While our government is busy running around wondering how much money should be given to whom, and how we can change the rules of engagement in business, Bill Poole, (yes, shameful, shameful) makes a very straightforward argument that all of this intervention is actually a bad thing in a NY Times Op-ed piece.
THE fundamental causes of this recession, unique in the experience of the United States, were mortgage defaults and the consequent insolvency of major financial firms. These insolvencies, and especially fear of them, damaged normal credit mechanisms.
The self-correcting nature of markets will ultimately prevail. We should not underestimate the power of monetary policy; with the sharp increase in the nation’s money stock starting in September, monetary policy is now extraordinarily expansionary. I believe, though without great confidence, that the recession will end in the second half of this year.
Federal policy is damaging the economy’s prospects. It fails to provide the needed tax incentives for investment in factories and equipment, incentives that were central to efforts to revive the economy during the Kennedy-Johnson era and under Ronald Reagan. But government spending can’t lead the way to sustained recovery, because its stimulating effect will be offset by anticipated higher taxes and the need to finance the deficit.
I, of course, agree with this assessment (although I believe the recession could linger quite a bit longer due to the current political response). There are 2 fundamental problems with the current administration’s approach:
1. Changing the rules of the game only makes sure players will wait until they are clear on what the new rules are before they begin playing again.
2. History has told us (even though we have deflation now) that a strong increase in the money supply is inflationary. The lag time between the money creation and the effects to rising prices is measured in years, not months.
In the end, a more moderate monetary approach, with the INCREASE in foreclosures, and expedition of foreclosures and bankruptcy will speed the recovery that much faster. It’s the difference between ripping the bandaid off (which is what free markets do to minimize pain) and slowly pulling it off.
We can’t forget that FORECLOSURE AND BANKRUPTCY ARE THE SOLUTIONS, NOT THE PROBLEM. The problem is too much debt, and the only way it can be resolved is the legal resolution as quickly as possible. All attempts to forestall the solution are forestalling the recovery in our economy. Once people are no longer held captive to bad bets, their discretionary income can once again be released and well-run businesses can capitalize on the demand.
I think it would be a perilous mistake to underestimate the government’s ability to take a bad situation and make it much, much worse. Many people have made that mistake in the past, but history has repeatedly, brutally, and fairly reliably proved them wrong. No matter how much you believe in the power of the free market to prevail in spite of government interference, manipulation, incompetence, and intentional malice, it’s better to err on the side of overestimation when it comes to the government’s ability to create and magnify problems and hardships.
I totally agree with the basic premise of the article and your analysis, of course, as I suspect every rational person with at least a few functional brain cells would. However, there is virtually no chance (in my mind) of a recovery this year, next year, or even in the next five years: there’s just no rational basis for that belief. Let’s look at the factors aligned against recovery:
- Americans are in debt: lots of it. Until debt is eliminated and savings are restored, you won’t see confident consumer spending, which is the only kind of consumer spending you’d expect during a recession. This will take a long time.
- We have socialist leadership, and more socialist laws and initiatives on the way. As people suffer, their knee-jerk (and horribly bad) reaction is to demand the government intervene more. Politicians use this impetus to enact stifling new regulations, expand government controls, push their own party agendas, and abuse the laws and foundations of the country under the guise of “extraordinary times”. Every one of these is already happening, and they are all bad for the economy and financial stability.
- Private businesses will fail, and private business activity will hugely decline. This is possibly the largest contributor to a prolonged Depression, so it makes ironic sense that virtually everything the government is doing contributes to this problem. From increasing unemployment handouts, to increasing regulations, to creating capital imbalances with agenda spending, to bigger government, to changing the tax laws, to creating inflation, to strengthening social support programs while increasing coincident costs (eg: socializing health care), to subsidizing less productive workers (eg: supporting some unions), to failing to support private industry at all: every one of these hurts private industry. Less private industry leads to less jobs and less tax revenue, which leads to less business and consumer spending and more government debt, which leads to a deeper downturn, which leads to more government actions, which reinforce the cycle.
- We’re jumping through hoops trying to find more “innovative” ways to socialize the Ponzi housing market losses onto the taxpayers while avoiding explicitly saying we’re doing that. Every new scheme wastes more money and creates more economic distortions and opportunities for abuse. If we’re going to socialize all the losses eventually anyway, it would be much cheaper and much less destructive long-term to just print $61+ Trillion and buy all the MBS’s, derivatives, mortgages, houses, used toilet paper, and anything else any other insiders want the government to buy. Years of stumbling around like a blind epileptic retard trying to feel your way into the politically correct way to perform a morally deplorable and financially suicidal absorption of every failed gamble made by every underhanded corporation with a lobbyist or individual with a vote doesn’t help the economy or “bring a renewed sense of transparency and accountability”.
