Why This Sucker Is Going Down... Again
appointing Bernanke to the Federal Reserve. And I agree, Keynesean
central banking policy is creating bubbles which will someday burst
all over again causing more recession. What we need is a hands-off
approach, let capitalism alone to do it's own thing. Banks are NOT too
big to fail. If truth be know, it's likely Bush listened to his stupid
advisers because he wanted McCain to win the upcoming election. Yet he
didn't see that McCain lost because of his stupid idea that he should
suspend his campaign to address the housing crisis. He should have
voted against TARP and stayed on the campaign trail.
Why This Sucker Is Going Down... Again
by David Stockman via Contra Corner blog,
George Bush famously told an assembled group of Congressional leaders
in the aftermath of the Lehman filing that unless they immediately
passed an open-ended Wall Street bailout "this sucker is going down".
They blindly complied. Yet for awhile it seemed of no avail.
By the post-crisis bottom in Q1 2009, household net worth had plunged
from $68 trillion to $55 trillion or by nearly 20%. That reflected a
60% collapse in the stock averages and a 35% meltdown of housing
For a fleeting moment it appeared that economic truth had come home to
roost. Namely, that permanent gains in wealth and living standards
cannot be achieved by the kind of rampant speculation and debt-fueled
financialization that had generated the phony boom of the Greenspan
But that didn't reckon with the greatest and most unfortunate accident
of modern financial history. The clueless White House advisors who
counseled George Bush in September 2008 to violate the free market in
order to save it, had also advised him to appoint Ben Bernanke to the
Fed in 2002, and then to promote him to the post of Chairman of the
Council of Economic Advisors in 2005 and finally to become head of the
Fed in January 2006.
But here's the thing. Bernanke was an academic hybrid of the two worst
economic influences of the 20th century——the out and out statism of
John Maynard Keynes and the backdoor statism of Milton Freidman's
central bank based monetarism.
Both of these grand theoreticians got the causes of the Great
Depression wrong, and Bernanke did doubly so. You can reduce all of
his vaunted expertise about the 1930s to a single proposition.
To wit, the Fed should have bought up the entire $17 billion of
government bonds outstanding at the time in order to liquefy the
banking system and thereby arrest the plunge in economic output.
I have refuted that hoary tale in detail in the Great Deformation. The
short of it is that the banking system collapsed because it was
insolvent after the 15-year, debt-fueled boom of World War I and the
Roaring Twenties, not because it was parched for liquidity or because
the Fed had been too stingy in the provision of reserves.
In fact, money market interest rates barely exceeded 1% during the
1930-1932 period when Friedman and Bernanke claim the Fed was too
tight; and excess (i.e. idle) reserves in the banking system soared by
There is no evidence that any solvent bank that was a member of the
Federal Reserve System was denied discount loans or that solvent main
street business that wanted more credit couldn't get it.
Instead, what happened was that the reckless expansion of bank credit
during the years prior to the 1929 crash was liquidated because it
couldn't be serviced or repaid.
Total loans outstanding had grown from $15 billion to $40 billion
during the proceeding decade and one-half, but much of it had gone
into margin loans on Wall Street, real estate speculation and massive
over-investment in US export and capital goods industries that
collapsed once Wall Street financing of foreign customers dried up
after the crash.
So the money supply measured as M1 shrunk by about 30% during the
three years after the crash because bad loans were being liquidated
and bank deposits extinguished. There was no disappearance of that
Keynesian ether called "aggregate demand". Rather, it was that the
phony wealth of the prior credit boom which inexorably evaporated.
Needless to say, the events in the fall of 2008 had nothing to do with
what actually occurred after the 1929 crash. Back then the US was the
world's powerhouse exporter and creditor, but like in China today the
apparent prosperity of the times depended upon vendor finance.
That is, with the help of the Federal Reserve, the US banking system
and bond market had advanced the equivalent of $2 trillion in today's
economic scale to foreign customers of US farmers and manufacturers.
When the stock market bubble collapsed in October 1929, however, the
Wall Street market in foreign debt went stone cold, triggering a
cascade of worldwide defaults. By early 1933, the booming foreign debt
market of the 1920s had become the subprime mortgage market of its
day—-with debt prices sinking to less than ten cents on the dollar.
In short order, Warren Buffett's famous metaphor about naked swimmers
being exposed when the tide goes out was well demonstrated; it
transpired that US export customers had been borrowing new money in
order to pay interest on their accumulating debts, but without access
to new credits they had no option but to drastically curtail new
Accordingly, US exports collapsed by 80% during the three years after
the 1929 peak, leaving US industry stranded in excess capacity and
overloaded with working inventories of raw materials, intermediate
goods and finished products.
