Patience: the medicine few want to consider

It's easy to understand why people would be demanding quick fixes to what ails the U.S. economy (such as raising the conforming loan limits) but perhaps the best solution of all is patience -- the kind required to let the market sort out its own excesses on its own. There are two stories which allude to this -- one in the L.A. Times, the other in the New York Times -- which suggest that putting a band-aid on a severed limb (my analogy) may not lead to the best long-term outcome:

First, from the L.A. Times article:

In the 1990s, when Latin America and Asia were rocked by financial crises similar to the one now dogging the United States, Washington officials were quick with stern advice: Don't bail out distressed banks. Don't intervene when stock market and real estate bubbles pop. Let your overblown economies shrink to their natural levels...

To date, U.S. officials haven't followed any of the advice they so readily dispensed to others. They have tried to aid troubled banks. They have slashed interest rates to help the struggling housing and stock markets. They have made it clear that they will go to extreme lengths to keep the American economy out of recession.

But if the current prescription fails to provide long-term relief, what comes next? The answer, many economists say, could be that old castor oil.

"People are going to have to buckle up their seat belts and expect some dicey economic times for much of the year," said William Grenier, chief investment officer at UMBS Management, a $12-billion asset management firm in Kansas City, Mo. "We're going to have to let the excesses wash out of the system."...

If Fed rate cuts are blunted by housing market weakness and banks' hesitation to pass along interest savings, and new public spending or tax cuts end up mired in politics or arrive too late, there may be no other solution to the nation's troubles than perhaps the most painful one: time.

Moreover, what can see like a cure in the short term can act like a poison down the road. From the New York Times story:

One day after the Fed slashed its benchmark interest rate to head off a possible recession, a small minority of economists warned on Wednesday that the central bank was in danger of invoking the same remedies that it did after the bubble in dot-com stocks burst seven years ago.

“We’ve literally forgotten that this is the very policy environment that led to the housing and mortgage problems in the first place,” said Michael T. Darda, an economist at MKM Partners, an investment firm in Greenwich, Conn. “We’re not going to see another housing bubble, but we could see more inflation.”

Mr. Posen of the Peterson economics institute predicted that the Fed’s new policy of lower interest rates would provide “too much rather than too little stimulus” and help push inflation noticeably higher in 2009 and 2010.