October 7, 2008 - No one knows what will happen as we stumble through the worst economic mess since the Depression. Yes, it's that bad. We're in a financial maelstrom that is setting new records, bad ones, like 800 points down in one day before rallying back a little to the relief of no one. How will all of this play out? What will be left on the economic landscape? Here's how I see it.

With so many investors losing large amounts of money, they will be loathe to buy more stocks. Professionals will, the ones running mutual funds and large institutions. They have to. But individuals will slowly return to the market. They've been burned so badly that the idea of buying another stock makes them convulse. Many have had to postpone retirement, having seen their nest egg fall from the tree. The eggs are mostly broken, and they don't have a lot of time to rebuild their nests. They'll be buying CD's, bonds and anything with a fixed income attached. They're done with the stock market. So don't look for a strong bounce once the selling stops. It will be more of a stunned silence for some time.

As for the banks, they'll be fine. Not any one specific bank, but the banking system will come through this with a damaged image but intact. Customers will go through some real trauma as they wonder each Friday if their bank will open on Monday, but all insured deposits are safe. As with Washington Mutual which was allowed to fail, the poorly managed banks will be taken over by the well managed ones, an evolutionary process that is necessary for an even stronger banking system.

In other words, in this over banked nation, the bad banks are going away, and the good banks will stay. That's a good thing. So as long as depositors keep their accounts at or below the insured maximum amounts, they will get their money out of any bank insured by the FDIC (Federal Deposit Insurance Corp.). But I would bet that 99% of depositors never have to deal with the FDIC. Rather, they'll just see a new name on the bank's front door when they visit after their old bank ceases to exist.

As for the frozen credit market, the Fed and the Treasury will do everything in their powers to get liquidity back into the system, to get credit available. We're seeing that in the new TARP (Troubled Asset Relief Program) as well as the recent purchase of commercial paper by the Fed. Most likely the Fed will lower interest rates sooner rather than later. In other words, short term credit will be in abundance and at a low rate.

That doesn't mean banks will be free with it. All credit standards will tighten. It will be more difficult to get loans than in years past, but the money will be there. If banks start piling up too much liquidity, then credit standards will start to loosen which isn't to say it will be easy to get, only that it will be a little easier for the best, most credit worthy customers to get it. Really loose credit won't happen again unless the Fed pumps way too much money into the system, and banks have to move it out to get earnings up.

Which brings me to the last part of the solution to our current problems. Once the credit crisis is fixed, loans are being made, and there's some normalcy back in the stock market and housing market, there will be a price to pay for the cure. The cure being tried right now is pushing liquidity into the market. If there's too much liquidity (money) sloshing in the system, then the spectre of inflation is waiting in the wings. And that will be the natural price the economy will pay for fixing our current problems. Make no mistake, too much money chasing too few goods begets inflation. But that's another problem for another time. Just know that everything has a cost. And our current cure will have a price tag attached. But then, I don't know anyone who doesn't want to fight inflation from behind a desk or hammering a nail instead of sitting in fear of a Depression on a couch, waiting for the worst.

- Ted Allrich