The Spectacle Blog

Dr. Bernanke’s Prescription

By on 7.13.09 | 1:48PM

Before noon today, the Dow Jones Industrial Average had jumped more than 100 points, which indictates . . . well, your guess is as good as mine, or possibly much better. 

One struggles to resist the foolish temptation to view the Dow as a barometer for forecasting the economic future. Highly trained forecasters (e.g., Jamie Saetelle) predict a long-term trend downward, while the zigzagging daily results are sometimes upward. Yet the folks who buy and sell stocks every day are interested in profits, not prophecy, and the long-term picture can usually only be seen in the rearview mirror.

One market-watcher who shares my own oft-repeated pessimism about the prospects for recovery under the current policy is Francis Cianfracco:

The extremely strong economic conditions that prevailed earlier in the decade were the result of a massive credit bubble, and you don't recover from those easily. The widespread deleveraging that has taken place in global finance can't help but be reflected in global economies. Relatively weak conditions are settling in for a long stay, and this realization is finally coming to market participants.

Cianfracco then goes on to examine the policies being pursued by Federal Reserve Chairman Ben Bernanke:

As with so many things in this big-government renaissance, the basic assumptions at work were accepted without question and with barely any debate. Following Bernanke, policymakers simply assume that it's possible to forestall widespread deflation with rapid, decisive action.. . .
The basic idea is that we can stop the collapse of a credit bubble by blowing it back up again. If this works, I'll be the first to tip my hat to Ben Bernanke and the intellectual revolution he has founded. But it will be a repudiation of centuries of financial history.

My thoughts exactly. This countercyclical interventionist approach, it seems to me, ignores a host of potential negative consequences of such policies. If we are unlikely to get a full-on Weimar-style currency meltdown, we at least risk 1970s-style "stagflation." 

However, it is impossible to predict exactly what will happen, simply because we're in uncharted territory and yet Bernanke, President Obama and the Democrats in Congress are like the "Star Trek" crew aboard the Enterprise, boldly going where no economic policy has gone before.

My hunch that we're headed straight into an economic black hole (the pessimist instinctively seeks out voices of doom) is reinforced by Guy Sorman's City Journal interview with Anna Schwartz, a colleague of the late Milton Friedman who says Bernanke is ignoring Friedman's teachings:

[Former Fed Chairman Alan] Greenspan wanted to avoid recessions at all costs. By keeping interest rates at historic lows, however, his easy money fueled manias: first the Internet bubble and then the now-burst mortgage bubble. . . .
Greenspan's successor, Ben Bernanke, has followed the same path in confronting the current economic crisis, Schwartz charges. Instead of the steady course that the monetarists recommend, the Fed and the Treasury "try to break news on a daily basis and they look for immediate gratification," she says. "Bernanke is looking for sensations, with new developments every day." . . .
[Bernanke] has famously declared that "the Great Depression will not happen again." Bernanke is right about the past, Schwartz says, "but he is fighting the wrong war today; the present crisis has nothing to do with a lack of liquidity."

Schwartz's verdict that Bernanke "is fighting the wrong war" echoes the concerns of many other economists -- unfortunately, none of them with any influence in Obamaland -- who see the current policy prescription as the wrong medicine, based on a misdiagnosis of the underlying economic disease. The Dow zigzags day to day, but any prognosis for a quick recovery from this disease requires an irrational faith in Dr. Bernanke's healing powers.

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