NORTHERN ROCK BANK LOOKS BUSTED

The run on Northern Rock Bank in England continues and is making "news". At the same time, former FOMC Chair, Greenspan, is blasting Bush while apparently trying to talk the market down as much as he can. He talks about inflation on the one hand and deflation on the other. He seems to have forgotten his part in this whole cycle. It is a matter of record that he took the Fed Funds Rate down to 1% in June of 2003, well after the stock market had turned up and after home mortgage lending was already hot. Big money is made when the market swings wildly. Most investors should stay in the market 95% of the time and avoid "playing the other man's game". To some extent it at least appears that the FOMC is running a crap table and the "big boy bankers" have the house odds in their favor.

While I believe in supply side economics, I cannot throw out classical and Keynesian truths. The control of money by the FOMC does play a major roll in the sharp fluctuations of the business cycle.


The good news is that in about two months, this will all be behind us. Unless "Big Ben" executes a water torture drip, the turn should be relatively fast. The wild card is still Congress. It remains to be seen just how hard the congress will push for tax and spend social programs while trying to cut off the support to the troops. Chances are that a continuing resolution will be passed at the end of September. Over the next few weeks, trillions of dollars of spending will be pushed into a hectic schedule of horse trading. Dr. Ken Wertz at Chapel Hill was fond of the muddling trough budget process. He, unlike most of us, enjoyed watching the sausage being made. Boy, do we need to reduce the wasteful spending. To not pass the 13 budget bills and then roll all of government into a massive last minute lump that no one knows all that has been stuck in and pulled out at the last minute is no way to run a railroad.

The savers at Northern Rock will not lose money but most are taking the precaution of withdrawing from one bank and redepositing with another down the street. Our fractional banking system works and the evidence shows that the level of skill of the central bankers keeps improving. I do not believe there will be a recession. I am counting on the central bankers to provide liquidity as is necessary to avoid a "real credit crunch". So far, as has been demonstrated by stock markets that are down only 5% or so from the top, this "turn" is being handled well.

The next few weeks will probably be volatile weeks in the market. You should avoid trying to jump in and out on the bounces because one of them is going to soar. The short term swings will look small when viewed in hindsight a couple of years from now. Get on this bucking bronco and hold on because a fun ride is under way!