Sailing Tips from Mr. Poole

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In the house we are building, I think we are going to install a geothermal heating/cooling system. That's an extra capital cost but it will reduce energy use. That's the kind of capital cost households and companies can put in place, but savings in energy takes awhile to occur. We don't want the change in energy prices to lead to monetary policy that creates generalized inflation on top. That is where I fear we are headed.

Q: Are we on the verge of a global depression?

A: If you mean by depression anything like the 1930s, no. I don't think we are likely to have more than a mild recession.

Q: Do you see the Fed bailing out more banks or brokerages?

A: Bear Stearns was a real game changer. The Federal Reserve would find it very difficult not to engage in a similar operation with a large bank or another investment bank. The more interesting question is whether the Fed would step in for assistance on a large non-financial company.

This is an example, not a prediction: Suppose we have a further upward spike in energy prices and one of the top U.S. airlines says it has to discontinue operations. If this happens when Congress is out of session, the only possibility is Federal Reserve resources.

What argument is the Fed going to make when politicians come and say, "Look, you bailed out Bear Stearns." The airline has more employees than Bear Stearns and the collateral damage would be greater. Would the Federal Reserve say no under those circumstances? No one knows.

Until the Federal Reserve defines the rules of the game, who has access and who doesn't, anytime a corporate crisis occurs, people will be asking, Why isn't the Fed stepping in after all it did for Bear Stearns?

I'm a small boat sailor. If my boat is sinking, I'm going to bail like crazy to stay afloat. Once you have your situation stabilized, you better know what direction you're going or you are going to end up on the rocks. The Fed bailed like crazy, saved the financial system from a cascading collapse. What has not been done so far is worrying about the compass course.

Q: Should the Fed have done more to stop the housing bubble?