The latter, for example, dropped from $40 billion to $18 billion and
capital spending dropped by 75% during 1930-1933. Likewise, with the
collapse of the stock market and the easy credit boom, sales of
durable goods like autos, washing machines and radios dropped by
upwards of 70%.
In short, the Great Depression was not an avoidable mistake of the Fed
during 1930-1933 as Bernanke falsely demonstrated when he xeroxed
Milton Friedman's erroneous history of the 1930s; it was the economic
consequence of the unsustainable 1916-1929 credit and financial bubble
that had been fostered by the Fed.
So Bernanke had it upside-down as a historical matter, and way out in
left field as a contemporary policy matter. That is, as he ran around
Washington in the fall of 2008 yelling that Great Depression 2.0 was
at hand he was preaching groundless hysteria.
The fact is, at the time of the housing and mortgage bust the US
economy did not resemble that of 1929 in the slightest; and there was
not even a remote risk of the kind of industrial depression that had
occurred in the early 1930s.
That's because after 20 years of Greenspan-Bernanke money printing and
its replication by China and the rest of the EM export mercantilist
central banks, the US economy had been essentially de-industrialized.
There was no risk whatsoever that the kind of capital spending
reduction and inventory liquidation that had occurred in the early
1930s would be replicated.
Indeed, for a short period of time the brunt of the industrial
production adjustment occurred in China and the EM. In effect, China
and its supply chain had become the exporter/creditors of the present
Thus, the post-crash Hoovervilles this time around were in the Chinese
interior as 100 million migrant workers streamed home after suddenly
being thrown out of work when world trade collapsed in the fall/winter
By the same token, spending by US households after the 2008 crisis was
bolstered by a surge of automatic income transfer payments for
unemployment insurance, food stamps, Medicaid/Medicare and other
safety net programs; and by employment in the vast domestic service
sector that as an inherent structural matter does not shutdown to
liquidate inventories because it has none.
During a spending recession service businesses shrink incrementally,
not radically. Pilates instructors book less hours but their studios
do not go dark like factories.
Needless to say, the global debtor, massive importer, service-based
de-industrialized welfare state that the US had become by September
2008 was the polar opposite of the 1930s economy that Bernanke so
badly misunderstood in the first place. And for that reason, a classic
industrial depression was never in the cards.
To take one example, inventory liquidation during the Great Depression
amounted to a 20% shrinkage of GDP, but only a 2% reduction during the
In fact, as I also demonstrated in The Great Deformation, the moderate
liquidation of the excess inventories and payrolls that had built-up
during the Fed's unsustainable housing and credit boom was over and
done by mid-2009. Indeed, the recession had cured itself even before
the $800 billion Obama stimulus program or the Fed's massive QE
maneuver had any measurable impact on the US economy.
So Bernanke lunatic money printing spree which took the Fed's balance
sheet from $900 billion on the eve of the crisis to $4.5 trillion did
not prevent any semblance whatsoever of a Great Depression 2.0.
What it did, instead, was inflate the mother of all financial bubbles.
Not only was the phony household wealth that had b een destroyed by
the last crisis entirely recovered, but it has been increased by
another $18 trillion to boot.
Needless to say, the above chart is the product of massive asset price
inflation, not increases in the ingredients of real societal wealth.
That is, gains in labor hours employed, productivity gains realized
and entrepreneurial energies unleashed.
In the case of labor hour growth, for example, there has been none.
That's right! Between the Q3 2007 pre-crisis peak and the most recent
quarter, household wealth as measured by the Fed soared by $18
trillion or 24%, but labor hours have risen less than one-half of one
Likewise, labor productivity has stalled dramatically. Since the
pre-crisis peak nonfarm business productivity has grown by only 1.1%
annually or at just half its historic 2.3% rate. Moreover, during the
last five years productivity has grown at just 0.4% per annum.
There is obviously no way to quantify entrepreneurial activity per se.
Indeed, the various facets of it—- creative destruction, business
innovation and disruptive technological change—-are crucial to
capitalist prosperity precisely because they can't be quantified in
recurring statistical series from the government's data mills.
Nevertheless, Gallup has long tracked the birth, death and net change
in US business firms, and that trend is unequivocal. It had been
heading south for many years, but took a step-change downward after
the financial crisis; and it still has not recovered.
Finally, it's just a plain fact of history that without gains in real
net investment there can be no gain in real wealth. Yet real net
investment in the US business economy today is 8% lower than at the
2007 peak and 17% below turn of the century levels.
So how do you grow household wealth by $18 trillion in the face of
these dismal real world trends?
In a word, with a printing press. But what happened today is that
Draghi showed he is out of tricks and Yellen confessed she is out of
Yes, this sucker is going down. And this time all the misguided
economics professors turned central bankers in the world will be
powerless to reverse the plunge.