brianoh

Recent Policy Decisions and a Greater Depression

The problem as I see it is one of fundamental direction. It is rather like the question in 2001 – should I buy the Dow or is it way-overpriced? It was overpriced. If one gets the overall strategy wrong, then the medium and long-term results are going to be wrong. Needless to say that with the Dow, many traders still made money during the 2001-2008 period even though the Dow was overpriced. These people were not the long-term holders however.

The analogy is similar with the economy. The overall strategy is wrong (Keynesian), however some of the results may still be favorable on a short-term basis. Quite simply, we have the wrong people running the economy – Cheap-Credit Academics.

Greenspan is a perfect example of this. In his recent speech to the NY Economics Club he was basically saying (in part) that we need high stock prices so that we can get credit creation. This I presume explains his moves to prop-up the Dow bubble in 2001 and created the problem that brought us here. Even I can see that it is ludicrous to pump-up the Dow in order to provide the mechanism for credit. The Dow has to earn the level that it has, not be pushed there by Greenspan. We now have a Greenspan protégé as Treasury Secretary.

There are many negative consequences from this “Keynesianism God Mad”. One of the main problems is an imbalance in the economy that was caused by fictitious wealth. There are many, many businesses that need to down-size, and this will not happen overnight.

While the US has the wrong people charting the course, the long-term results will be negative. To generalize the problem – the problems caused by cheap credit cannot be solved by more of the same. The economy requires restructuring and that will not happen until the NORMAL supply-demand dynamics are allowed to play-out. Prop-ups, bailouts, mailouts, rate drops, stimulant measures, and deficit spending all create a wrong-sized economy that is unsustainable long term. In addition, the losses in the financial system that resulted from the misguided policies need to be written off, not propped-up.

It is extremely difficult to make economic decisions knowing that the policymakers are manipulating the free market at unprecedented levels. Time to let the chips lie where they fall and let industries survive or fail as a result of their own decisions.

Who Benefits When the Fed Floods the System with Liquidity?

"when Easy Al took interest rates down to 1% and held them there for a very long time, it did not stop the Nasdaq from falling 77%. Instead, the liquidity flowed into housing, ..."
The dotnet bubble had already burst at that point and the Nasdaq had lost 50%+. The interest rate cuts were to stop the Dow and S&P falling to realistic levels. These cuts began in 2001. The Dow had risen 10 fold (1000%) in 13 years up to its high of 12000 and was then falling. The liquidity did flow into housing of course and cause the bubble.