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.