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Jim Cook

 

RUNAWAY SOCIAL SYMPATHY

Every once in a while I switch the TV channel from Fox to CNBC to see what the liberals are saying.  After listening awhile I get a deep sense of hopelessness and foreboding for our country.  The most important thing for the left is giving money to people.  They are happy to see the growth of food stamps, disability payments, housing subsidies, free healthcare and all the other welfare benefits.  They utterly fail to see the damage it is doing to the recipients.  Whole cities that once flourished have deteriorated into rotting eyesores populated with shambling hulks of chemically dependent drones.  These people are no longer employable.  They have become incompetent and helpless and the liberals can’t see that it’s their doing.

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The Best of Jim Cook Archive

 
Best of Doug Noland
August 10, 2011
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 “To UNDERSTAND THE GREAT DEPRESSION is the Holy Grail of macroeconomics.  Not only did the Depression give birth to macroeconomics as a distinct field of study, but also – to the extent that is not always fully appreciated – the experience of the 1930s continues to influence macroeconomists’ beliefs, policy recommendations, and research agendas.  And, practicalities aside, finding an explanation for the worldwide collapse of the 1930s remains a fascinating intellectual challenge.”  Ben S. Bernanke, Journal of Money, Credit and Banking, February 1995

Most economists agree that the Great Depression was associated with a breakdown in the international monetary system.  But that’s about where any semblance of consensus ends.  Some will argue that monetary factors were “passive” – mostly the inevitable consequence of economic breakdown.  Others hold the view that monetary forces were the primary cause of the economic collapse.  Contemporaneous economic analysis placed significant responsibility on momentous Credit and speculative excesses from the Roaring Twenties and the inevitable bursting of a historic financial Bubble.  As time passed and the analytical (and ideological) focus shifted, many, including the leading economic policymakers of our era, saw the Depression as primarily the consequence of inept U.S. monetary policy in the late-twenties and early-thirties.  I view this misdirected analysis as a most dangerous case of “historical revisionism.”

The causes of crises and depressions are incredibly important and pertinent issues – and they are, as well, exceedingly complex.  There will be no resolution in what is essentially a one-sided debate.  Chairman Bernanke, considered the eminent economic analyst of the Great Depression, has been a long-time “disciple” of the Milton Friedman view that repeated Federal Reserve errors – beginning with ill-timed tightening moves to ward off stock market speculation in 1928 and culminating with a failure to adequately ease policy and ensure sufficient money supply growth after the crash and as bank failures weighed on the system – were the prevailing cause of the Depression.

Then Fed governor Bernanke concluded his November 2, 2002 speech commemorating Milton Friedman’s 90th birthday with the following:  “Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You're right, we (the Federal Reserve) did it. We're very sorry. But thanks to you, we won't do it again.”

For more than twenty years now (commencing with aggressive monetary ease to recapitalize the banking system back in 1990), the prevailing objective of Federal Reserve policy has been to ensure that deflationary forces were not allowed to take root.  And while these deflation “panics” occurred only on those few occasions when market confidence in the U.S. Credit system waned, Fed alarm and associated policy responses were sufficient to convince the markets that the Fed held a singular top priority.  This “asymmetrical” policy bias has been instrumental in distorting the markets’ view of financial excess.  The Greenspan/Bernanke Federal Reserve communicated clearly to the markets that the Fed would not intervene to thwart asset Bubbles, but would instead focus on having aggressive “mopping up” measures ready in the event that faltering asset markets risked impacting the real economy.  In short, accommodatiive Fed policy incentivized speculation throughout Bubble periods – and the bigger the Bubbles inflated the more speculative profit potential available to financial operators seeking to profit from the government’s “mop up” reflationary measures.  And, as we’re witnessing both at home and abroad, the greater the scope of the bust the more confident the markets become that policymaking will factor potential market responses very importantly into all decisions.

We now have an almost three year “mopping up” experience to contemplate.  I’ve referred to this period as the “global government finance Bubble.”  Sovereigns have issued Trillions upon Trillions of debt, while global central bank balance sheets have inflated somewhere in the neighborhood of $5 Trillion (largely with holdings of government debt).  Moreover, governments around the world have both explicitly and implicitly guaranteed Trillions more of private-sector debt and various obligations.  The notion of "too big to fail" has evolved from a focus on major financial institutions to the system overall.
Here at home, the mortgage finance market has essentially been nationalized, with combined GSE and FHA obligations continuing to swell.  FDIC insurance obligations grow by the week.  Washington is assuming additional current and prospective healthcare expenses, and so on.  In Europe, debt failure at the “periphery” has added greatly to obligations now weighing on the “core.”  It is worth noting that Moody’s this morning addressed the additional cost of European debt bailouts as an important factor behind the deterioration in France’s Credit standing.

On the causes of the Great Depression, I side strongly with the “contemporaneous” view that economic cataclysm emanated primarily from a collapse of what evolved over years into an exceedingly fragile Credit structure.  This fragility was primarily the consequence of more than a decade of Credit excess, policy accommodation, reckless speculation, and an economic structure that over time had become dangerously distorted and imbalanced.  Similar critical issues haunt the global system today. 

Major fissures are developing in the global government finance Bubble.  And, to be sure, so-called “mopping up” strategies have become pressing factors in an evolving crisis of confidence in sovereign debt.  In Europe, the markets are better appreciating the enormous – and unending – costs associated with bailouts of badly maligned “periphery” Credit systems and economies.  And, importantly, markets are seriously questioning the perception that eurozone politicians and central bankers retain the capacity to thwart any crisis that risks the stability of its euro currency.  The market distortion that allowed sovereigns from Greece to Italy to borrow at rates inconsistent with their underlying Credit standing has come to a rather abrupt end.  Moreover, the market’s reassessment – the repricing of sovereign debt to incorporate more reasonable risk premiums – is illuminating the severe structural debt and economic problems afflicting the region.

Here at home, the politics of dealing with massive deficit spending is illuminating the vulnerability of the market’s unflinching faith in our debt.  Similar to Europe, our nation’s debt problem has been festering for many years.  But unlike European policymakers, our policymakers have yet to confront debt market confidence issues.  In this respect, there is some truth to the notion that this is a self-imposed crisis.  On the other hand, Washington is doing its best to test both market perceptions and general complacency, an exercise I last week noted was “playing with fire.” 

Debt crises tend to follow a common path:  the problem mounts over an extended period, with distorted markets doing an increasingly poor job of adjusting constructively to significantly heightened risk late in the cycle.  However, at some critical juncture the pressure becomes too much to bear.  Markets will likely react abruptly and, often, in dramatic fashion (think subprime, Greece or, more recently, Italy).

Today’s dismal Q2 GDP data and the Q1 downward revisions provide added confirmation that ongoing massive fiscal and monetary stimulus has had diminished economic impact.    I certainly see ample confirmation that economic issues are fundamentally structural, from my viewpoint ensuring that aggressive stimulus (and concomitant distortions) exerts only fleeting boosts.  Indeed, there is a strong argument that unprecedented “mopping up” has aggravated structural issues and only delayed economic reform.