By Jeff Diamond - I’m getting tired of Tim Geithner, Ben Bernanke, Barney Frank, Larry Summers, and President Obama making false promises about what our government can accomplish with all of this intervention. The intervention spans markets, private enterprise, government, and even the judicial system (as they make end runs around bankruptcy law and contract law, etc.)
When in the world are they going to admit that we’ve got problems that the government can’t fix? When are they going to allow some of the “too big to fail” institutions to fail? You know it’s coming. They know it’s coming (or at least they should!) Bad risk-takers should fail. That’s the way capitalism works, and if you intervene on the downside, then don’t expect capitalism to work to the upside either. Sure, we might get bouts of improved economic activity, but don’t expect a lasting recovery. Just look at Japan. We are looking a lot more like them all the time. They started intervening back in the early 1990’s and look how far that has gotten them.
Bubbles form when capital is misallocated, and they burst when that misallocation leads to unsustainable price levels. Admittedly, the bursting is no fun. It’s damn painful. So, I understand the desire and willingness of politicians to step in to alleviate the pain (and I have no doubt that we would be in the same position if George W. Bush were still President and Henry Paulson in the Treasury.) The problem is by not allowing the markets and the economy to “clear,” our government just delays the day of reckoning.
The topic of stimulus package II keeps resurfacing since there is general dissatisfaction with the continuing malaise. Now, I guess I should distinguish between bailouts and stimulus. I am vaguely sympathetic to a well-structured stimulus plan. The problem is that the stimulus money isn’t getting spent on stimulus. The biggest share of Stimulus Package I was given to the states who are using it to support their bloated and unsupportable state budgets. Revenues have fallen off a cliff in most states around the country and they aren’t going to bounce back big enough and quick enough to avoid painful cutbacks. Just look at California, even with the stimulus money from the federal government they can’t make ends meet! Federal, state, and local governments are attempting to provide too many services and benefits that they cannot (and never could) afford.
So, when is the greatest capitalist society in the history of the world ever going to allow capitalism to work? The first step is allowing the bad actors to fail and suffer their due (and that includes the states.) Yes, asset prices will fall and people will lose more jobs, but it will happen anyway. Just pick your timeframe… One or two years of pain? Or, one or two decades? If you picked the latter, then I hope you are prepared for all sorts of unintended consequences. We are already seeing the bad actors that the government has propped up undercut their competition who didn’t need a bailout. The explosion in government debt is going to lead to something bad. I’d guess higher interest rates and a weak currency, but who knows? And who knows what the unintended consequences of the unintended consequences will be, but in general, I’d guess that they won’t be pleasant.
So, this grand experiment in government intervention needs to grind to a halt. Let’s take our medicine and get on with it! The average American isn’t getting much out of all this anyway. I can see how the “too big to fail” crowd with all of its lobbying money is getting something, but it’s hardly trickling down. In fact, banks are rushing to cut credit lines, raise minimum payments and interest rates even on its customers in good standing. If the government wants to offer incentives for investment so that money flows rather than being hoarded, then maybe you can convince me, but enough of the money printing and exploding debt. That’s going to lead to nothing but trouble.