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What To Do If The Stock Market Crashes?

By   Follow Me on Twitter     Message Carmine Gorga, Ph.D.       (Page 1 of 2 pages)     Permalink    (# of views)   No comments

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There are warnings in the airwaves about a collapse of the Stock Market on March 15--or any time in the future.

What to do then?

There is a flip side to the set of considerations that I advanced a short time ago around the fact that there is almost no real wealth at all behind the three trillion of zeros accumulated in the Stock Market since the last election.

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The flip side, the positive side, is this: No real wealth will be destroyed, if the Stock Market crashes. And the issue is not if, but when the Stock Market crashes.

When the stock market crashes is a question of great interest to individual players. Those who cash in in time will go home with a bundle.

Individual investors, who are determined to remain in the market until it might be too late, have some serious calculations to make: They have to determine what is the most they can lose without being utterly ruined.

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Individual people can also find some sense of security if they--in time--make a run for gold. Since the price of gold has its own outstretched gyrations, what type of security is this? And there are many more objections to this false solution. First, what security is obtained if all other people around us are ruined. Then, what type of security is there when coming out of the bunkers one finds the entire structure of production and organization of society destroyed?

The individual alone can at best save himself. Real security, long term security, can be acquired only through the community as a whole. To adopt Benjamin Franklin's warning, "We must, indeed, all hang together or, most assuredly, we shall all hang separately."

There are two actions that the community, the community represented by--and led by--the Federal Reserve System (the Fed), can immediately take before the crash. Quite apart from doing what it is planning to do with interest rates, the first, most urgent deliberation is to shut the lending door down, to shut down all lending destined to purchase any form of financial assets.

This set of actions will not necessarily burst the bubble: The private money market might sustain the Stock Market to higher levels still. With the Fed stopping any lending that is not devoted to the creation of real wealth, the Fed will only put a stop to the waste of public financial resources. The Fed will no longer tolerate unjustifiable exposure of public money to risk of failure.

The second immediate decision that the Fed must take is to announce ahead of time that, the moment the Stock Market crashes, the Fed will open the Discount Window to fund individual entrepreneurs, cooperatives, corporations with ESOPs and/or CSOPs engaged in the production of real wealth, and public agencies with taxing power and shovel ready infrastructure projects.

The Fed will have to make it clear that the Discount Window is open only to fund operations devoted to the creation of real wealth of table and chairs and services.

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The Fed will issue such loans at cost.

The Fed is legally empowered, today, to implement these measures, because these measures would undoubtedly sustain growing levels of employment, and reduce the rate of deflation that eventually follows from a Stock Market crash.

Once national and international behemoths of finance collapse because of a crash in the Stock Market, if the proposed measures are in place, even the people in them will emerge unscathed. Being highly skilled technicians, they will be coveted employees of entities that devote energies to the creation of real wealth.

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President, The Somist Institute, 87 Middle Street
Gloucester, MA USA 01930

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