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.
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.
Comments
I agree on your depression prediction. It's a safe bet now. I second your thoughts on the public's ambivalence. They'll pay the price for that, and then they'll be wise for a while until a future generation has no memory of it.
Unfortunately, I believe it is PRECISELY government intervention in the economy that has allowed an insurance company to hold the economy hostage. Some of the key factors leading to our current crises resulted from 1) the creation of GSEs (Fannie and Freddie) to provide subsidized loans and 2) the abnormally low interest rates from global central banks that fed a MASSIVE credit creation.
Without government intervention we never would have seen a explosion (which occured over the last 20 years), and it was this massive injection of liquidity that led directly to most of the abuses we are paying for now. Because private finance couldn't make money with traditional loans (i.e. they can't compete with subsidized Fannie/Freddie), and t-bills had such low rates, people were scrambling for ANYTHING that offered yield. This led them to all manner of risky investments that eventually blew up.
If anything, it is the government's whole effort to encourage (and subsidize) home-ownership that is the root evil.
The last thing we need is more intervention/regulation.
The point is that without regulation, no insurance firm would ever grow to be so huge. Customers would be FAR more circumspect about where they put their money, and which insurance firms they would deal with if they KNEW that there was nothing to bail them out.
Also, much of what fed the growth of AIG to such a huge magnitude was the easy money of the credit boom, which the global governments created. If interest rates hadn't been kept so low, there never would have been an explosion in capital seeking out all manner of risky investment strategies.
http://www.nytimes.com/2008/09/20/washi ... SYsRms//ig
http://www.minyanville.com/articles/sho ... ex/a/19076
I don't know about this for an insurance company, but I doubt it for a hedge fund. If people could invest in a hedge fund that would leverage the money by a factor of one billion, so that any loss would be absorbed by the taxpayers (or else there's mass starvation), of course many people would invest in it.
What about Long-Term Capital Management? Interest rates weren't so low then (1994-1998), yet they managed to bet $1.25 trillion with just $5 billion in capital. They got interest payments waived in many cases. One hedge fund almost tanked the entire world economy. How would your plan stop that from happening, without regulations?
Having no regulations in the financial industry is like having no regulation on owning nuclear weapons. Just holding accountable the the ones who trigger their nukes seems sub-optimal to me.
http://www.minyanville.com/articles/gol ... ex/a/19081
The free market was always a myth, and no matter how many times this is proven, some still believe the ideology over the reality. Many of them even suffer for it, but think they benefit. It's a Bizzaro world out there.