Crash Course for Bernanke
I am reading an interesting article from October 2000 called A Crash Course for Central Bankers. The following excerpt seems strikingly pertinent:
There’s no denying that a collapse in stock prices today would pose serious macroeconomic challenges for the United States. Consumer spending would slow, and the U.S. economy would become less of a magnet for foreign investors. Economic growth, which in any case has recently been at unsustainable levels, would decline somewhat.
History proves, however, that a smart central bank can protect the economy and the financial sector from the nastier side effects of a stock market collapse.
The Japanese Experience
Here is another paragraph from the article:
The downturn following the collapse of Japan’s so-called bubble economy of the 1980s was not as severe as the Great Depression. However, in some crucial aspects, Japan in the 1990s was a slow-motion replay of the U.S. experience 60 years earlier. After effectively precipitating the crash in stock and real estate prices through sharp increases in interest rates (in much the same way that the Fed triggered the crash of 1929), the Bank of Japan seemed in no hurry to ease monetary policy and did not cut rates significantly until 1994. As a result, prices in Japan have fallen about 1 percent annually since 1992. And much like U.S. officials during the 1930s, Japanese policymakers were unconscionably slow in tackling the severe banking crisis that impaired the economy’s ability to function normally.
It's amazing that anyone could possibly think that if only Japan had started cutting rates in 1992 instead of 1994 it would have made any difference. Unfortunately for the world, we now get to test out Bernanke's theories in real life.
The Great Fiscal Stimulus of 1929
Consider The Great Fiscal Stimulus Package... of 1929:
Herbert Hoover -- only nine months into his presidency -- assembled leaders from the public and private sectors to create an economic-stimulus package. Among the measures, Time magazine reported at the time, was a promise from Congress to offer bipartisan support for a tax-cut package. Also on the table was an assurance from the Federal Reserve that it would provide cheaper credit. Of course, there were a litany of public-works projects, plans for new corporate investments, and even a promise by Henry Ford to raise wages at his auto plants. None of this worked.
Certainly, our economy now has far more differences than similarities with the economy of 1929, and few expect a new depression for the decade ahead. But it's also worth remembering that the best laid plans of presidents, chief executives and senators can sometimes come to nothing.
Like the fiscal stimulus of 1929 the Fiscal "Stimulus" Of 2008 Is Doomed To Fail.
Yes, there are differences between 1929 and 2008. However, many similarities are striking.
Similarities Between 2008 and 1929
- In the 1920s there was a massive overexpansion of manufacturing capacity. Today there is a massive overexpansion of productive capacity in China and a massive overexpansion of retail stores in the US.
- In the late 1920s bank credit propelled a massive real estate boom in New York City, in Florida, and throughout the country. We now have the biggest housing bubble in history.
- In the late 1920s credit was expanding at a rapid pace but there was no need for additional productive capacity. Today GDP is rapidly falling but credit is still rising (for now).
- In 1929 there was no pent up demand for manufactured goods, especially autos. Today there is no pent up demand for homes, restaurants, retail stores, strip malls, autos, trucks or just about anything else.
In 2008 as in 1929, the ability and willingness of consumers to borrow and banks to lend is under attack not only in the US but Europe as well. For more on the latter please see Financial Crisis Poised To Hit Europe.
Four Reasons Bernanke Will Fail
- Changing Social Attitudes About Debt: People are willing to walk away from homes, save more and spend less.
- Commercial Real Estate Crash Underway
- Unemployment Soaring as Private Sector Jobs Contract
- Global wage arbitrage
For more on changing social attitudes please see 60 Minutes Legitimizes Walking Away From Homes.
Ludwig von Mises: "There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved."
Final analysis will show that Bernanke can change interest rates but not attitudes, and attitudes are far more important. Indeed, changes in attitudes will render all of Bernanke's academic theories about the Great Depression meaningless.
Greenspan had the wind of consumers' willingness and ability to go deeper in debt at his back. Bernanke has the wind of boomers fearing retirement in the midst of falling home prices and impaired bank balance sheets blowing stiffly in his face. There is no cure for what ails us other than time and price. And with the aforementioned attitude changes, the biggest, most reckless global credit expansion experiment the world has ever seen is coming to an end. Central banks are powerless to do anything about it.
