At least something good has come out of the economic crisis; it blew off the purple robes that clothed economists and exposed their naked flanks. Still, they don’t deserve the beating they’re getting in the press – with snide remarks and sarcastic comments; they deserve better. A beating with sticks!
Even Alan Greenspan admitted he had “found a flaw” in his own thinking. We will have to imagine the giggles from the back of the room – if anyone had been awake. It was as if Stalin had confessed to being rude to his mother or Bernie Madoff copped a plea for shoplifting. The mea was fine, but the culpa didn’t seem to measure up to the facts. He, more than any living human being, was responsible for the biggest financial debacle in history; you’d hope he’d be a gentleman about it and hang himself.
Meanwhile, the queen of England visited the London School of Economics and had a question: why weren’t economists on top of this thing?
They replied to this question last month. In a three-page letter, they avoided the simple truth – that their trade was no more reliable than fortune telling and marriage counseling. The letter claimed that a “psychology of denial” prevented government and financial eyes from seeing the catastrophe in front of them. It was “a failure of the collective imagination of many bright people”, they said.
In fact, it was the exact opposite – imagination run wild. Economists imagined a world without yesterday or tomorrow…a world in which you could run up debts forever and never have to pay them back.
Last week, Timothy Geithner promised the Chinese that the US economy would recover thanks to demand from the private sector. That was his way of reassuring America’s biggest creditor that the public sector wouldn’t continue to run huge deficits – practically an outright lie. But it’s one thing to stiff the Chinese; it’s another to stiff time.
Adjusted for inflation, the US consumer’s earnings barely rose from the ’70s. By some measures, he had actually less disposable spending power in 2007 than he had in 1973. And now his income is going down. The June number reflected the biggest drop in income in 4 years. Salaries and wages fell 0.4% in June…the 9th drop in the last 10 months. How is it possible for him to spend more?
We pose the familiar question only to set up an unfamiliar answer. In the past, the consumer reached into the future. In many cases, he reached beyond the future, and into Never Never Land. Consumers spent money they hadn’t earned yet…thus bringing forward purchases that should have been made years later. The accumulated effect of this was to add $35 trillion in extra spending to the world economy – from America alone – over the course of the great credit expansion, 1945- 2007. That’s why we have a depression now – because consumers already spent what they would normally be spending now.
Time always gets even. Now, it is the past that is doing the reaching. The automobile bought in 2006…the house bought in 2005…the vacation taken in 1999 – the ghosts of yesteryear spending reach for Americans’ paychecks. Of course, in some cases, consumers spent more than they could reasonably expect to pay back – ever. They reached so far the poor ghosts are disappointed. Lenders realized that they’d never get their money back, which is what led to the credit crunch and the collapse of Wall Street. Of the big five – Bear, Lehman, Goldman, JPMorgan and Merrill – only two survived intact. And we know now that Goldman only survived because Henry Paulson, former CEO of Goldman, then Treasury Secretary, arranged a hidden bailout. He had the government step in to save AIG, which owed Goldman $13 billion.
From one scam to another…from bailing out Wall Street to bailing out the entire world economy, the more stimulus programs fail to bring a recovery, the more economists call for more stimulus.
What are they thinking? Since neither the private sector nor the public sector has any savings from the past, additional demand from either sector must be borrowed from the future. (Setting aside ‘quantitative easing’…or Zimbabwe-style stimulus…an even bigger fraud.)
The purest illustration of how this works is in the popular ‘cash for clunkers’ programs. Instead, of letting the consumer buy a new car when he is ready, the feds give them money to buy now. So, he buys in 2009 and not in 2010. What good is accomplished? It is as if they didn’t expect 2010 to ever arrive…as if they thought they could stop the sun and the seasons…and the Chinese…forever. Like moths in amber, their wings will never tatter…nor will their faith flag. The dollar will always be strong. US bonds will always be in demand. And the future will never arrive.
But the more economists try to stitch up the future; the more it gets away from them. After the 2010 sales have been moved forward to 2009, they will have to reach into 2011…and then 2012…all the way to the end of time.
Until next time,
for Markets and Money