By: Douglas J Utberg

In the midst of the current financial crisis, there have been many people micro-analyzing the actions of the Federal Reserve.  One school of thought is that the Fed caused the crisis with a prolonged string of easy money from 2002 to 2005 that generated an asset bubble from investors chasing yield into risky investments.  Another narrative is that the Fed went too far in trying to dampen the impacts of the crisis by lowering the Fed Funds rate to nearly zero and unleashing a flood of reserves into the banking system.  Each of these observations has merit, and each probably has a part to play in the nature and severity of the financial crisis.

However, there is one critical observation that does not seem to receive much attention and that is asking why we allow a small group of people to have so much power over the US financial system?  It has always been true that the power to do good is also the power to destroy.  Our natural hubris dictates that we would rather have somebody be ‘in charge’ of the financial system who can ‘fine tune’ interest rates and the money supply to soften the impacts of recessions and accelerate recoveries.  After all, do we really want to let markets set things like interest rates?  It feels very impersonal to have something that important left to open competition.

The unfortunate problem with having ‘somebody in charge’ of the financial system means that any small mistake by the people in charge can create massive devastation for the entire national and world economy.  Realistically, it is inevitable that any system which relies on the discretion of a powerful committee for the health of the financial system is going to experience a dramatic collapse since it is not possible for any group of people to act correctly every time they need to make a decision.  When decisions are fragmented down to individual buying and selling decisions, prices are dynamic as people individually vote with their wallets.

Many years ago, Milton Friedman advanced a simple proposal for the Federal Reserve to grow the supply of money at the approximate annual rate of productivity growth (Somewhere around 2% and 3%) and allow the market to reach equilibrium on interest rates and asset prices.  Such a system would not attempt to mask the effect of economic downturns with accommodating monetary policy.  However, it would also lack the false sense of stability that was created by a prolonged period of smoothed cycles that was ruptured in a crash that nearly collapsed the entire financial system.

Any time that volatility can be artificially suppressed is conditioning people to panic when the inevitable market disruptions transpire.  The fundamental question that we must ask ourselves is whether it is more advantageous to make our own decisions instead of relying on the government authorities to create stability.  Change is a reality of life, and attempting to create artificial stability will not accomplish anything more than further conditioning people for panic when the fictional expectations of stability are eventually broken.

The Magic of Thinking Small

Fans of business literature are familiar with the slogan to “Think Big,” which emerged from the famous book by David Schwartz entitled: The Magic of Thinking Big.  There are many noted advantages to thinking big, such as focusing your attention on strategic priorities and elevating your perspective above the daily chaos.  However, there can be magic in thinking small as well.

A call to ‘Think Small’ is not intended to suppress big ideas.  Instead, it is intended to be a bridge between where you currently are and the big ideas that you would like to accomplish.  Thinking small is the art of finding small things that can be done immediately that move you closer to your goals.  Many people have goals to be a fabulously successful investor, but lack the capital to begin investing.  In a case like this, thinking small may prompt you to begin a home based business where you can accumulate a small supplemental income that will allow you to begin your investing career more quickly.

Many of us also have very lofty career goals, but achieving those career goals will require a long series of small steps.  By expanding our mindset to include the notion of “Thinking Small” and focusing on the next step that gets us closer to our long-term goals, we can systematically turn those goals into reality.