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One of the biggest misconceptions in America is that the stock market is the economy. It is not. It especially does not represent the economy of basic needs of most of the people. The stock market is a poker game. A bunch of rich people (top 1%) get together and start a poker game when everyone is broke. They throw some 'seed' money into it. People walking by are harassed into joining by throwing in more money a little at a time, until the kitty is large enough, whereby the Rich sell their cards (stocks) to groups who say they represent the future of the Working Man (401K, mutual funds, etc). Once in a while, the government staggers by and a bag of cocaine falls out of its pockets called "War". This always gets people's attention, and they throw more money into the pot. If the kitty stops growing, the Rich know it's time to pull out. Sometimes, they get the government to throw another bag of coke on the pile. This is called a "stimulus package" (on Wall Street, it usually coincides with something called "the dead cat bounce"). In the meantime, the rest of us keep working, eating, fighting, and dying on the 5 or 20% of the economy that doesn't go into the kitty.
The best thing we can do with the government checks is to burn them. It's like the credit card offers you get in the mail. They don't send them if they can't rip us off somehow down the line. If you don't want to burn it, then spend it on garden supplies and seeds. Make sure your next meal doesn't depend on the poker game outcome.
Embrace Descent for what it is: Honesty.
Instead, an entire industry has been built up around a financial system increasingly designed to benefit the relatively few privileged and powerful at the expense of the common people who represent the heart of the economy.
In fact, not only does the financial system appear to be rigged in favor of the rich & powerful, increasingly it seems they have infiltrated the political system & leadership compromised by their symbiotic relationship which perverts the principles upon which the US was founded.
On January 28th at 11:21 AM
Dan Conine wrote:
I'm posting this again because I think it's important. The conclusion of the Congressional investigation into the 1929 crash called the Fed and government stimulus packages "throwing gasoline on the flames".
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One of the biggest misconceptions in America is that the stock market is the economy. It is not. It especially does not represent the economy of basic needs of most of the people. The stock market is a poker game. A bunch of rich people (top 1%) get together and start a poker game when everyone is broke. They throw some 'seed' money into it. People walking by are harassed into joining by throwing in more money a little at a time, until the kitty is large enough, whereby the Rich sell their cards (stocks) to groups who say they represent the future of the Working Man (401K, mutual funds, etc). Once in a while, the government staggers by and a bag of cocaine falls out of its pockets called "War". This always gets people's attention, and they throw more money into the pot. If the kitty stops growing, the Rich know it's time to pull out. Sometimes, they get the government to throw another bag of coke on the pile. This is called a "stimulus package" (on Wall Street, it usually coincides with something called "the dead cat bounce"). In the meantime, the rest of us keep working, eating, fighting, and dying on the 5 or 20% of the economy that doesn't go into the kitty.
The best thing we can do with the government checks is to burn them. It's like the credit card offers you get in the mail. They don't send them if they can't rip us off somehow down the line. If you don't want to burn it, then spend it on garden supplies and seeds. Make sure your next meal doesn't depend on the poker game outcome.
Embrace Descent for what it is: Honesty.
Unfortunately, instead of government implementing feedback systems or enforcing rules to keep it from happening again, the government allowed the rules to be written by the revolving door lobbyists. That's fascism. Bad enough when it is done for some Fodderland or another, but when it's done purely to suck the life out of the country, something should be done that doesn't involve keeping the public fat, dumb, and drugged. If the economy needs to be axed in order to make it happen, then so be it. It's not like we have the resources to keep it going anyway.
On January 28th at 10:35 PM
Fred Schneider wrote:
The stock market isn't the economy and it has been increasingly subject to manipulation thanks to often opportunistic & offshore hedge funds, lax regulators & regulations & a central bank alternating between too accommodative and too restrictive positions, but it does still in theory represent the most efficient mechanism for allocating resources, if the market were truly transparent and thus allowed to operate freely.
Instead, an entire industry has been built up around a financial system increasingly designed to benefit the relatively few privileged and powerful at the expense of the common people who represent the heart of the economy.
In fact, not only does the financial system appear to be rigged in favor of the rich & powerful, increasingly it seems they have infiltrated the political system & leadership compromised by their symbiotic relationship which perverts the principles upon which the US was founded.
