Hussman Funds: Bernanke Sees A Recovery – How Would He Know? – August 24, 2009
Excerpt (click on the link above for the full version)
A good economist thoughtfully recognizes “general equilibrium” – resources moved to one place must be taken from somewhere else. Securities or monetary liabilities, once issued, must be held by someone in the economy until they are retired (the failure to recognize this is the basis for the “cash on the sidelines” fallacy). Instead, Bernanke’s economic research is a minefield of partial equilibrium analysis. Helicopter Ben is a lot like John Maynard Keynes, who wrote in his General Theory “If the Treasury were to fill old bottles with banknotes, bury them at suitable depths, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again, there need be no more unemployment.”
Solving economic problems, to our Fed Chairman, is as easy as throwing money out of helicopters. Not surprisingly, throwing money out of helicopters has been the basic core of his strategy during this crisis. This does not involve complex thought about debt restructuring, moral hazard, incentives, equitable distribution of resources, or other factors. All it requires is the three second tape playing in Bernanke’s head – “We let the banks fail in the Great Depression, and look what happened.” And then the tape repeats. Never mind that the cause of the upheaval was not the failure of banks per se, but the disorganized Lehman-style failure of banks. The tape isn’t long enough to encompass such nuances.
Ben Bernanke (like Tim Geithner and his predecessor Hank Paulson), shows no hesitation in diverting the real resources of the American public to defend and compensate the bondholders of mismanaged financial companies who made reckless loans and who should have (and equally important, could have) been expected to write down principal or swap debt for equity as an alternative to receivership. This is not decisiveness. It is timidity and poor stewardship. Worse, the underlying problems are not healed – only band-aided temporarily by a flood of public money.
Unfortunately, the resources used in the recent bailout were not just free money tossed out of a helicopter. Only a partial-equilibrium economist thinks that way. No, this was an allocation of trillions of dollars of real resources that could be spent improving access of poor families to health care, finding cures for life-changing diseases, providing better education, and reversing the crowding-out of productive private investment. A public servant willing to act this carelessly with the resources entrusted to him, and so strongly in defense of fellow bankers, frankly does not deserve the job. Most likely, we will face the same credit issues a few quarters from now, given that the lull in the adjustable-rate reset schedule is near its end. We continue to expect a fresh acceleration of credit losses as we enter 2010. It would be best if we faced these challenges with more thoughtful leadership.
Meanwhile, Harvard economist Martin Feldstein (who was the likely alternative for Fed Chairman when Bernanke was appointed) noted last week “I think we’ll see a positive number in the third quarter, but what will it be driven by? Fiscal stimulus, Cash for Clunkers, and some inventory building. But the question is what happens next – in the fourth quarter and into next year – and I think there’s a real danger of a double dip.” Elsewhere, Alan Greenspan concurred, saying “We’re OK for the next six months. We are getting a recovery… but the process doesn’t have legs to it.”
