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Long-term liquidity crisis?

The crisis keeps setting new lows, and governments and central banks are desperately fighting back with everything they’ve got. But what are the long-term effects of US government interventions?

There have been a lot of different opinions about how the US government have handled the financial crisis, and how they should handle it moving forward – both among economic experts, but also, as we saw with the rescue package bill, among themselves. Many believe the government has done the right thing by interfering in the financial markets, providing liquidity, helping packages, etc. etc. And of course it seems as a satisfactory solution when the market bounce right up in the minutes following the announcements, but what will the medium or long-term effects of this be? Spitting too much money out in the banks and in the financial system will obviously have consequences on a long-term basis, and will probably cause the end of a number of planned government projects and goals. On the environment side, take for example the Renewable Portfolio Standard (RPS), a project which the US government set in motion with a goal of achieving a 15% rate of alternative energy by the year of 2020. Not only is it unsure how they will finance the project after pumping liquidity into the markets and potentially raising taxes, but the financial crisis have also set it’s marks on the alternative energy providers that the US would be working with in order to achieve this goal, such as Siemens and Danish company Vestas, both of which have previously (even before the crisis) had trouble with meeting clients’ demands.

Therefore one could ask to the long-term implications will be of the government solution to this crisis, and consider the long-term implications in their assessment of the government’s handling of the situation. It is easy to second guess, and since it is obviously an extremely complex matter, it doesn’t necessary have to be black and white – but how do you think they have handled the situation?

Personally I believe the long-term picture would have looked better if the governments had led banks fail, and let markets suffer. If they, and even FeD, would have kept out, what was the worst thing that could have happened? Banks would fail and markets would fall – but haven’t recent events displayed that this seem to be the consequence anyway? A lot of banks have gone bankrupt, and the financial institutions that have been rescued will be in rehab for several years. Obviously the situation would have looked worse if they had led Fannie and Freddie fail, but hypothetically, if they hadn’t interfered, would all this turmoil have taken place last year (or the year before that?), and would we see light at the end of the tunnel already by now?

I’m not saying this would be the case, because no one can tell how the current would have looked like, but I believe it’s worth considering, especially during times of election.

When passing judgments to the administrative entities, we might as well have a look at the entities that actually caused the crisis. Personally I also believe that one could have a number of reasons to be disappointed in the banking sector. Firstly, in the fact that their historical success caused them to take some things for granted (such as people paying mortgages) – and secondly, in their handling of this crisis. What initiatives have we seen from the banks that could possibly get them out of this mess? Instead of cutting headcounts and shutting down operations trying to limit their losses, it would be refreshing to see a bank trying to diversify themselves out of the crisis by focusing more on the business areas that were actually making money, such as online trading markets. And even in times of credit crisis’, some companies are providing liquidity solutions in this market that could easily provide a gateway into this increasingly profitable market, allowing banks to take advantage of the situation by making some money off the financial crisis, instead of the other way around.

In any case, the question remains – have the government done well enough? What will be the long-term effects of their financial support to the markets, and have the banks deserved this support at all?