How Policy Is Made

MANIFESTO

A butterfly flapping its wings on one side of the world can cause a tempest on the other.

One junior employee at a global investment bank covers up investing $60 Billion he wasn’t supposed to invest. The bank finds out and meets with regulators in its home country and get permission to minimize loses by dumping assets prior to announcing anything to the public. As the assets are dumped in already slumping markets around the world, the self-off accelerates. Based on what is happening abroad, stock futures on New York Stock Exchange, closed for the MLK holiday, plummet. The Federal Reserve holds an emergency meeting and makes a major policy decision with out knowing any of this.

As the story above develops, there is a general assumption that the Federal Reserve knows something no one else does, and it must be bad. Emergency action means a recession must be inevitable. Markets are skittish. People are scared. Politicians are energized. The DOW climbs with the hope further rate cuts from the Federal Reserve are inevitable. In record time bipartisan meetings between the White House and Congress hammer out a stimulus package: a little something for everyone in an election year.

By mid-afternoon Friday the story is out. With the realization that another cut from the Fed may be smaller than was hoped for during the frenzy, markets give up their gains. Although the justification for a stimulus package is diminished, investment banks are expecting their tax breaks and middle-America is expecting a check in the mail so why turn back now?