Innovation/Global Crisis Blog

To Fix America’s Busted Economy, We Need to Call an Electrician

By Shlomo Maital

     Woody Allen once commented,  “not only is there no G-d,  just try to get a plumber on the weekend!”   Or, he might have added, an electrician.

   Maybe America needs an electrician.  Yesterday the Fed announced its Operation Twist, with $400 b. in bond-buying of long-term bonds, to raise 20-year bond prices,  hence lower their yields and push down long-term interest rates that impact mortgage borrowing, corporate borrowing, etc.,  while selling an equal amount of short-term bonds, to keep its balance sheet balance. It’s called “twist”, because the interest rate term structure is twisted, with the short-term rates rising, and the long-term rates falling.   This was done in the 1960’s, but with minimal effect.  It is a sign of the Fed’s desperation.  The vote in the Federal Reserve Open Market Committee was far from unanimous, 7 in favor, 3 against.  This is also rare, usually the meetings end in consensus.  Not only is America’s politics a ‘house divided’, so is the Fed itself. 

     Here is why America needs an electrician.   Ohm’s law states that the current through a conductor between two points is directly proportional to the potential difference across the two points, and inversely proportional to the resistance between them.  Say that again?

                       I =   V/R , I = current, V = voltage,  R = resistance

     Let’s say, I is “power”, or “current” (economic momentum).  V is  voltage, or the Fed stimulus, zapping the economy with money.  Let’s say R is ‘resistance’ (desire of people to lower their debt, stop borrowing, save more, etc.).    If the Fed raises the voltage, it will do no good, if at the same time it does so by saying things are MUCH worse than anyone thinks, and ordinary people tighten their belts even more.  If V rises 10%, and R rises 10%, it’s a wash. Nothing happens to the economic “power”.

      We need an electrician.  How do we lower the “R”, resistance?  By offering ordinary people a clear simple strategic plan for rebuilding America’s economy, its schools, investment, infrastructure, manufacturing and society as a whole.  ANY plan will do,  a clear vision will lower “R” if people think there is such a vision and there is hope for the future.

      Obama is no electrician. Neither is Bernanke.  Is there an electrician out there?  And, will he/she be willing to work this weekend? 

 

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