Excerpt from the Hussman Funds' Weekly Market Comment (1/26/09):
There is a time-honored principle called Ockham's Razor, which states that the explanation for any phenomenon should focus only on the essential and relevant elements, avoiding as many unnecessary “second-order” factors as possible. Albert Einstein put it this way: “A theory should be a simple as possible, but no simpler.”
There is certainly a wide range of important programs and objectives that the new Obama administration was elected to pursue, including investments in alternative energy, infrastructure, health care, and other programs. But from the standpoint of economic stimulus, Ockham's Razor suggests that we will fail as a nation to address the current economic crisis if we fail to address the source of that crisis. Again, this means focusing first on bank capital and mortgage foreclosures.
Although the troubled assets relief program (TARP) was originally based on an ill-considered idea to purchase distressed assets directly from financial institutions, the Treasury somewhat inadvertently discovered what we had strongly argued from the beginning – that providing capital directly to financial institutions was the most effective use of TARP funds. (see You Can't Rescue the Financial System if You Can't Read A Balance Sheet). Unfortunately, neither Treasury nor Congress has made an attempt to address foreclosure abatement. Without that, financial institutions will face a continued need to replenish capital, and far more Americans than necessary will lose their homes.
In short, the essential problem is not “insufficient aggregate demand” but rather risk-aversion and anticipatory saving triggered by fear of financial instability. Ockham's razor cuts straight to bank capital and foreclosure risk. We can address a much wider range of interests in the cause of economic stimulus, but if we fail to address the central cause of the present economic crisis, the attempt to increase “aggregate demand” will predictably fail.