“If you investigate individually the manias that the market has so dubbed over the years, in every case, it was expansive monetary policy that generated the boom in an asset… The particular asset varied from one boom to another. But the basic underlying propagator was too-easy monetary policy and too-low interest rates that induced ordinary people to say, well, it’s so cheap to acquire whatever is the object of desire in an asset boom, and go ahead and acquire that object. And then of course if monetary policy tightens, the boom collapses.”—Anna Schwartz, “Bernanke is Fighting the Last War,” The Wall Street Journal, October 18th, 2008.
If a problem is misdiagnosed by a doctor, invariably he or she will fail to administer the proper treatment for what ails the patient. And so it is with the federal government’s response to this year’s financial crisis.
Of all the problems Big Government has dutifully emerged to “solve”—foreclosures, credit drying up, banks failing, mortgage giants Fannie Mae and Freddie Mac failing, Bear Sterns failing, AIG failing, and finally recapitalizing banks—it has treated only the symptoms of the overall disease.
Anna Schwartz, eminent economist and co-author with Milton Friedman of “A Monetary History of the United States,” observes that the real cause of the current financial calamity is “expansive monetary policy.” Easy credit. Interest rates too low. Overleveraging. Sound familiar? It should.
ALG News has been essentially reporting this for months, but there were several other voices in the wilderness who were sounding the alarm bells against the Federal Reserve’s monetary policy for years. They were—and to this day still are—largely ignored except occasionally in the pages of financial newspapers, or on select cable business channels.
Maybe now that narrative will gain more attention. Ms. Schwartz is not a dummy. She is an expert. Yet the substance of her expert analysis—which is shared by many other experts—is almost completely whitewashed in the explanations given to the American people about the state of the economy. She ought not be ignored, but she has been, and will be—unless concerned mainstream scribes etch it daily.
If one close pays attention to esoteric financial news, one would hear the above analysis. But for the majority who do not, it is not really widely understood just how the nation found its way into its current mess.
Which is a shame. Politicians—like the presidential and congressional candidates for office in 2008—are completely getting a pass on the root causes of the largest crisis facing the economy in decades. They instead talk about symptoms, here and there, but nobody dares talk about precisely how we got where we are. Which is understandable, in a perverse sort of way. It was Congress that originally ceded monetary policy to the Federal Reserve in the first place. So it is only appropriate that they now gloss over and cover up the dire economic consequences of Fed-enacted monetary policies.
What are they afraid of? Perhaps they fear that the people will understand. And then hold the responsible parties accountable.
Government policies—in particular the federal government’s loose dollar policies—are at the center of the boom-and-bust cycles that the economy has been experiencing. It caused the housing bubble as home building overproduced to keep up with the artificial demand created by cheap credit. The bubble popped when the Fed tightened. And then the Fed caused the commodities bubble as it engaged in easing yet again to cope with the growing mortgage crisis.
At its core, though, Big Government mismanagement caused firms all over the world to become overleveraged. Now the process of deleveraging is well under way. It was unavoidable. And yet the Fed saw fit to attempt to prevent it anyway by loaning JP Morgan $29 billion to buy Bear Sterns back in March. The overall monetary easing began in August 2007 when the housing bubble had finally popped. All of the subsequent bailouts have been aimed at preventing this deleveraging, and yet it happened anyway.
Along the way, the reasons behind the bailouts have shifted with the emergence of new symptoms. And yet, in none of the debates were the candidates asked what they would do to correct these errant government policies, or to take command of the nation’s monetary policy.
As Ms. Schwartz notes in her Wall Street Journal interview, and as previously reported by ALG News, the government’s market interventions have prolonged the crisis and prevented the markets from finding their appropriate bottom. She also called—as has Americans for Limited Government and others—to allow failed institutions to bottom out, rebuild, or go the way of other self-endangered species.
Whether they be banks, investment firms, or even governments, they must be allowed to fail. As Ms. Schwartz says—and it is a sound principle that if enacted into policy would bring certainty back to the markets: “Everything works much better when wrong decisions are punished and good decisions make you rich.”
If that does not fit into the conventional narrative that is often reported to the American people, then nobody should be surprised if those flawed policies continue to be the norm. Already, the government has responded to the global debt crisis by treating all of the various symptoms by… borrowing yet more money to now cover, bail out, and otherwise guarantee financial obligations all over the world.
The government has seemingly gone as far as to at least implicitly guarantee every deposit and debt throughout the nation, and the markets are uncertain as to which investments will be protected, too. Can the government even afford to do that? There is a certain insanity about all of this. And yet nobody asks the tough questions to those who would presume to handle this crisis come January.
Perhaps, some years down the road, the patient, the American taxpayer, will sue for malpractice—if he has enough of his own money left to hire a lawyer.
Robert Romano is the Editor of ALG News Bureau.
