The Nobel Prize for Quack Economists Like Stiglitz

Stocks up again yesterday. The S&P 500 has gained 120% since March, 2009.

Gold is up too, almost back at the $1,700 mark. We’ve made money on gold every year since 1998.

What’s ahead? Can’t tell you that. We don’t know. The best we can do is to try to eliminate things. We try to figure out what is not ahead.

‘Inequality is holding back the recovery,’ writes Joseph Stiglitz in the New York Times.

What do we know from that? Only inequality is not holding back a recovery. Inequality is what you get when the feds manipulate, manage, and mangle an economy. They take money from the outsiders… and give it to the insiders.

It’s not inequality that is holding back a recovery, it’s the insiders!

Stiglitz, according to Nassim Taleb’s account in Antifragile, looked at Fannie Mae just as the credit bubble of ’05-’07 reached its peak. In his report he said that ‘on the basis of historical experience, the risk to the government from a potential default on GSE debt is effectively zero.’ The odds of a default by Fannie were ‘so small that it is difficult to detect’.

In 2008, the odds had gone to 100%. Unless the feds stepped in, Fannie would have defaulted.

But Stiglitz is a Nobel Prize-winning economist, so let’s see what he has to say now:

‘There are four major reasons inequality is squelching our recovery. The most immediate is that our middle class is too weak to support the consumer spending that has historically driven our economic growth.

‘While the top 1 percent of income earners took home 93 percent of the growth in incomes in 2010, the households in the middle – who are most likely to spend their incomes rather than save them and who are, in a sense, the true job creators – have lower household incomes, adjusted for inflation, than they did in 1996.

‘The growth in the decade before the crisis was unsustainable – it was reliant on the bottom 80 percent consuming about 110 percent of their income.’

See. If the middle classes had more money they could spend it and then the economy would recover. So, if you want a real recovery, he reasons, you have to get more money to the middle classes.

On the other hand, if the middle classes had more money we wouldn’t need a recovery; there wouldn’t be anything to recover from. The real problem all along was that the insiders – such as Stiglitz himself – had distorted the economy, twisting it into a grotesque new shape.

This lured the middle classes and lower classes to spend more than they had. You could wonder why they had so little… and come up with a lot of reasons. But you wouldn’t have to look very far to figure out why they spent so much – credit was too cheap.

The feds – under the influence of people like Stiglitz – believed they could manipulate the economy into performing better than it would if left alone.

Their simpleminded formula was one even a child could see through: when people buy more stuff… the economy grows more. What do they need to buy more stuff? They need more money… or credit. So let’s give them more money and credit!

That is the kind of thinking that brought us to where we are.

But Stiglitz misunderstands the problem. He thinks inequality is the problem… and not just a symptom. He comes up with another flimsy fix.

‘[We] must all face the fact that our country cannot quickly, meaningfully recover without policies that directly address inequality. What’s needed is a comprehensive response that should include, at least, significant investments in education, a more progressive tax system and a tax on financial speculation.

‘The good news is that our thinking has been reframed: it used to be that we asked how much growth we would be willing to sacrifice for a little more equality and opportunity.

‘Now we realise that we are paying a high price for our inequality and that alleviating it and promoting growth are intertwined, complementary goals. It will be up to all of us – our leaders included – to muster the courage and foresight to finally treat this beleaguering malady.’

So you see, we need blah blah… new policies to replace the old policies. More education. More taxes. More… more… more… More of the nation’s wealth to the insiders… who will decide who gets what.

Enough of Stiglitz… let’s go to another person who has conveniently misunderstood everything: Robert Rubin.

Again, we turn to Taleb for a character reference:

Robert Rubin, former treasury secretary, earned $120 million from Citibank in bonuses over about a decade. The risks taken by the institution were hidden but the numbers looked good… until they didn’t look good… Citibank collapsed, but he kept his money – we taxpayers had to compensate him retrospectively since the government took over the banks’ losses and helped them stand on their feet.

So what can you do to prevent another bank crisis… short of actually letting a correction give Robert Rubin and other insiders what they so richly deserve? Robert Reich in the Chicago Tribune:

‘The biggest Wall Street banks are now far bigger than they were four years ago when they were considered too big to fail. The five largest have almost 44 percent of all US bank deposits. That’s up from 37 percent in 2007, just before the crash. A decade ago they had just 28 percent.

‘The biggest banks keep getting bigger because they can borrow more cheaply than smaller banks.

‘That’s because investors believe the government will bail them out if they get into trouble rather than force them into a form of bankruptcy (as the new Dodd-Frank law makes possible). This belief itself – a virtual federal guarantee – is worth billions to the big banks. It makes dealing with them less risky.

‘To make matters worse, with bigness comes more political clout… So now that TARP is over, shouldn’t we make absolutely sure we don’t need another Wall Street bailout? No bank ever again should be too big to fail.

‘That’s why it’s necessary to limit their size and break up the biggest. There’s no alternative.’

Of course, there is an alternative. Let Mr Market do with them what he will. If they can survive honestly, what is the harm of bigness? If they can’t, why not let them fail?

But Mr Rubin and Mr Stiglitz share a common goal: to bring economic activity under insider control, where right-thinking economists – rather than willing buyers and sellers – get to decide where the money goes…


Bill Bonner
for Markets and Money

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Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.

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