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.
