We might start to feel some benefits from the stimulus in 2010, but the root problems are both too widespread and too complex to handle in legislation that has a “little something for everyone.” Admittedly, some legislation is better than none, but it is far from clear how much immediate benefit there will be.
Since we don’t really know any specifics about TARP II, it’s too soon to tell to what degree and over what period it will help stimulate credit. It appears, however, that some credit doors have opened already.
Nevertheless, there is a tension: lending to people who couldn’t afford to repay debt was the root cause of the housing crisis, and with unemployment rising each month there are more people who fall into the subprime category.
The bottom line is to create more jobs — and job creation depends on capital investment. Grousing about planes and perks won’t get the job done.
Once we get over the hump of the economic downturn, all this new government debt will likely result in serious inflation down the road. So we’re in for some tough sledding on several fronts for some time to come.
What does this mean for the Board of Pensions? In a nutshell, it means that we have to do some contingency planning. We should consider what we might do in the next 12 to 36 months if we are facing a stalled economy, a steady economic downtrend (at varying rates) or a precipitous decline.
Beyond that, what are our alternatives if inflation comes back at unacceptable rates on the heels of a recovery?
As investors, we would be foolish to make a “big bet” based on any one analysis, so we should be prepared to move in facile and observant increments. We’ll be gathering some ideas and meeting on this subject in the next few weeks.
One thing is certain: riding out the storm, while one alternative, should not be our only option.
For the Board of Pensions 2008 Investment Review — by senior vice-president, treasurer and chief investment officer Judith D. Freyer — click here
