Anyone interested in the future of the economy and financial markets should click on the title of this post to link to a marvelous piece. It reviews the history of major financial and economic crises over many countries and different time spans. Even leaving l'affaire Madoff aside, it appears that many of the other financial crises cited did not involve the level of fraud and systemic lunacy that occurred in America's debt-induced panic. I would therefore expect that the American experience will tend to be worse than the average. The Bernanke response and the Obama-Congressional plan is right out of the 1930s as well as Japan in the 1990s- makework. Just as the Hoover-Congressional solutions followed conventional wisdom and were counterproductive, I fear and expect that the current "solutions" are equally unimaginative and will prove to be unhelpful. At least the US in the '30s and Japan in the '90s were creditor nations with unleveraged governments and societies. How, pray tell, does the incoming Adminsitration intend to pay for its "stimulus" program? It can only be out of borrowing- which is the problem that got us to this point and therefore can't be the solution- or money-printing, which failed when tried in the 1970s. And does anyone really believe that there are massive amounts of "shovel-ready" public works/infrastructure programs that will "stimulate" the economy promptly after a bill is signed? And does anyone really believe that these programs will end before the next up-cycle, and will not therefore add to inflationary pressures in that up-cycle? Also, perhaps a few people believe that much of the money won't be wasted or stolen. I am not one of those believers. As a New Yorker now living in Miami, fraud and waste are the norm with infrastructure-related projects paid for by you and me; and nothing is ever completed on time, if indeed a project is ever completed at all.
The core solution too our current problems is simple. Because it is simple and involves torpor rather than stimulus, it buys no votes or campaign contributions. It involves the acceptance of the fact that there is an economic cycle. This cycle is similar to that of people and organizations that work very hard. They need a rest. This economy is going to rest. If Government had no debt, sure- let a John Maynard Keynes suggest the revolutionary approach of borrowing to stimulate. We need to reliquefy at all levels of the economy. The Bernanke solution of turning the Fed into the largest borrower of junk financial assets is way too risky. Just "Let It Be". The economy will recover when it is good and ready. Cheap oil, lots of eager labor and hungry capital: if government stays out of the way and stays solvent, things will be just fine. A hyperactive government appears desperate and hurts, not helps, psychology.
In "Swing Time", Fred Astaire sings of picking yourself up and starting all over again. That's what we need to do here. End the super-cycle of debt piled upon debt and a still-over-leveraged banking system. Deal with the losses, bring debt to manageable levels, and implement a system in which equity and not debt is preferred. Save the financial system but let the mismanaged corrupt institutions disappear. The impending "stimulus" program is a "hair of the dog" strategy and will fail. America needs a real change. Unfortunately, it's not going to get it until the Obama program fails.