We are experiencing the worst economic recovery since the Great Depression. Central bankers across the world, frightened by potential deflation, are considering measures to inflate their economies including negative interest rates.
Steve Forbes commented on Fox News last Saturday that our central bankers are so incompetent they cannot even debase our currency.
Federal Reserve Board Chairwoman Janet Yellen told Congress last week that a further increase in the interest rate is likely to be put on hold. Frankly, the Fed has exhausted all its tools and will likely be forced to sit back and watch. Thank God!
A Wall Street street sign is framed by a giant American flag hanging on the facade of the New York Stock Exchange, Tuesday, Sept. 8, 2015. U.S. stocks are opening solidly higher as traders come back from the Labor Day holiday. (AP Photo/Mary Altaffer)
When I was learning how to fly airplanes nearly 50 years ago I got some advice from my instructor that applies to more than just flying.
He told me that if the plane ever gets into a difficult position and you’re having trouble righting it, take your hands and feet off the controls and it will right itself.
That needs to be etched in stone in the boardroom of the headquarters of the Federal Reserve System.
Markets go up and markets go down. Their movement is driven by millions of individuals making millions of choices every day. When a price gets so high that the underlying asset cannot support the cost, the price declines. When the price has escalated beyond belief by euphoria we will have a crash. Those who got greedy will be punished.
Five hundred years ago tulips bulbs were the hottest investment in the world. People bought them to sell for a quick profit.
The exploding prices brought amateurs into the market and at one point a single tulip bulb could sell for more than the annual income of a craftsman.
In time people began to question the inherent value of tulip bulbs and the market came back to earth.
Our dot.com bubble had investors paying large sums for new technology companies based on a clever business plan.
Ultimately investors began to question the value of a company with no sales and in 2000 the dot.com market crashed.
The housing market was only the most recent bubble. The relaxation of underwriting standards by mortgage lenders coupled with the expansion of mortgage backed securities created a market that drove people to speculate in homes that they didn’t intend to live in and certainly couldn’t pay for.
It doesn’t take a degree in finances to realize that a person with a $50,000 annual income couldn’t afford a million dollar home.
The collapse in the housing market threatened financial institutions that were holding mortgage backed securities and the Federal Reserve stepped in and began buying troubled assets and lowering interest rates.
Politicians soon passed TARP legislation that was designed to purchase troubled assets from banks. It soon became a slush fund to bail out the United Auto Workers by propping up General Motors and Chrysler.
That was followed by a trillion dollar stimulus program sold as an investment in infrastructure that largely was used to increase welfare benefits and protect public employee union payrolls.
Cash for Clunkers was an agreement between environmentalists (get older, dirtier cars off the road) and the administration that now owned a car manufacturer. There is no evidence that it helped the economy at all.
Someone close to appliance manufacturers got a member of the Democrat leadership to introduce Dollars for Dishwashers.
The golf cart industry found a friend to get a bill passed to subsidize the purchase of new golf carts. (They were not available to most of us. The dealers bought them all personally so they could sell new carts at a discount and personally pocket a nice profit. Thank you taxpayer.)
All of these were political decisions, not economic decisions and the end result was dislocation in the market.
Markets are designed to reward good behavior and punish bad behavior. When the Fed steps in to try to protect financial institutions the punitive side of market discipline is short-circuited and the final correction is never achieved.
Famed investor Jim Rogers said that the central bankers don’t have a clue. “They’ve got to let the markets sort themselves out,” he added.
The smartest economists in the world, with the most sophisticated tools available, cannot find the equilibrium that the market finds on its own.
A free market, driven by millions of individual choices on a daily basis, will find equilibrium when individuals find value at a cost they are willing to pay.
Nobel laureate Eugene Fama said, “I think it would have been, in the long term, very healthy to have let the banks fail.”
It’s time for the political and economic wizards to get their hands off the controls and let the economy right itself.
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