industry, such as Bill Gates or Warren Buffett, nobel prize winning economists, such as Joseph Stiglitz and Edmund Phelps, or even elder statesmen, such as former presidents Bill Clinton and George H.W. Bush. Falling into a "liquidity trap" is too serious a threat to the U.S. economy to not try everything possible to get people to believe in the U.S. economy and the global economy again. What worked for tsunami relief in South East Asia may also work in economic tsunami relief -- certainly worth a try. 

Full post as published by Credit Slips on October 12, 2008 (boomark / email).