Does Anyone Believe Them?

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?


8 comments to Does Anyone Believe Them?

  • Larry S

    I agree with the sentiments that you’ve expressed in this piece as I also yearn for a free market, especially one in interest rates. I do wonder though, how the US could survive an increase in rates. I believe that we are spending roughly $400B in interest expense at these low,low,low rates. If our rates were to double, we would be in a terrible fix. Volcker did not have to deal with that contingency back in 1980.

    The only way to raise rates, which I agree must occur, would be to slash government spending across the board. Considering this electorate does not have the sense to be insulted by these debates, I would sincerely doubt that anyone expressing those views would have any chance of being elected. It would seem that the only way this can occur is for another shock to the system to occur, and frankly by then, it might be too late.

  • David Pristash

    We, here, all know what has to be done — and so we can accept that we have cancer and take the Chemo that will save us but make us ill in the process; or we can drink some more Kool Aid and wish the problem would go away —

    The former will save us and the later will probably kill us — the choice is very clear and the longer we put it off the worse the end will be.

  • GaryP

    Neither candidate will tell us the truth because we can’t handle the truth (stole that one.)

    Obama doesn’t know the truth.

    Romney may, but certainly knows that telling the truth would cost him the election.

    Americans, like the rest of the Western world, want our cake to magically be replenished so we can eat it forever with no thought of where cake comes from.

    This is not the end of the world, but it is certainly the end of our world.

  • D

    The can will be kicked down the road ’till it flies off a cliff and sinks in the ocean.

    Government exists to perpetuate itself, and the voter is a bit player in the game of politics. Why vote? Both parties are complicit in the destruction while doing their best to freeze out a third choice. The real question is when the can finally sinks, will it shortly wash up on shore to a new dawn, or rust in the darkness of ages?

    Best financial plan now is country diversity–do not have all your eggs in the US anymore.

  • John B.

    There is nothing surprising about it. When you check some recent numbers, you can see there is a significant flow of US citizens immigrating to Canada.

    But their presidential candidates do not mention this. They rather talk about some obscure topics like tax reform. We do not understand why they rather do not talk about real problems – homeless people, foreclosures, middle class reaching the levels of poverty, GM´s etc.

    No, we are being conned all the time, it is better for us and for the “economy”, represented by artificial numbers and empty concepts nobody seems to understand.

  • Old Glory

    I just randomly bounced over here from Zero Hedge.

    I must say, this is a great summary of how we got here and how to fix it. I’ve just emailed this to a few friends. More people need to have their eyes opened to all of this.

  • Alex

    I find it amazing that people doesnt understand that QE Eternity all about the Fed paying down the balance sheet of the big banks (by buying bad mortgage traunches) where later on down the road we will pay back with significantly higher taxes. But then maybe not so amazing Ive met several people that believe the government actually has a revenue stream that is not taxes. Nothing will change until the pain exceeds the pleasure.

  • There is no need or reason to vote for evil. There is one third party candidate advocating cutting government spending and no bailouts, who will be printed on the ballots in 48 states. I’ll be voting for Gary Johnson come November — instead of wasting my vote on one of the major party candidates. On cutting spending, Johnson’s record as Governor of New Mexico matches his rhetoric. And he has promised there would be no more bailouts under his administration.