In response to an FT article by Larry Summers on 10th January 2016, entitled 'Heed the fears of financial markets'
"Markets understood the gravity of the 2008 crisis well before the Federal Reserve"
True, and the Fed still don't get it. They still don't understand how their easy money policies of the late 1990s fuelled the dot-com bubble, nor do they understand how they replaced one bubble with another by stoking a housing boom in the early 2000s, fuelling the crisis of 2008. And they are equally clueless about the effects that their ongoing Ponzi scheme has had on the real economy since they introduced zero interest rates and QE in December 2008. Their cluelessness will not change - they've built mathematical models built on spurious concepts like the Phillips curve and NAIRU, but understand nothing about capital formation, wealth creation, human motivation, or what its takes to make a business successful. Their models are like unicorns - you can describe them but they don't exist in the real world. In short the Fed are a bunch of quacks.
Three decades of academic groupthink have produced a cabal of central banking 'monetary doctors' who are totally hooked on the neo-Keynesian Kool-Aid. They imbibe this brew daily, mixed with a twist of monetarism for added potency. The feeling of omnipotence that this narcotic produces, fuels them to bustle about dispensing their monetary largesse like turbo charged tooth fairies. Unfortunately the real economy has not been stirred from its stupor, and will continue to suffer until the inevitable detox starts the process of a painful recovery. Meanwhile the CBs are too intoxicated with their models to notice, and cannot entertain the idea that it is their ‘medicine' that is making the patient sick.
A different remedy is required - one that supports the patient’s natural immune system rather than suppressing it. Here's a starter for ten.
1. Sack the quack
2. Very Important Step - Change the patient’s diet. I.E.: Reform the monetary and banking system, separate the retail banks from the casinos, reform how governments fund their revenue, and put the financial system back where it belongs - in service to the real economy, not in charge of it
3. Allow the patient’s immune system to kick in and do its job when the long delayed hangover hits (I.E. the recession we are now entering). No more bank bailouts, no more zombies kept on life support
Note a) This will be worse than it would have been had the hangover not been suppressed by the Fed in order to repeatedly rescue the organisations that fund their education, and put them in post - Wall Street banks.
Note b) The temporary ‘high’ created by the suppression of hangovers was marketed as ’the great moderation’ but was never anything more than the ‘buzz’ that led the patients to overlook the inevitable side effects of the monetary drugs, whilst they developed an addiction.
Note c) These side effects were predicted by a number of other practitioners, but those warnings were ignored by the Fed, who suffer from ‘wilfull blindness’ when it comes to the world outside the Eccles Building. Refusal to listen to criticism is also good preparation for when it’s time to say ‘no-one could have seen this coming’.
Note d) When denying responsibility the CBs have found that it is particularly important to keep a straight face in front of camera. The maestro was peerless at this; BB was never convincing but had sufficient hubris to gird his loins and look defiant when he said things like ‘I am 100% sure this will work’. JY is relatively untested on camera but I predict ‘the great crumbling’ when the time comes
4. Be patient (pun intended). The patient will recover and will be out of bed surprisingly quickly once he is off the drugs. But this will require policy makers to put more faith in the economy’s natural ability to recover, than in the temporary fix of quack medicine. Given how long the monetary drugs have been administered with clearly negative results, this should be possible for all except the Fed themselves - who have invested decades in making the stuff and will find it hard to swallow (pun intended)
5) This step will be very messy - Prosecute any Wall Street, Congressional, and/or Fed officials who attempt to sabotage the process or hide evidence of wrong doing. Incompetence is one thing, criminality is something else. Those who are prepared to play nicely can help with the clean-up and the rehabilitation process - given that they know more about the ’secret ingredients' than anyone else, they will finally get to do something useful. If not, they can be re-introduced to the novel idea of ‘consequences’ and housed in a nice 8 x 8 room amongst other Federal guests who will be keen to get to know them, and where they can watch endless re-runs of ‘The Dukes of Moral Hazard’.
Sounds a bit crazy and rather harsh doesn't it? We have short memories - that's pretty much how 2008 felt too - like a car crash. Our mistake then was giving the keys back to the fool who'd crashed the car. I'll leave the last word with Ludwig von Mises, who was the only economist of note to predict the crash of 1929:
”There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”
A fellow reader replied:
Much the same advice that Herbert Hoover, according to his memoirs, obtained as president from Andrew Mellon "liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate... it will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people."
So your view is that the reason why the US suffered the great depression in the 1930s is that Hoover ignored Mellon's advice and muddled along after 1929 without killing the credit boom. Do I have this correct?
No. This is not an either/or situation. There are not only two choices. As Gregory Bateson once remarked: 'One option is tyranny, two options is a dilemma, three options is choice'. I am suggesting we have a choice to address this problem at the source. If we don't, the markets will force a crisis that will make 2008 look like a trailer to a very dark movie.
I am suggesting a complete reformation of the monetary system, the banking system, and how the government funds itself through taxation and the debt market. For example, almost 70% of the US debt can be accounted for as cumulative interest on previous debt. Under the current system this money will never be paid off - it will continue to accumulate through 'guns and butter' policies and Congressional horse trading, funded though the Ponzi scheme of cheap money. Bear in mind, we have not even begun to consider the impact of the 'unfunded liabilities' that increase every year through a combination of electoral bribes and demographics.
If interest rates were to rise - which they need to if state and municipal pensions are to avoid a total wipeout, the 'bankruptcy' of the Federal government would quickly become apparent - you have shifted the problem. not solved it. Monetising the debt can always be done on a technical basis but sooner or later overseas buyers will revolt - we will have a dollar crisis. On the other hand you cannot just wipe out government debt without destroying the bond market - E.G.: other people's pensions.
So we need to address the whole system - this was not done in 2008 and it is not being done now. Most policymakers are oblivious, the ones who are not are frightened, one or two are in cloud cuckoo land. If we do not address this, the global system which cannot be tweaked like a primitive machine or DSGE model, will force the issue. I'm suggesting we start with a blank sheet of paper and ask ourselves: what do we want from government/money/banking, how are we going to fund it, and how do we get from here to there without hiding anything, protecting the vested interests of the people who are doing very well from the status quo, or punishing the innocent? A big task - one worthy of far more consideration than the mixture of ignorance and denial currently being demonstrated by our governments and central banks.
One clarification so there's no misunderstanding - when I say
"I'm suggesting we start with a blank sheet of paper and ask ourselves, what we want from government/money/banking, how are we going to fund it, and how do we get from here to there without hiding anything, protecting the vested interests of the people who are doing very well from the status quo, or punishing the innocent"...
...I am NOT suggesting we wipe out the rich or try to install a Marxist utopia, which is bunkum as far as I am concerned, as are the modern varieties of ‘tooth fairy economics’ proposed by academics like Professors Krugman and Piketty. I am talking about the vested interests of the crony capitalists who do very little other than rig the deck, skim off the top, and occasionally loot...and then when the Ponzi scheme goes belly up, get out their begging bowls and use their bagmen at the Treasury to plead their case. That is not capitalism, it is socialism for the rich.