This is a piece I wrote for a local newspaper, edited slightly for the blog. — JH
This is the political season, the every four year binge when our politicians pay billions to stay in power or to get power. Drive around your fair city and count the lawn signs. Turn on your TV and we are bombarded with political ads. The last three debates are enough to turns one’s stomach. My wife refused to watch the last debate. They both lie big lies. They both say they have the answer to our economic woes and that they will transform America to that bright new future.
Don’t count on it.
Listening to them weasel their way through the debate, not answering questions, avoiding the really important issues, and heaping as much mud on the other as they could required a strong stomach. I still insist on voting but, unfortunately, it comes down to whomever you think is the lesser of two weasels.
My thing is economics. I have been writing The Daily Capitalist since 2007. My readers are mainly financial types, and, in full disclosure, our popularity is based mainly on the fact that our macro forecasts have been quite accurate. My detractors would say “dumb luck.” Whatever.
I think about things like: What caused the Great Recession? Who’s to blame? Why haven’t we recovered? Are we on the right economic track? What would bring about a full recovery? My answers usually infuriate all sides of the debate.
I’m going to try to get around the Democrat vs. Republican framework of these issues. Let me say that I have great distaste for both parties and their policies. There is enough blame to go around. So please don’t write back accusing me of being a “knee-jerk” whatever (Republican, Democrat, radical, fat cat, idealist, etcetera).
In brief, the cause of our economic woes wasn’t greed; it was the Fed. Unless you have a different view of the human race than I, then you would have to admit that greed is ever present. The proper question is “Why now?” Is greed just some spontaneous virus that all of sudden appears, people go nuts, some asset class explodes (housing this time), and then collapses?
Actually there is a very excellent correlation with the money supply that the Fed inflates to get us out of the last mess they created. Every time they blow up the money supply a new bubble takes off a few months later. As we see the easy money inflate some asset class (this time housing), it looks pretty easy to make money. Your neighbor sees the value of their condo skyrocket and they start buying condos, flipping them for easy profit. Don’t tell me you didn’t see this and were never tempted to do the same. If this is greed, then it is part of our basic nature.
Of course it’s never real and as the funny money goes into things that are over produced and then we discover we don’t want them (again, housing), the whole credit bubble collapses. Boom and bust. Suddenly we return to sanity and aren’t greedy anymore. Fiat money makes us crazy.
Wall Street didn’t cause boom or the bust, but they certainly were major players in creating complex investments that expanded the bubble many-fold. They based their game on the premise that housing would never go down—“never did, never will”. Oops, as Rick Perry would say. Let us say that Wall Street had some pretty stupid ideas about risk (see, The Black Swan).
Did regulation have a major role in this? Yes. Did deregulation have a major role in this? Yes. Here is how crazy our system is. The government had a huge apparatus to stimulate housing, well beyond market disciplines (it was about politics, not economics). They guaranteed these crazy mortgages! That’s why Fannie and Freddy went bust. Yet on the other side of the coin, they deregulated the banks, allowing them to play with the funny money, but guaranteed they would bail them out if they failed! It’s something economists call “moral hazard”.
The crazy thing, and this is typical human behavior during these bubbles, is that no one thought it would ever end. I should say that economists who think like me saw it coming and shouted warnings but were drowned out by the stampede of the herd.
Crashes are like an economic cleansing process. Sorry folks, but that McMansion you bought and overleveraged isn’t going to come back any time soon. This isn’t your father’s recession. It was the biggest boom and bust the world has ever seen and until we sweep away all the bad investment and related debt, we aren’t going to recover.
What has been the government’s response? Both W. Bush and Obama thought that bailing out their cronies was a good idea. More moral hazard. Now the Big Banks are doing the same stuff as before. Both administrations thought that propping up inflated housing was a good idea rather than letting the system right itself. And the new regulations? Dodd-Frank, like most laws born out of indignation, uses a bludgeon on the entire financial system while ignoring the real problem. Their attempts to require banks to have higher capital to loan ratios was weak and now the Big Banks are fighting those weak requirements tooth and claw.
The Fed is even worse. What are they doing? They are trying to ignite a new bubble by “printing” more money (technically they create money out of thin air and credit the accounts of the major banks). We are now at QE3, yet QE1 and 2 didn’t work. QE∞ is a very bad idea.
Folks, we have the same players doing the same things that brought about the crisis in the first place, yet they don’t have a clue what they are doing. If government could regulate our way to prosperity we would already be there. If the Fed could print our way to recovery we would all be rich. Why do they think that doing what they did before will work this time? Answer: they don’t know what else to do.
Here is what they should do to bring a recovery:
They need to let the bankrupt go bankrupt and wipe out the bad investment and related debt. Greenspan did that back in the savings and loan bubble and we recovered relatively quickly. We need to raise interest rates to prevent the destruction of capital and the dollar and to encourage savers to fuel a recovery. Volcker did that back in 1979 when we had stagflation and it worked. We need to reduce regulations on those who would invest in America and hire workers. Reagan did that and it worked. We need to reduce federal spending and cut back the national debt before it sucks the life out of the economy (see, Europe).
Did anyone hear Romney or Obama say those things in the last debate? Oh, excuse me; they both said that they would cut spending, balance the budget, and free employers to create middle-class jobs. Does anyone believe them?