Stocks in the U.S. were up overnight. Here in Australia, the blind are following where the deaf boldly lead. But is anyone listening? Or is everyone too busy hoping?
What we’re talking about are Ben Bernanke’s comments. The news headlines read that he predicted the recession will end later this year and the American economy will recover in 2010. But that’s not exactly what he said.
Here exactly is what he said, “If actions taken by the Administration, the Congress, and the Federal Reserve are successful in restoring some measure of financial stabilityand only if that is the case, in my viewthere is a reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery.”
If you wanted to put it another way, it might go like this: If our plan is successful to solve all the problems, then all the problems will have been successfully solved according to the plan.
How inspiring is that? Does it give you confidence that these guys have any idea what they’re doing?
What the system needs is more instability, not less. That is, prices and asset values need to fall to their real level to restore confidence. In this sense, a proper recession is the cure for uncertainty and instability.
Yes, we know this is in direct contradiction to what elected officials are telling you. But think for a moment of a man who’s done nothing but eat greasy and fatty foods for a year. He’s on his deathbed. His arteries are clogged with fat and cholesterol.
Now you couldn’t improve the man’s health by telling him to feel better about himself. “C’mon big fella. Buck up! Have another cheese burger. With bacon. And avocado. This whole being morbidly obese and killing yourself thing is all in your head. You gotta get your mind right!”
You could tell him all that. But it would be bad medical advice. In the same way, our financial mal-practitioners have mis-diagnosed the economy. Confidence is not the problem. Bad credits and loans are the problem.
You restore confidence when you directly address the problem. Investors get out of cash and back into shares or property when they have demonstrable proof that the banks aren’t hiding/lying any longer.
Or, as Murray Rothbard puts it in America’s Great Depression, “The completion of liquidation removes the uncertainties of impending bankruptcy and ends the borrowers’ scramble for cash. A rapid unhampered fall in prices, both in general, and in particularly in goods of higher orders (adjusting to the mal-investments of the boom) will speedily end the realignment processes and remove expectations of further declines.”
But instead of realigning with economic reality, our policy makers are acting as if it is possible to sustain all the bad investments made during the credit boom. They want to save homeowners, shareholders, bondholders, and pretty much anyone who stands to lose from the risks gone bad.
That is not possible. Someone has to pay for the bad bets made in subprime loans, Eastern Europe, or the developing world. That someone is probably a) the guy who took out the mortgage he can’t repay, b) the bank who made the loan to the guy who took out the mortgage he can’t repay, c) the investor who bought the bond sold by the bank who made the loan to the guy who took out the mortgage he can’t repay.
Evading responsibility for one’s actions doesn’t solve anything. Making other people pay for them doesn’t help much either. Of course we’re all going to pay for it one way or another, through more bailouts or the general contraction in credit and growth that has to come during the “realignment process.”
But those appear to be the two choices: allow failure, which allocates resources from the bad debts and losers to those who can produce real wealth. Or, try to “stabilise” any inherently unstable situation (perpetuating asset values after the credit spigot has been turned off).
Not that we’re absolving market institutions for getting us into the problem. The credit ratings agencies essentially sold investment grade ratings on issues they didn’t or couldn’t understand. AIG sold default insurance on CDOs to make an easy buck. It’s now become a black hole for taxpayer capital.
But that is fictitious financial capitalism at work, or at waste if you prefer. That kind of financial capitalism is dead, and good riddance. But don’t mistake that episode of mismanagement and theft for conclusive proof that “capitalism” has failed. That would be a big mistake.
But the commies are feeling their oats these days. Yes, the commies are back in the DR mailbox. They’re in the paper. They’re even on TV. We saw a report on them last night and how their explanation of the financial crisis validates what they’ve been saying all along.
–In fact, a few readers stormed the barricades yesterday in response to our debunking of the Marx quote.
“Karl Marx did write this prediction and many communists have repeated it over and over. No really educated person believes that Capitalism can possible [sic] work, it never has. it is invented by the jews as part of Christianity. Your reckoner has almost nothing to learn from. Cancell [sic] my membership please.
With pleasure Mr. Seaton. Had we known you thought this way, we would have done it pre-emptively a long time ago. We wouldn’t want to be a member of any club which would have you.
And why is it that instead of making real arguments, you simply assert that an educated person couldn’t possibly believe in capitalism? It doesn’t require belief. There’s plenty of proof around you in the global economy. Go in peace Mr. Seaton, and never come back. Please.
“Surely you jest the current financial crash is due entirely to the market and it’s [sic] insatiable greed, regardless of the cost to the rest of society. I’ve never heard anything so stupid as your puerile explanation of the boom bust cycle being the product of governments manipulating interests rates. Interest rates are determined by central banks and the market. The boom bust cycle has always been a characteristic of capitalism, get used to it. Whether you like it or not the cause of the financial collapse (and it will get worse before it slowly starts to recover) is the sole making of the free market and the crazies who ran the merchant banks and AIG.
And for the record you should take the time to read Marx. The translation from German to English is nowhere near as tortuous as your Fox channel economics. Is Rupert Murdoch the new economic guru??? How about some proper analysis for a change and drop the ideological nonsense. Morons!!!!Now where did that come from.
It’s hard to imagine, having written a letter like that, that you’d ever get any enjoyment whatsoever from reading the Markets and Money. Why do you torture yourself?
It wasn’t our idea that manipulation of interest rates perverts the business cycle. It was the Austrians. We’ll have more for you on that tomorrow. As for the moron comment, you can never say often enough about politicians, even though it’s way too kind.