It worked, but it's no way to run an economy. Bad examples keep getting repeated and each time show up worse. That's precisely today's dilemma. The stakes are enormous. No one for sure knows to what degree, and there's even less assurance how things will play out.
Minsky on Markets
He's passed but surely smiling and saying I warned you. His economic writings were mostly ignored in the prosperous 1980s and 1990s, but current market turbulence proved him right. He constructed a "financial instability hypothesis" building on the work of John Maynard Keynes. It showed how speculative bubbles grow out of outsized greed. Finally, asset values collapse in the end-game part of a seven-stage up-then-reverse journey downward. It's a "Minsky Moment" when euphoria turns to panic, investors bail out, and meltdown ensues.
That's how markets reacted to the Greenspan-caused tech bubble. They sold off hugely, then reinflated from outsized monetary and fiscal stimulus. Last summer, they peaked, dropped sharply, stabilized in April after a lesser Minsky reversal, but there's no way to know if it's over. Grantham doesn't think so. Neither do others. More on that below.
Economist Michael Hudson Cuts Through the Clutter
Hudson is an economist and President of The Institute for the Study of Long-Term Economic Trends (ISLET). He's also a Distinguished Research Professor of Economics, a former Wall Street financial analyst, and a no-nonsense critic of the current economic environment. He notes how recent events show that "economic royalists" and "money changers" run things and have "mismanage(d) our economy into dire straights of unprecendented risk - (a combination of reckless) debt creation, euphemized as 'leveraging' and 'wealth creation.' "
Few regulatory checks remain, and anything goes "under the guise of 'saving the system.' " If money manipulators hadn't endangered it, no fix would be needed. Now with systemic trouble of undetermined proportions, trillions of dollars are being misdirected. They're going for wars and bailouts instead of helping beleaguered homeowners who were manipulated for profit, face possible foreclosure, job loss, and likely hard times ahead.
Hudson says what's going on is "an economy-wide Ponzi scheme (for) creditors to lend debtors enough money (for their) interest costs so as to keep current on their loans." The idea was for various asset prices (stocks, bonds, real estate) to be inflated enough so debtors could pledge them as collateral at higher market valuations for more loans.
It worked as long as valuations rose. When they fell, all bets were off, and here's how trouble started and spread:
-- cracks in the multi-trillion dollar US securitization markets showed up last summer; they created liquidity crises for two Bear Stearns hedge funds; they were heavily into sub-prime mortgages; Bear Stearns was a Wall Street outlier; it was much unloved on the street, notorious for taking outsized risks, and that made it very vulnerable for a run on its assets when the opportunity came; it happened in March and forced the firm to sell out for pennies on the dollar after 85 years in business;
-- the initial damage spread to a little-known German bank, IKB; it forced the European Central Bank (ECB) to provide large amounts of liquidity to stem the damage;
-- it became apparent that trouble was systemic; it could touch down anywhere and likely hardest where greatest risks were taken - in America; and
-- intervention wasn't working; panic didn't stop; reserve hoarding took hold instead; and a run on commercial paper began - the kinds international banks issued in Structured Investment Vehicles (SIVs).
The bottom began to fall out, and the problem was how to stop a growing debacle from becoming catastrophic. The solution, of course, was "immoral hazard" by bailing out transgressors, and the bigger they are, the greater the bailout amounts. Hudson calls it a "trillion-dollar bailout of bad mortgage debt" while homeowners go begging.
It began in March with heaps of hyperbole selling it. Multi-billions poured out. Money supply growth exploded. It now averages a near-monthly 18%. Deficits are mounting, and fiscal spending is just as outsized, but not much of it reaches households even with the so-called "rebate." In the meantime, real wages keep falling. Oil and food prices are skyrocketing. Real unemployment tops 12%. Consumer inflation is nearly as high, and real GDP (not the phony official number) hovers around -2%. Most other economic numbers are just as worrisome, so manipulating magic fixes them.
We're in uncharted territory, problems are huge, they're systemic and structural, and Hudson says "the Fed and Treasury officials seem to be making up new rules on a daily basis - that receive only....perfunctory" congressional oversight. Speculation is being rewarded, anything goes, and bailing out Wall Street and big banks takes top priority.
I am a 72 year old, retired, progressive small businessman concerned about all the major national and world issues, committed to speak out and write about them.
