19 September 2008

it's official: depression just ahead...

The US government’s decision to step in and acquire hundreds of billions of dollars worth of bad loans at above market prices pretty much guarantees that what was already looking like a dismal economic future will be an out and out disaster. I do not use the word lightly, when I describe the virtually certain outcome as a depression.

As much as policy makers have attempted to avoid repeating the mistakes of the past (e.g. Messr Bernanke is an expert on the ‘30s depression) they have wound up following the script of past catastrophes to a T. Just as Hoover and FDR fell over themselves to attempt to bail-out the economy as dark clouds mounted, the global governments are doing the same thing today. In the feverish effort to stop the immediate pain, we are actually making it increasingly harder to come out the other side.

Not only have we not learned the lessons from the Great Depression, but we haven’t even learned the lessons from the .com bust of 2001/2002. Recall that in order to avoid a significant recession the Federal Reserve dropped interest rates to historic lows, and pumped masses of short-term liquidity into the financial system. The policy makers succeeded in preventing any serious economic contraction but wound up blowing another bubble into the real-estate and M&A sector --the mess of which we are dealing with now. What Bernanke et all failed to realize in their studies of the past is that when the apocalypse is staring you in the face, policy makers will always cave-in and try and attempt to bail things out. The only real choices occur in the decades before the crisis hits.

The irony is that every bail-out and intervention merely drives more good money out of the system, ensuring that more bail-outs will be needed. Every government subsidy, or bail-out, makes it that much harder for the private sector to be profitable on its own. Who would want to get a 30 year fixed mortgage from the private sector at 12% when they can get a government guaranteed loan for 5.5%?

There are so many bail-outs and interventions under way that I don’t even know where to start, and I am sure this is only the beginning. To take just one bone-headed idea, let’s look at the decision to ban short sales of financial stocks. This is tantamount to killing all the “repulsive” carrion beasts to prevent them from dis-respecting the deceased. Unfortunately, the dead animals are still with us and will just take MUCH longer to finally rot away. This is just another superb example of how the desire to stop short-term pain only makes things more dire.

Perhaps the most maddening thing of all this is how utterly ambivalent the public is to all of this. Hardly any voices are raised in protest. Expert after expert chimes in with agreement that all these interventions are simply “necessary”, albeit regrettable. Does no one realize that all of these interventions come at the price of shackling the global economy in even more red-tape and regulation? The politicians will want their pound of flesh in return for their help, in the form of extensive (and muscular) new regulatory regimes that will hold back economic growth for decades. Even the Wall Street financiers who ought to know better are begging for government help in their hour of need.

It’s like some medieval village that begs a Knight to defend them from a barbarian horde headed towards their town. The knight and his pals may well defend the town, preventing mass rape, looting, and death. The price, however, is that the goodly Knight will henceforth treat the villagers as his chattel, forever taking away their freedom. Sometimes rape and pillage is preferable to the cost of temporary salvation.

Yes, the governments of the world might succeed in delaying the onset of severe economic distress through their interventions, but they will ultimately push us even deeper into a long, dark, abyss. It would be far better to allow the real pain to be felt through the economy now, thereby allowing it to start recovering quickly thereafter.

4 comments:

  1. I agree, and more over I would like to extend the scope beyond economics and make the very same argument for our apathy toward the impending climate change crises. I feel that our governments need to stop subsidising oil projects (most recently Ms. Paylan's Alaskan pipe-line dream) and other dirty energies just because it's familiar and the jobs and infrastructure/delivery system already exists. The ominous looking energy and climate clouds on the horizon are a-glitter with a platinum lining..and possibly a way out of the economic whirlpool we are in.

    The entire scientific community agrees that the climate is changing because of our habits. It is long past the chance to "save the world"- the world will keep on spinning regardless of unpredictable weather- now it's about saving ourselves. What will we do when Our food staples can't evolve as quickly as their soils and environments change? How about all of our coastal cities conveniently placed where ocean storms make landfall?
    There will be a desperate need for technology based innovation on every level- from food science to urban landscape development to clean energies and more. Both Canada and the U.S. have excellent potential to become leaders in this field and the world will have no choice but to flock to whom ever can provide solutions. We have the culture, universities and cash to make tremendous steps in this direction but our leaders are so afraid of rocking the boat that no one is encouraged to lean over and paddle! With sound leadership the whole crew can lean over and get their hands wet, and while the tipping of the boat may frighten some at first, the craft makes way and soon the passengers will take heart that progress is being made. We need to cast overboard the chest-beating apes that have been picking expensive fights and steering us toward the sirens oily songs, and choose a helmsman that can say all together now: STROKE! (And here are your extra large government-issue paddles!)



    Wasn't it one of your past leaders that said something like " When opportunity knocks most people won't answer because it's dressed in overalls and looks like work"

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  2. What was it Jefferson said about the tree of liberty needing to be fertilized every now and then with the blood of patriots?

    Unfortunately, there aren't many patriots left once politicians, bureaucrats, Socialists and greedy ignoramouses are deleted. As a Libertarian for 53 years, I've been bleeding far too long and I'm wondering just how much blood is left.
    The Socialists, on the other hand, as they observe the nationalization of the financial underpinings of America which they as "advisors" have created, are slathering at the mouth. I might add, many of the same advisors who convinced George W. that Iraq was a global threat.

    I'll tell you the source from which the blood should be flowing; from the private parts of the first, second and third levels of management of AIG, Frediestein. Fannystein, et.al. as they hang from the nearest lamp post.

    In the purest of Keynesian fashion, let's throw money at it. After all, it's not their money , it's ours...and we pay dearly from inflation and the bloating of our Federal superstructure and power.
    Bernanke tells us that inflation is "under control." Tell that to the seniors who are paying nearly double for groceries!

    As long as we retain the vestiges of our animal forebearers, we will be selfish, greedy...and bloody. It comes with the territory; but must we exacerbate the condition with ignorance and short term actions? A free economy has to bleed. It's good manure. It cleans the system of impurities -think Enron. What emerges, bloodied, but unbowed, is the healthy enthusiasm of go-get-em business unencumbered by a bureaucracy of endless dictates and regulations.

    For the past few months, the blog at the bottom of my emails has offered this observation: Socialism has failed in every part of the world, except the U.S.

    My heart bleeds.

    Gary Bell

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  3. The entire scientific community agrees that the climate is changing because of our habits.

    I am not so sure about how "universal" this consensus is. Even if it IS true (i.e. that humans are largely responsible for global warming), there is precious little evidence to show any any specific actions will have any appreciable impact on reversing things.

    Heck, it is even unclear as to whether global warming is "bad".

    I find it interesting that most environmentalists seem to brush aside some of the big climate changes that have happened in recent history WITHOUT the intervention of man-kind even while they are arguing for massive policy responses to curb global warming.

    The mini-ice age in the early middle-ages, for example, led to the abandonment of Greenland by European settlers (as it became too cold to sustain crops), and the regular freezing over of the Thames and Seine.

    Going back even further, Gibbons writes about how German tribes were able to invade the Roman empire when the Rhine froze in the winter. What caused such substantian periods of cooling back then? Was it all those Gauls roasting pigs over a spit spewing CO2 into the air?

    Here is an interesting discussion on the whole issue of human intervention in the environment if you are interested:

    http://seattlebubble.com/forum/viewtopic.php?f=5&t=1485

    In any event, I think the whole issue of the environment is a little orthoganal from the debate about government bail-outs of the economy. :)

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