The U.S. Dollar, once one of the world's strongest currencies has been so dramatically damaged by the current economic crisis that it may need a highly unlikely bailout.
Under pressures that would have destroyed other currencies, the Dollar remains, however, its strength is severely weakened. The overstretched currency is caught in a strange crisis. As it falls in value, prices of key commodities such as oil, gas and other petroleum products rise. This puts intense inflationary pressures on the economy, further weakening the dollar, which lowers, and causes the prices of those commodities to rise even further... in a never ending spiral.
Other pressures, such as the value of real estate, dropping significantly, have caused additional pressure on the currency, pulling in the opposite direction. The US economy is fundamentally rooted in the value of real property, primarily the value of people's homes and for the first time since the 1940's, home values are lower than the sum of debt on those homes.
Meanwhile, other key currencies, such as the Euro, British Pound, and Yen are rising in value against the Dollar. The central banks of Europe, Britain, Japan, China and Russia are unlikely to bailout the Dollar over concerns that by doing so might weaken their own currencies and create economic crisis of their own.
Federal Reserve Chairman Bernanke is taking extraordinary steps to answer many of the key issues weakening the currency, such as trying to put liquidity back into credit markets and establishing emergency loan programs for banks to stave off any potential bank collapses. Even after a dramatic cut in the prime rate, which was clearly intended to entice lenders to loosen the tight credit market, the Dollar continues to weaken and the credit markets have not been rebounding quickly.
Unfortunately, this crisis is a result of a number of issues beyond even the control or influence of Chairman Bernanke. For example, the Bush Administration has been systemically deregulating banking for years, and the result of deregulation, usually sought by bankers, has in fact shown every time, to harm banks in the long-run, even though it creates a short-term gain in profits. Invariably, it hurts the economy as a whole and disregards the reasons for the regulation in the first place.
In deregulating, banks made billions in profits during the mid part of this decade and regulators are now feeling no sympathies towards the banks or bankers who presently suffer significant losses in revenues as a result. What the Administration, the bankers and regulators seem to be forgetting in this entire crisis is that it is the average US citizen being seriously harmed in this mess.
Homes being foreclosed at the highest levels ever, unemployment rising at alarming rates, small to mid-sized business failures rising, and families finding it impossible to pay for basics such as heat, food, essential medicine, and healthcare, etc. The public is what the Administration was charged to protect, not a single industry and as a result of such disregard for the citizenry, it permitted and encouraged deregulation. Whether this is viewed in history as a blatant breach of the Oath of Office, and of the American public is yet to be seen, but clearly, there is an historic lesson to be learned here... deregulation does not work any more than excessive regulation.
While a happy medium is difficult to find, dramatic shifts one way or another in profits with a regulated industry or wildly swinging economic conditions should be the red flags creating immediate investigation and regulatory action.
The current crisis of the US Dollar will not necessarily require a central bank bailout. Chairman Bernanke is correct in that we should be able to resolve this internally. It will take some forms of regulation to prevent such a mess from happening again. That being said, regulators and Congress must accept the fact that banking is, like any other industry, an ever evolving one, and will adapt to fixed regulations and find ways around them. Regulations must be fluid, and regulators should not be constrained from promptly adapting to such evolutionary changes when signs of trouble appear.
We at the Institute are waiting for the second shoe to fall, with the mortgage mess being but the first of two. The second will be business lending. In the March 2008 z1 report, a periodic report issued by the Federal Reserve, the total volume of business lending in 2007 was finalized at $627 Billion. Deficits against that were $216.2 Billion. The crisis in mortgages was only $170 Billion, so we are expecting yet another serious kick to the currency. Only time will tell.
