De-leveraging is a necessary prerequisite to a real recovery. The brunt of federal policy to date, however, has seemed directed at keeping the squirrel cage running at high speed -– trying to help consumers carry on borrowing and spending, taking questionable assets onto the Federal Reserve Bank’s balance sheet, instead of accelerating the burnout of accumulated excesses.
I struggled with the image of a “squirrel cage running at high speed,” and initially figured Morris meant something like a hamster wheel. But thanks to the magic of the Google (see, Nick, it’s making me smarter!), I now know that he’s probably talking about the squirrel-cage rotor, which according to the Wikipedia is “the rotating part often used in an AC induction motor.” So maybe I should be referring to him as mechanic-turned-investment-banker-turned-financial-chronicler Charles Morris.
Anyway, his point is one that I had been meaning to make in my David Einhorn column, but sort of let get away from me. The Fed and other regulators’ actions so far have been almost entirely about keeping this crisis from getting worse, not getting at the root causes or really clearing the way for recovery. I’ve been generally sympathetic with that, being as how I’d kind of prefer not to experience the second Great Depression. But at some point policy has to shift toward encouraging thrift and discouraging inflation and financial nuttiness. Everybody in Washington seems to think that shift should happen sometime in 2009. I’m starting to think there’s a serious case for doing it sooner.