Thursday
I had some kind of extrasensory
perception connection with Bob Bartley, the late editor of the
Wall Street Journal’s edit page. He and I were often
thinking exactly the same thoughts, even before he hired me, nearly
forty years ago, to write a column for the edit page. I would run
into him and we would just right away start saying the same things
about pop culture, politics, Israel, defense, free markets.
Now, Bob has been dead for several years and he and I parted
company intellectually years before that over Milken and Drexel and
then about the efficacy of tax cuts.
But I still find that I will write an article or a speech about
something and the next day I will awaken to see an editorial about
the same subject from the same perspective on the WSJ edit
page. There is still usually a similar way of viewing the
world.
Example: About a week ago, I spoke to a group of investors in
Phoenix. One of the subjects was Ben Bernanke’s Zero Interest Rate
Policy. I said it had not worked and was just punishing savers and
the retired by keeping interest rates low. The real problem, as I
told my kind audience, was not bank liquidity, and thus could not
be fixed by flooding the system with reserves.
The real problem, as I told them, and as had been told to the
world by the genius economist, Anna Jacobson Schwartz, after the
crash of 2008, was insolvency risk, not lack of liquidity. Banks
can be overflowing with money from the Fed, but they will not
readily lend it out because they fear they will not be repaid.
The banks were burned so horribly by the real estate crash and
other crashes around 2008-2009 that they will lend to only a few
entities, mostly the federal government. It is this insolvency fear
— and a well placed fear — that keeps us in recession or mild
growth. When Dr. Bernanke says he will keep flooding the banks with
cash, he is simply working on the wrong side of the problem. He is
like a mechanic trying to fix a car with a crashed transmission by
changing the oil in the crankcase. The “solution” he has been
advancing just does not address the problem. So I told my audience
and then wrote about it here.
To my total lack of surprise, this morning’s WSJ edit
page has a similar editorial. Dr. Bernanke says he will keep
interest rates low or nil until unemployment greatly declines. But
as the Journal notes, one thing has nothing to do with the
other (as I have been saying). He can pump and pump the left rear
tire and the car won’t go if it’s another tire that’s flat.
We are just getting a spectacular rise in the monetary base
which will possibly lead to horrific inflation some day, and we are
cheating retirees, and we are not ending the slowdown. By the way,
Dr. Bernanke is the same man who said, when he was Chair of the
Council of Economic Advisers under Bush 43, that there was no
threat of a national real estate collapse, that there was no Wall
Street built mortgage bubble, and that there was and is no
retirement readiness problem. Yes. He is that guy. Chair of the
Fed.
Mr. Timothy Geithner, Secretary of the Treasury, actually had
the best idea of anyone about the whole subject back in 2008. He
wanted the Treasury to guarantee all loans of any kind from the big
banks. It would have been a good move and would still, now, be a
good move.
But Mr. Bernanke’s move are just blowing in the wind. Meanwhile,
taxes are about to soar, spending for defense will contract, and we
slouch towards debacle. It is really sad.