- “Restart lending” is utter BS; lending is not frozen because it’s cold outside, it’s frozen because it’s financially ludicrous to lend to people or businesses while your looking over the precipice of the largest Depression in US history.
Anyway, that’s my take; hopefully the negative outlook was tempered at least in small amount by the entertaining presentation. Viva la Obamanation.
Nick,
Want to have an opportunity to blog here? Love the thought process….
However, bankruptcy is what wipes out that debt. The MBS and consumer credit markets are telling us what you just said, and banks are living in this reality: many Americans will need to file bankrutpcy, and therefore the debts are nearly worthless.
But, people still have their incomes for the most part. What our country is doing is turning a financial crisis into an economic crisis. If banks that made bad debts would be allowed to fail, new, more prudent banks would be able to step up and provide the lending for good investments. As it is, banks getting preferential treatment means that other banks are not playing on a level playing field; rather the table is tilted in favor of the mega banks that are mega insolvent.
The faster we unwind our debt through bankruptcy and foreclosure, the faster we come back to a growing economy.
Think about it this way… those people struggling under large payments need to get out from under them so they will have some discretionary spending money to put into the economy. Our current central bank chairman and president believe the best way to do that is to renegotiate outside of foreclosure and bankruptcy… the exact solution to the problem.
It’s like the story of the guy sitting on his house roof during a flood. Several people come by to save him, but he’s waiting for God to save him. When he dies, he asks God why he didn’t save him. He responds that he already sent several people to save him. Our lifelines are already there and waiting for us… we just need to latch on to the idea to face our fears and let people go bankrupt. It’s what’s best for them.
PS. the end of a recession is not when we’re back to where we were before the recession, but rather when we stop shrinking. With the pace of our shrinking, I think we’ve already overshot fair ground and that there’s plenty of opportunity for people to start businesses if people will stop changing the rules. If we just flush it out, we could definitely hit bottom before the end of 2009 (perhaps 4th quarter). In my opinion. Maybe I’m just optimistic. Maybe I’m not seeing the structural problems that can’t be dealt with in bankruptcy and foreclosure.
I may take you up on the offer at some point, if my urge for a wider audience overtakes my desire to feel like I can say whatever I want, cause nobody really reads my blog anyway… I’ll let ya know.
I agree, though: bankruptcy, corporate and personal, is what really erases the debt and clears out the system the “right” way. That said, when Lehman failed the government stared the impending consequences of immediate total systemic unwinding in the face and found they had no balls; we’ve been living in the Groundhog Day Japan-style zombification process ever since. The “right” way to clear out the system is to force the banks to suck up the losses, fail, and make sure the default, cleanup, and rebuild process is as smooth and unobstructed as possible: pretty much the exact opposite of our learned approach.
As for the end of the recession, I wish I could be more optimistic, but I’m fundamentally a rationalist, and I just don’t see it. There’s no business opportunity now outside of government or government-distorted capital allocation areas (eg: capitalizing on agenda-spending); and as we observed, with the rules in constant flux, the only “safe” way to operate in that context is to utilize and rely on government connections, which is a sucker’s game for private equity. Add to that consumer and B2B spending evaporation and no meaningful private business support (indeed, probably more burdens with carbon credits and higher taxes), and I see nothing but contraction in the private sector, until either consumer spending eventually picks up (a long time), or we get more private sector friendly leadership (a long-shot in a Depression). Contraction in the private sector means less jobs (which is already happening), which will compound on itself until you get a game-changing event (revolt, outright Socialism, world war, etc.), with the possibility of other secondary effect (eg: hyperinflation) in the interim. To paraphrase the 8-ball: signs point to “bad”.
Pushing through all the foreclosure inventory and personal and corporate bankruptcies which are pending would help the problem, and be a step in the right direction, but it wouldn’t be enough to make up the real gap in consumer spending. Even if the government wasn’t compounding the problem with every single action they take, I’m not sure we’d recover in 2009. I wrote what I think would be the correct government approach to help the situation here; with that approach (and elimination of all the bad policies), I think we could have a real quicker recovery, at the expense of borrowing against our future. Without that, though, we’re going to overshoot to the downside of normal in the private sector, and we’re not even to normal yet; beware, we’re going to live through interesting times.
you guys are tits
This is a very interesting article. Well written. I’m always very interested in the state of the Real Estate Market in California.
Chris Carter
eVolV equity