There is an old military dictum (seemingly more honoured in the breach than the observance, these days) that one should never reinforce failure – the financial equivalent of which is that one should try to avoid throwing ‘good money after bad’.
Sadly, our modern cognoscenti – the policy advisors and pundits who hog the headlines – either have no truck with the wisdom encapsulated in this injunction, or are stubbornly unable to realise that their original policy analysis could ever be wrong.
How otherwise to reckon the latest effusion from the FT’s Martin Wolf when he argues that the lack of palpable recovery, despite all the trillions spent and market-shattering interventions undertaken, represents not a resounding refutation of his Keynesian misapprehensions, but, rather, a Nietzschean lack of will on the part of the Obama administration, who did not follow this sage’s supposed advice with sufficient ‘aggression’?
“The direction of policy was not wrong,” our Oracle intones: “policymakers – though not all economists – had learnt a great deal from the 1930s. Sensible people knew that aggressive monetary and fiscal expansion was needed, together with reconstruction of the financial sector.”
Well, actually, the really sensible people – though not all Austrians (!) – warned well ahead of time, not only of the impending bust which completely blindsided the likes of Mr. Wolf, but also that, instead of drawing the correct lessons from the 1930s – namely that the New Deal perpetuated, rather than truncated, the slump – the state-worshippers would repeat many of the errors which condemned our grandfathers to the traumas of that long, dark decade.
In her own valediction, ex-White House pet intellectual (sorry: ‘advisor’), Christina Romer, catalogued all the surprises and unforeseen developments thrown up by what she plaintively termed, ‘Not my Father’s Recession’, before airlifting yet more divisions into the ideological Stalingrad she and her ilk are defending, by stating that:
While we would all love to find the inexpensive magic bullet to our economic troubles, the truth is, it almost surely doesn’t exist. The only surefire ways for policymakers to substantially increase aggregate demand in the short run are for the government to spend more and tax less. In my view, we should be moving forward on both fronts.
For his part, the Wisest Fool in Christendom, Chairman Bernanke, offered a predictably self-exculpatory address to the Financial Crisis Inquiry Commission in Washington in which he claimed that it was ‘frankly quite difficult to determine the causes of booms and busts in asset prices…’ He also conveniently shifted the blame to European banks, rather than those coming under the purview of the Fed itself: ‘Notably, European institutions issued large amounts of debt in the United States, using the proceeds to buy… securitized products… The strength of the demand for [this]… helped to maintain downward pressure on U.S. credit spreads, thereby reducing the costs… [and] increasing… demand for loans. Denying that the Fed could have acted at any stage to restrain the Bubble, he also re-cycled the hoary old myth that perversely underconsuming foreigners were also at fault: ‘… the excess savings of Asian nations have predominantly been put into U.S. government and agency debt and MBS…’
When confronted by such an obstinate display of perverse logic, one cannot resist the comparison with the old trial by ordeal method of repeatedly ducking a presumed witch, under the somewhat flawed judicial premise that if she drowned, she was innocent, but if she survived she was clearly a bride of Satan!
Incidentally, in writing in the 1940s of the critical events of two decades before, the long time chief economist at the Chase National Bank, Benjamin Anderson, had already exploded this ‘saving glut’ nonsense, long before Blackhawk Ben came to plead it in his defence, mistaking an ex post accounting identity for an ex ante causative factor, as he did.
One must here protest against the dangerous identification of bank expansion with savings, which is part of the Keynesian doctrine… [this is] particularly dangerous today when we find our vast increase in money and bank deposits, growing out of war finance, described as “savings” just because someone happens to hold them at any given moment. On this doctrine, the greater the inflation, the greater the savings! The alleged excess of savings over investment in the period 1924-29 was merely a failure to invest all of the rapidly expanding bank credit. All of the real savings of this period was invested and far too much new bank credit in addition.
In addition to wilful blindness at the top, rational investors are also up against the incredible speculative whirl that, according to the latest BIS Triennial survey, has seen daily foreign exchange turnover explode to $4 trillion a day – something equivalent to turning over the whole world’s daily merchandise trade flows in the space of just 20 minutes – and that of interest rate derivatives jump to over $10 trillion a day – meaning a sum equal to the entire existing stock of debt securities is being turned over in less than two weeks, total net new issuance being accounted for in under 15 hours.
Put another way, in a world where the admittedly v-e-r-y broad brush estimate of income per head of the ~6.9 billion population is some $9,000 a year, the churn in these two categories alone – hence with no reference to activity involving equity or commodity derivatives or physical securities trading – amounts to $520,000 per person per year, $260 per working hour, or 58 times their average income.
If you think all of this mindless to-ing and fro-ing is based upon clinically rational expectations; that it is amenable to exact quantifications of risk; that it engenders an instantly disseminated perception of the ‘fundamentals’ underlying each of its constituent parts, as well as those pertaining to their combined interactions: if you imagine that the enormities it visits upon us with monotonous regularity have nothing to do with the pernicious financial architecture presided over by Mr. Bernanke and endorsed (barring a few regulatory quibbles) by the likes of Mr. Wolf and Ms. Romer, then I have a CDO-squared based on the receipts from an LBO-driven, sale-and-leaseback of a certain bridge in Brooklyn to sell you!