A volatile Summer 2008 . . .

Dow Jones Industrial Average, June 25-Sept 25 2008. Source.

. . . but are the economic vibes shifting? Will the Paulson Plan reverse the downturn?

Summer 2008: Stock market volatile amid financial collapse, but no major crashes. Will the current downturn prove just a blip?

What is meant by a downturn? The key question with our economy is not the stock market, for markets exist today for things like 'credit-default swaps' and 'short-selling' in which organized money can increase returns even in downward stock markets. The key question is more fundamental: How much wealth do we have left that is not in off-shore hedge funds and that is not in the form of bad credit?

Make no mistake, the country lost a lot of wealth this summer, in terms of housing values and credit write-downs. To fix this situation, the country faces a challenge: what to do with the $700 billion Paulson Plan, what others are calling the 'bail out.' Like it or not, Sec. Paulson has come up with a plan and, as a country, we must now answer our own question: Will the $700 billion Paulson Plan do what it needs to do? Will it put a bottom to falling house prices and stabilize credit flows? Will it expand regulation or at least enforce already existing laws governing credit flows? Will it initiate an era of fiscal and monetary responsibility? Will it reflect a step forward in the direction of understanding hedge funds and the practice of short-selling (i.e. betting against companies)?

That final question is about knowledge. I do not propose any regulation of hedge funds until we at least know something about them. Are they too massive for free markets to absorb? What does their leverage mean for the free market? Does their wealth trickle down?

Chances are we will go forward with a slightly different version of the Paulson Plan. Will it mark the end of the downturn? The answer to that will come from (a) the extent to which it puts a bottom to the country's falling wealth by freeing credit lines and moving economic exchange; and (b) the extent to which we are able to respond in kind to the unintended consequences of the plan.