Reno Hayek Symposium

This is by far the best statement of our dire straights that I have seen: Francis Cianfrocca’s take on our current situation correctly states, in my opinion, that the Fed is shooting in the dark. The question is whether shooting is better than not shooting. In issues of “systemic risk” of collapse of the financial system there is no question that the Fed must shoot and shoot BIG. In other instances, doing something for the sake of “don’t just stand there, do something,” is not necessarily the correct course. “Standing there” in the market sense may be just what the economy needs. The point is that “non-systemic” failure must be PUNISHED, NOT REWARDED! Just as success should be rewarded.

The basic point we all must believe in is that WE MUST DELEVERAGE (reduce debt), AND INCREASE SAVINGS. Nothing should be done to interfere with this process, already in process.

What I’m saying is that the world economy got far ahead of itself in the last several years. Why that happened is a subject for a book (maybe a shelf full of books). But it’s unwinding rapidly now, and this is the deflationary pressure we see everywhere. We don’t need as many autoworkers or factories, because people won’t be spending as much on new cars as they once did. And people still need to adjust to lower housing values in many parts of the country.

This process is plain, simple reality. The deleveraging and rebalancing simply has to happen. It’s a fast, disruptive process but ultimately a very healthy one. To be blunt, it’s like a big dog walking into your kitchen out of the rain. He plants his feet and shakes all the water off. It’s smelly and disgusting and you have to clean off your kitchen and yourself, but then it’s done and you move on. That’s how we’re shaking off the debt overhang caused by years of underpriced capital.

The government is flailing because they don’t want to allow this process to proceed at its own pace. So they’re doing a whole raft of desperate things, like the stimulus package, the desultory bank half-nationalizations, and the exceptionally dangerous attempts to prevent mortgage foreclosures.

Bernanke’s approach is to try anything, as long as it’s different from what was tried in the past. The Administration’s approach is to assume that we can get back to partying like it was 2006 as long as we push enough extra money into the system. It would be far better for everyone if they stepped back, got out of the way, let everyone rebuild her personal balance sheet, and let the housing markets find their own level.

What could we be doing that would really have a positive effect? There’s nothing we can do to stem the reduction of debt and the increase in personal savings. (Repeat: there’s nothing we can, or should, do about that.)

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What we could be doing is to encourage the eventual return of business and consumer confidence. That’s because a good shot of economic growth would provide the resources to make all the other problems less bad. But here, the Administration is doing its worst job of all.

The recently-announced budget would be radical and damaging to business confidence in the best of times. But these are the worst of times, and the budget is nothing short of disastrous. We’re being told to expect tax increases on high earners, business income and capital, increases in business regulation, a new energy tax on the whole economy (“cap and trade”), and the biggest expansion in government spending since World War II.

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Tom Motherway