A blog is really nothing more than the process of jotting down stuff you’re thinking about when you should really be doing something else. This probably explains why so many more people are addicted to blogging than are addicted to reading blogs. Right now, for example, I should be slogging through Greycourt’s year-end financial statements. Instead, I’m still thinking about Ben Bernanke.
In my last two posts I argued, first, that the Fed has over-estimated its understanding of and ability to stimulate the American economy. I then argued that the last resort for the Fed – that the “wealth effect” would pull the US out of its slump – was a crock.
But people often say to me, “Hey, at least the Fed is trying to do something, which is more than you can say for Congress.” True enough, and if the risks that the Fed’s unprecedented policy initiatives presented to the economy were low, well, why not? But suppose those risks are high? Suppose they are extreme? A do-nothing Congress starts to sound better and better. The US economy is a highly resilient animal, and if you don’t do something to screw it up it will likely turn out just fine.
Is the Fed doing something that’s screwing up the US economy? Many people who are a lot smarter than me think the Fed’s (and other central bankers’) policy experiments are risky. I won’t repeat all the risks here (see, among many others, but for particularly blood-curdling fun, Jeremy Grantham’s Night of the Living Fed, here.)
Instead, I’ll simply mention the three concerns that keep me up at night, which are, in no particular order:
Groupthink. Following the Crash of ’29 and the subsequent economic collapse, central bankers and chancellors of the exchequer all over the world thought they knew exactly what to do to set the world right. Since the problems had been caused (in their view) by rank speculation and a serious departure from the old habits of thrift, the world’s economies could easily be righted by proceeding as follows (I’m using words attributed to US Treasury Secretary Andrew W. Mellon):
“Liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate… it will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people.”(1)
As we now know, all the central bankers and all the chancellors of the exchequer were flat-out wrong. Whatever the causes of the crisis of the 1930s, the solution wasn’t to starve the plunging economies of capital, but to make capital more available so the world could pull itself out of its downward spiral. This was the core insight of economists who studied the Great Depression, including, of course, Ben Bernanke.
Fast forward roughly eighty years and we have Groupthink 2.0. Every central banker in the world and every chancellor of the exchequer now believes the exact opposite of what their predecessors thought back in the Thirties: namely, that the way to deal with an economic crisis is to stimulate, stimulate, stimulate, and when you’ve finished stimulating, stimulate some more.(2)
Has it occurred to anyone that there’s a middle ground here?
Iniquitousness. I know, I’m starting to sound positively Biblical. But has anyone noticed that central banker policies actively discourage actions we would think of as desirable in a citizenry, and encourage actions we would think of as undesirable? Is this the way powerful government officials ought to behave?
Millions of people in the US and across the world played the Game of Life straight up, saving their money for their retirements, postponing gratification. Millions of these and other people focus on risk when thinking about their investment portfolios, never taking on more risk than they are comfortable with, never “reaching for yield.”
Central bankers sneer at such people. They are, in the (adapted) words of Secretary Mellon, to be “liquidated.” What the central bankers celebrate are speculators and folks who reach for yield at any cost. And this is supposed to be our salvation?
Dismal scientists like to worry about the so-called “paradox of thrift:” when times get tough, people save more, causing times to get tougher. No doubt it’s true, at least in a small way.(3) But every problem in the world doesn’t have a solution that isn’t worse than the problem itself. I could swear, for example, remembering Mom say that two wrongs don’t make a right. Undermining public and private virtue because economic theory says we should is no way to run a railroad.
Enabling. Imagine we wake up one morning to discover that our teenage daughter is mainlining heroin. One possible response would be to stock up on the drug so the girl wouldn’t run out of it while she’s figuring out how to kick the habit. Well, yes, that’s one possible response, but most of us would consider it so completely idiotic that we would have to wonder why someone would mention it in his blog.
The reason I mention it, of course, is that it precisely describes the actions of the world’s central bankers. They all woke up one morning and discovered that the world’s developed economies were mainlining debt, entitlements, and low tax rates. “Aha!” they cried. “What we’ll do is give them a big dose of… more debt, more entitlements, more low tax rates!” (Except for taxing the rich, of course, since that doesn’t raise any money.)
Instead, I suggest the Federal Reserve place the following letter in the overnight express.
Dear Boys & Girls of the US Congress:
We admit that we’ve been bad, enabling central bankers for ‘lo these many years. But we’ve seen the error of our ways. Effective immediately, we will take the following actions:
1. Beginning this week, we will cease to reinvest principal payments on our portfolio of mortgage and Treasury securities.
2. In six months we will stop buying $85 billion of securities every month and will start raising the federal funds target rate.
3. In one year we will begin selling off our $3 trillion balance sheet.
Yes, these actions will likely cause the stock market to crash and the economy to plunge into recession. But these are trivial issues compared with the headlong rush to catastrophe we’ve been enabling. You have roughly one year to come to grips with our problems of debt, entitlements, and revenue. After that, you will probably all be recalled.
Hugs & kisses,
(1) Actually, the only evidence that Mellon ever said anything of the sort comes from Herbert Hoover’s autobiography, conveniently published seventeen years after Mellon died.
(2) Not to sound like a conspiracy theorist, but Ben Bernanke, Mario Draghi, and all four (!) division heads at the Fed have Ph.D.s from MIT. Prime Minister Abe, desperate to avoid having to take any action himself to resolve Japan’s deep, structural problems, is probably in Kendall Square right now scouting around for a stimulator.
(3) Actually, though, in the real world some people don’t save more no matter what (the rich), and some people don’t save more no matter what (the poor), and some people don’t save more no matter what (the clueless), leaving, precisely, who?
Next up: Time to Junk Junk?
Please note that this post is intended to provide interested persons with an insight on the capital markets and is not intended to promote any manager or firm, nor does it intend to advertise their performance. All opinions expressed are those of Gregory Curtis and do not necessarily represent the views of Greycourt & Co., Inc., the wealth management firm with which he is associated. The information in this report is not intended to address the needs of any particular investor.