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.