This from quote Martin Hutchinson on the lively Prudent Bear site:
“Once upon a time, governments didn’t do rescues. The great Robert Banks Jenkinson, Lord Liverpool in a prime ministerial speech to the House of Lords during the 1825 speculative bubble, said: ‘I wish it however to be clearly understood, that those who now engage in Joint- Stock Companies, or other enterprises, enter on those speculations at their peril and risk. I think it my duty to declare, that I never will advise the introduction of any bill for their relief; on the contrary, if such a measure is proposed, I will oppose it, and I hope that Parliament will resist any measure of the kind.'”
Times have changed. Now, central banks rescue everyone. Part of the reason for this is that they think they have gotten better at it. Another part of the reason is that people expect it of them. And finally, not doing rescues got a bad name during the Hoover administration.
We will leave it to practicing economists and people with nothing better to do to argue these points, we only wish to point out that the Fed is a strange rescuer. It is like a fireman who comes with a bucket of gasoline…or a St. Bernard that arrives at an avalanche with a barrel full of snow around his neck.
How can central banks rescue an entire economy? Of course, it can’t really. It can only make credit more or less easy to come by. If, by some strange conjunction of things, lenders and borrowers were unable to get together, maybe the Fed could help. But what can it do when an economy has had TOO MUCH credit? All it could possibly do is what Paul Volcker did – that is, not a rescue, but a burial. Anything else is a sham…just making things worse by introducing even more credit.
And much of the rescue attempts have more to do with the psychology of the markets than anything else. People see central banks willing to bail out the economy, and poof! Suddenly, it doesn’t seem like such a big, bad world after all. Maybe it’s OK to go out to dinner…buy more gee-gaws and gadgets at Wal-Mart – all on the trusty credit card, of course.
Ah, then the rose-colored glasses are put firmly into place…the printing presses are a’whirling…and your money can’t buy as much as it used to.
Markets and Money