Fantasy-Based Economics

Here's the latest work of David Malpass, chief economist at Bear Stearns. You can find it in the romance & fantasy section of your local bookstore WSJ:

"When President George W. Bush addresses the Economic Club of New York on Friday, his comments on the dollar crisis will be the crucial issue for markets and the economy. The best thing he could do would be to state clearly that he wants a stronger dollar. That would draw liquidity back to the U.S., lower inflation risks, and head off the growing calls for government bailouts and support programs.

Absent administration support for the dollar, recent Fed rate cuts have simply sped up the flood of capital away from the U.S. without providing enough domestic stimulus. The rest of the world is already full of cheap dollars, pushing gold and oil to new highs, European tourists onto Madison Avenue, and petro-dollar sovereign wealth funds into building islands to use up their excess.

A clear presidential preference for a stronger dollar could cause an immediate leap in financial markets. U.S. stocks and corporate bonds are attractively priced -- except for the dollar risk. No matter how high a bond yield or how strong the track record of a U.S. private-equity manager, the threat of continued dollar weakness holds global liquidity at bay. The prospect of a stronger dollar would reverse that." (emphasis added)

Um, no.

The folks who believe this sort of drivel would do well to recall Ralph Waldo Emerson: "Your actions speak so loudly that I can't hear what you're saying."

The President's words about the dollar, in the waning lame duck months of his presidency, are irrelevant. His actions over the past 7+ years, in concert with those of the Federal Reserve, are what matters. Can anyone honestly believe that mere speechifying is going to overcome the impact of enormous deficits, excessive government spending, reckless growth in M3, historically ultra-low rates, and an ongoing intervention in credit, currency, capital and fixed income markets?

I've noticed this wingnut fantasy sequence repeatedly over the past 8 years: ignore reality, jawbone the way you hope things should be, ignore the results of your words and actions, declare victory. Mission accomplished.

It is an absurdly infantile way to manage any sort of enterprise. You will note that none of this crowd truly runs anything -- much less manages assets. The returns would overwhelmingly disprove the theory; this group is long on blahblahblah and short on accountability.

Here is a simple truism: Capital goes to where it's treated best. All the bully pulpit speeches and wishful thinking cannot change that reality. The Fed's mad dash towards zero interest rate policy [ZIRP] has debased the dollar in pursuit of an even more absurd policy aim: ending the ups and downs of the business cycle.

Who is more culpable: The emperor, or those who comment on his finely woven garb?

Source:
Bush and the Dollar
DAVID MALPASS
WSJ, March 11, 2008; Page A21

Comments

[hattryx:]

funny how now even the wsj is all loosey goosey. they, of all sources, would know to run this one through a fact checker

2008 Mar 11 09:16 AM

[nukldrager:]

Who's more culpable? Who knows, who cares. What matters is which end of the fork you're on. After all the chickens are eaten, will the wolves start eyeing each other and licking their chops circling around in a slow deadly waltz called the last man (or group) standing... wahoo we did it!? No, I don't think so. I think you are right about the efficiency of capitalism. Also, I don't think that ultimately it will kill the golden goose, the consumer, but it's not hard to argue that it doesn't maintain it's best asset very well.

2008 Mar 11 09:20 AM

[keneaise:]

Amen. This is so absurdly obvious even to laypersons that it is hard to fathom supposedly intelligent men spouting this drivel. I want to see a series of actions from our "leaders" that demonstrate they really understand how to get us out of this mess. I am retired and I do not have enough time to recover what I've lost, especially when Washington doesn't appear to have a clue (or a single clear-thinking advisor).

2008 Mar 11 09:28 AM

[Tom B:]

"I've noticed this wingnut fantasy sequence repeatedly over the past 8 years: ignore reality, jawbone the way you hope things should be, ignore the results of your words and actions, declare victory. Mission accomplished."

Too bad W slept off hang overs during science class when he was in school. Reality has a way of asserting itself.

2008 Mar 11 09:35 AM

[Tom B:]

....BTW, my prescription for fixing the economy would start with an Iraq pull out. That adventure is costing hundreds of times (or more) more than it is taking in (unless you are Halliburton).

2008 Mar 11 09:38 AM

[CAPTGWK:]

An excellent post! Best quote -- "Actions speek louder than words." For the past 7+ years this administration has sneaked in a 30% devaluation of the dollar. Nothing Bush could say will make the cognoscenti believe him. Then again Abraham Lincoln had some advice (for Bush?), "You can fool some of the people ..."

