“This week, Tokyo’s central bankers rediscovered a modicum of their old mojo,” The Financial Times told the world on Wednesday. Typically, the FT reports the dialogue correctly but misunderstands the plot action. But we can correct the sentence with a single capital letter. For what they really discovered was a modicum of their old Tojo.
Japan’s Co-Prosperity Sphere expanded greatly in the ’30s, as the Imperial army marched through Asia. But as its supply lines stretched, Japan became more and more vulnerable to interdiction by the US navy. Rather than restrain its ambitions, Tojo Hideki bombed Pearl Harbor.
One of the eternal puzzles of history is why smart people do such silly and stupid things. We have no answer, but we’re happy to see the Central Bank of Japan, the US Federal Reserve and the European Central Bank swing into action. It should be entertaining. Bankers tend to be boring, prudent and cautious. They hold their pants up with belts and suspenders too. “On one hand this…on the other hand that…” they say, hedging their bets. And every one of them has two arms! What a delight to see these timid pedants take decisive, bold and foolhardy action.
Japan’s economy has been taking on water for the last 20 years. They must be getting tired of it. In the heavy seas following the crash in 1980, they flung out life preservers to its businesses, heaved aboard thousands of soaked enterprises and submerged banks, flushed the seawater out of their lungs, and crowded them onto the lower decks. Then, Japan used all its monetary and fiscal tools to keep the boat above water – including quantitative easing, QE. While the economy never fully recovered, neither did it sink.
In the West, the storm blew up only 3 years ago. Lehman went down. Trillions of dollars worth of assets were washed overboard. But tempest-toss’d and weary, the great ship of modern, degenerate, state- managed capitalism is still bobbing up and down…kept afloat – as in Japan – by pumps and chumps.
And now, their barks riding lower in the water than ever, the admirals grow desperate. The Japanese have vowed to use their QE more aggressively. The amount pledged so far – $60 billion – is trivial. But they say they’re going to target a wider range of financial assets…drive the key lending rate even closer to zero…and keep at it until deflation is defeated. The ECB is committed to spend $63 billion on QE too. It was forced to spend $1.4 billion of it last week to buoy up poor little Ireland, which is in danger of slipping beneath the Atlantic waves at any minute. And Ben Bernanke has told America that it should expect a more muscular approach to QE after the Fed meets on November 2nd.
“Central banks open spigot,” proclaimed The Wall Street Journal.
What else could they do? They think they face a choice: it’s the devil or the deep, blue sea.
The politicians didn’t hesitate for a minute. They passed their stimulus bills in a panic. And now they claim success. Steven Rattner, former advisor to the US Treasury secretary, argued in the FT that TARP “did more to keep America’s financial system – and therefore its economy – functioning than any passed since the 1930s.” Were it not for TARP, he says, AIG, Citigroup and Bank of America would have certainly sunk. Maybe GM and Chrysler too. And the recession would have “spiraled downward.”
Maybe he’s right about that. Even so, it seems like a small price to pay. Besides, how do Rattner, Geithner, Bernanke et al know who should survive and who shouldn’t? The trouble with degenerate, state-managed capitalism is that it lets politicians and policy makers decide these things. Why should a bank survive if it can’t weather a foreseeable storm? Why should an automaker stay in business if it can’t make cars at a profit? Why can’t willing buyers and sellers decide these things for themselves? That’s just how it’s supposed to work. It blows up gusts from time to time and sinks the unworthy and the unprepared. That’s what the deep, blue sea was made for.
But the interveners are neither poets nor philosophers. They’re men of action. In Japan, there is little room for more fiscal stimulus. Japan’s government already owes twice the nation’s GDP. In Europe, the big spenders cannot overcome opposition from the tightwad Germans. The Americans are blocked by politics too. Voters rarely have any idea what is going on. But the TARP plan – which just expired on Sunday – was seen for what it was, a payoff to the bankers at everyone else’s expense.
“You can take your stimulus and shove it,” is the message being sent to the US Congress.
Not only that, the paralysis in Congress could prevent an extension of Bush’s tax cuts. This will be the equivalent of raising taxes during a recession, a repeat of the mistake of 1937, when Roosevelt’s pact with the devil led to higher taxes, more regulation and trade barriers.
Everyone claims to favor the democratic process, but few people want to abide the decisions of the yahoo masses. Fewer still will put up with an honest economy. So, it’s up to the central bankers. Bonzai!
for Markets and Money