Left or right, governments cannot turn the economy around

Stocks are rallying this afternoon suddenly on headlines that the Italian PM may be stepping down.  Or turning round, or holding his head upside down.  Here is a latest from Bloomberg:   “BERLUSCONI: PRESIDENT WILL DECIDE HOW TO RESOLVE CRISIS.”  Oh you can fix this? Great, well why didn’t you say so earlier?

It is amazing to me how many people from all sides of the political aisle today are looking to governments and Central bankers to “turn the economy around.”  Notice a universal theme today is that governments are being voted in and thrown out at record pace because they are not “doing enough” to fix the crisis.  Democratic governments are designed to maintain roads and basic public services, but command the economy?  This is simply a ridiculous expectation.  It is up to free market forces to find an equilibrium for the economy.  What amazes me is that even those who express staunch conservative allegiance and say governments need to stay out of business are today criticizing incumbent governments for not “creating jobs”.  Say what? 

The system is already flooded in tons of cheap credit, adding more is not the answer.  In fact the relentless calls from the left and the right to lower rates and increase liquidity over the past 10 years are a huge part of the mess we are now in.  The truth is that no one–neither democrats nor republicans have been true fiscal conservatives over the past 20 years.  Everyone wanted to take more for themselves and their own pet causes and no one wanted to make cuts or save for the rainy days. 

The truth is that those who seemed like brilliant leaders and business heads during the great leveraging phase were actually not very brilliant at all.  Jack Welch? Jamie Dimon? Give me a break.  They were simply aiding and abetting the great leverage bubble up.  Demand seemed insatiable and defied reasonable expectations because all reasonable rules and traditional relationships were tossed aside in order to goose profits year over year at all costs. There was a cost though. The cost of then is the price the world is paying now for the great unwind of the prior systemic excess and abuse.  The world has truly earned its current plight.

Meanwhile the Chinese yield curve has just inverted in a classic warning of the incoming global downturn.  But apparently this afternoon we prefer to dance, distracted by nonsensical musical chairs in club-med governments.  Here is Dallas Fed head Richard Fisher talking about the limits on what monetary policy can do to resolve present issues. Watch the video interview here.

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3 Responses to Left or right, governments cannot turn the economy around

  1. Jack from Surrey says:

    How is it that I have no “formal” training in economics, but totally agree with this…..governments won’t make a difference in the end! We’re prolonging the inevitable with stimulus and this faux economy folks! You do not need an economics degree to figure this one out, just read your history text.

  2. michael says:

    Well done….. I wonder how some of these “legends” would fair in a real free market. One not manipulted by Fed policy and sycophant politicians.
    “Genius asset managares” who only had to throw a dart or buy the index in 1982 to look brilliant when pressed to perform now are showing their true abilities.
    Of course they are still clipping the fees whether the market goes up or down or sideways. I wonder how many would stay in business if they got paid only if their clients did.
    There was recently “one of our favourites” asset managers(indexer) on the Cad version of tout TV a while back who proclaimed that he had been managing money for 30 years and he had seen this all many times before. Stocks were dirt cheap. Said he was fully invested for his clients. Maybe they are all comatose…he didn’t say.

  3. Larry says:

    Danielle – This is simply a brilliant piece of writing on your part. Brief yet packed with truth. We may revisit 2008 as described below.
    “Now we can see that the economy is a confidence game. With markets spinning out of control and liquidity frozen, analysts and commentators repeat again and again that the problem is that investors have lost confidence. What they don’t adequately stress is that this loss of confidence is fully justified.”

    “This confidence goes beyond economics. The financial meltdown is a symptom of a profound crisis in our sense of reality, which is endemic to contemporary society and culture.”

    “In contemporary philosophical terms, money has become virtual, unmoored from the “real” economy. …and securities will never again be secure.”

    The above is excerpted from an article in the November 10, 2008, Barron’s weekly by Mark C. Taylor, chairman of the religion department at Columbia University and author of Confidence Game: Money and Markets in a World Without Redemption

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