2008 Mar 11 10:53 AM

[sammyg123:]

Good job Thomas Barta - way to sneak in a jab against the Iraq War! What about congress spending hundreds of billions more than the cumulative cost of the war for the last 5 years? Get real. At least the Iraq war might have an outcome that brings IRAQI OIL SUPPLY TO THE MARKET, thus easing all of our pocket books which are hurting because of the rising cost of gas, and therefore, all commodities. Wouldn't that help the economy? If you want to be infuriated, then have a talk with congress and get them to stop wasting tax payer money on useless pork.

2008 Mar 11 11:09 AM

[Is All Well?:]

Given the comments here, it seems time for a change. The person elected president needs to be a leader. Without that I'm afraid we will continue the same old same old. I'd like to see us elect:

(1) Someone who can look idealogically at both sides of a question and make a judgment that will benefit the country. Bury ideology rather than the country's economy and future. Someone who is analytical, as well as political.

(2) Someone who can have an open mind on any issue and consult with a wide variety of expert resources and make a judgment based on the overall input that he/she values. Not simply listen to the advice (bias) of "trusted" friends.

(3) Be able to have a vision and to be audacious to STUDY the possibilities and EVALUATE, with idealogical bias, the benefits/risks of a given action.

I could enumerate other qualities that I would like...but the question is which major candidate will come closest to meeting the crisis that our latest "fearless" leader has landed us in. Michael Bloomberg would be my choice; perhaps he could be persuaded to bring his wisdom, compassion, innovative ideas and quest for inclusiveness to the next administration.

Unfortunately, politics is closely linked to economic survival. Let's hope that the country can elect a candidate who we deserve....rather than one imposed on us by vested interests who are only interested in their own hyper-prosperity. Let's get with it...the time for a change in thinking/action is now.

2008 Mar 11 11:25 AM

[robert99:]

@ Is All Well: Ron Paul. Too bad he never had a chance. Silly voters - They never learn.

2008 Mar 11 12:18 PM

[Urbane Gori...:]

I think what we need is a whole new approach to how the US interacts with the rest of the world and our ecology. I never could understand the thinking behind "war is good for the economy".. Sure, maybe in the short run! We **do** however know that our war efforts have not netted us any real results, and in contrast, our generosity has. My father, many years ago (in a moment of awareness) said "the way to end the Vietnam War, is not to continue bombing them. Try dropping Chevys and Fords, 5 gallon cans of gas and TV sets. Make them consumers. Then they'll come around. Further, truly bringing the US up to speed (literally) on high speed DSL lines like they have in Asia (10 times faster than ours!!) Cellphone connectivity like they have in Finland, more sustainable energy (Nuclear, wind and solar) so that we can wean ourselves away from oil and generate a booming business here in the US...

-Or, in the words of 'Yorick, barber of York' (portrayed by Steve Martin on SNL), "Never Mind"...

Thx jegan

2008 Mar 11 03:50 PM

[pochovilla:]

As my Sales Director used to say regarding meeting sales objectives and not goals "HOPE IS NOT A STRATEGY"

2008 Mar 11 07:14 PM

[sammyg123:]

Silly liberal operatives, this is A FINANCIAL DISCUSSION WEBSITE. Finance is for capitalists. Statecraft is for politicians. Stop trying to sell a good economy in exchange for a withdrawing from Iraq. It's retarded, and false. You can't buy votes with a dreams based on fantasy economics based on socialism. NOBODY BELIEVES IT. Move your posts to Moveon.org.

2008 Mar 12 02:46 AM

[fmccain:]

I think Malpassis theoretically correct, but (as many have pointed out) it is only theory. Bush will never stand for dollar strength as that would mean he would need to curb spending.

Question: How many Presidents funded a war via tax-cut?

Answer: 1

Anyone care to guess which?

2008 Mar 12 02:22 PM

[sammyg123:]

There are reasons why the dollar was taken lower - probably because the Fed is trying to stimulate our exports and reduce our trade deficit. This is an attempt, albeit weak, to compensate for the receding mortgage and finance industries. Of course, we all pay for it, because now our dollar purchases less, and we have inflation across the board to contend with. The Fed is in a lose-lose position, and so is the American people. Point fingers all you like, or drive on and figure out how to preserve your purchasing power. Cry me a river. Sh&t happens, and the world is a nasty place sometimes. The markets are not there just to give you money. You have to take money from the market, and that is the name of the game. Get smart, trade right, or lose. If you lose, don't cry. Improvise, adapt, and overcome. Get a grip on reality, and anticipate it's developments. The global economy is hurting, so what are you going to do? Quit? Waste time trying to get what you want from politicians? Good luck.

2008 Mar 13 01:07 AM