Financial Crash Instructions

Four Steps to Arresting a Financial Crash

If the economy was a commercial airline flight, we'd now be approaching the point where the flight attendants would be dropping the oxygen masks and instructing passengers on how to use them.

Instructions -- and preparedness -- are no less important during a financial crash. In roughly the order of priority, here are the four most important steps to take:

One. Make sure you've got the best possible pilot and co-pilot flying the plane.

The jury's necessarily out on President-elect Obama and Vice President-elect Joe Biden, but . . . so far, so good. Some would have preferred a new(er) crew -- Rahm Emanuel, Hillary Clinton, and Lawrence Summers et al are not exactly fresh faces. However, what's most important is that they know their jobs well and follow the pilots' direction. Again . . . so far, so good.

Two. Make sure the aircraft is as aerodynamic as possible until the engines can be re-started.

While the economy has certainly lost a great deal of altitude since the financial crisis began 18 months ago, it's still at a comfortable 20,000 feet or so and traveling at an acceptable -- if rapidly slowing -- cruising speed. (At least in the U.S.; emerging economies clearly have much less cushion).

Most people have jobs. Most mortgages are not in default. The dollar, at least for now, is holding up.

And yet . . the stalled, and now, descending plane is still dangerously heavy. Debt-heavy. At every level. That includes the government, the Federal Reserve, the too-big-to-fail banks, as well as many, many U.S. households.

Just as a plane preparing for a rough landing needs to dump fuel, a falling economy needs to jettison excessive debt. Fortunately, the U.S. bankruptcy system is the world's most established and sophisticated at lawfully doing just that. Now is the time to make use of it.

Three. Re-start the engines.

It is normal for there to be swings in economic activity.

During booms, animal spirits run high -- arguably, too high. Consumers become complacent, careless about risk, and apt to frenetically, well . . consume.

During a bust, the opposite is true. People are loathe to take chances, become defensive, hoard cash.

The government -- er, pilot's -- job now is to push the pendulum back toward the middle.

If you prefer, think of it as Alien in reverse: lurking inside a dysfunctional, steroid-stuffed "monster economy" is a healthy, sustainable, and yes, market-driven one struggling to get out -- albeit a smaller, slower-growing, and certainly simpler and more transparent economy.

Four. Make sure that the people on the ground are ready.

In turn, that means two things: 1) preparing the runway for a rough landing; and 2) lining up emergency fire, medical care, etc. to deal with any aftermath.

The equivalent of spreading foam on the runway -- monetary easing -- has already been done (arguably, overdone).

That leaves evacuating survivors and providing them with medical care, while making sure the fuselage doesn't burn.

Those tasks necessarily fall to the first responders in an economic crisis: state, and especially, local governments. Far better to use billions in federal aid to bolster their ability to provide food, shelter, and clothing to the truly needy, than to bail out Wall Street, Detroit, or any other special interest group. Providing for unemployment benefits, job (re)training, health insurance and the like come next.

Once the plane has landed -- with or without engine power -- it will be timely to take up an arguably even more important task: charting an altogether new course.