This page has been archived and commenting is disabled.
Zombie Economists and Why "Financial Genius is After the Fall"
“If one has been a financial genius, faith in one’s genius does not dissolve at once.”
John Kenneth Galbraith
Watching the jobs numbers this week, one is tempted to say “told you so” with respect to those analysts who are pounding the table for the US economy. Who can look at expanding investor bubbles in asset classes like housing assets or even auto paper, and conclude that the real economy is on the mend? As one analyst said last week, the housing market has recovered but the mortgage sector has not.
The explosive growth in subprime auto paper is especially notable since it reflects a deliberate downward move in credit targets to boost sales in an irrational industry. Most auto producers don’t even hit their cost of capital in terms of equity returns in a normal market. The expansion of auto sales volumes via growth in subprime debt issuance is one of the least followed big stories of 2013. “Irrational exuberance” somehow does not quite do this situation justice.
As with the mortgage market in 2007, nobody at the Fed has taken public notice of the mid-double digit growth in auto securitizations over the past several years. Indeed, the Fed views the expansion of consumer debt as a measure of success. There may not be any real growth in jobs or income, so the Fed economists seem to believe, but we can borrow our way to prosperity. No surprise then that the neo-Keynesian socialists who populate the majority on the Federal Open Market Committee assert that buying RMBS and Treasury paper is somehow going to spur the real economy to recover in terms of jobs and, magically, without stoking domestic inflation.
David Kotok of Cumberland Advisors noted in a comment this week:
“When the Weimar Republic attempted to meet international flow requirements under the Treaty of Versailles, it did not immediately cause hyperinflation. The process started with currency expansion and banking manipulation in an attempt to manage foreign-exchange flows. It ended with hyperinflation, the demise of the government, and the rise of Nazism in Europe. Thus, the European contagion did not begin with the fall of the government and rise of Hitler in the 1930s; it started years earlier.”
The overtly inflationary policy stance of the FOMC is especially significant when you consider that Fed Chairman Ben Bernanke is no longer in control of monetary policy. The Greenspan protégé is now outnumbered by appointees of President Obama, who would gladly hyperinflate the US economy in order to protect their short-term political interests. The fact that most investors have acquiesced to this policy direction is reflected in credit spreads, which are now at the tightest levels since the 2007 meltdown. As Rick Santelli at CNBC correctly notes, “the rotation” is back into bonds kiddies so long as confidence is maintained.
Irving Fisher, the man labeled by Milton Friedman and John Maynard Keynes (correctly in my view) as the greatest US economist of the early 20th Century, famously pronounced in the fall of 1929 that all economic restraints on unlimited future growth had been eliminated. Two years later he wrote the definitive essay on how to unwind a debt contraction deflation, but EVERYONE best remembers him for that 1929 bull market call.
The arrogance of the reflationist majority on the FOMC is proportionate to the exuberance which temporarily blinded Fisher and his contemporaries in the late 1920s, and also economists in the 1990s and 2000s. Robert Shiller wrote in his 2005 book “Irrational Exuberance” about the psychology of bubbles:
“Many perceptive people were remarking, as the great surge in the stock market of the 1990s continued, that there was something palpably irrational in the air, and yet the nature of the irrationality was subtle. There was not the kind of investor euphoria or madness described by some storytellers, who chronicled earlier speculative excesses like the stock market boom of the 1920s. Perhaps those storytellers were embellishing the story. Irrational exuberance is not that crazy. The once-popular terms speculative mania or speculative orgy seemed too strong to describe what we were going through in the 1990s. It was more like the kind of bad judgment we all remember having made at some point in our lives when our enthusiasm got the best of us. Irrational exuberance seems a very descriptive term for what happens in markets when they get out of line.”
Of course, the Fed’s initial response to the 2007 subprime crash and the threat of global deflation was appropriate, namely the proverbial wall of money. The trouble is that neither the FOMC nor their counterparts in the EU or Japan understand that buying time via massive infusions of liquidity does not create the circumstances for growth unless it is followed by debt reduction and restructuring. While the US has made some progress restructuring in terms of refinancing and/or modification of mortgages, there is still a vast pile of assets that are not being fixed. No surprise, therefore, that GDP growth and job creation lags popular expectations.
The reluctance to restructure is not merely because investors must feel pain. Any restructuring of zombie banks must involve a discussion of financial fraud, a topic nobody at the Fed or other bank regulatory agencies want to touch. It is interesting to note, in this regard, that the upcoming elections in Iceland will turn on proposals by the Progressive Party candidate to haircut both underwater mortgages and sovereign debt.
Just imagine how the fascist operators of the great Eurocracy will react if Iceland actually does impose permanent debt haircuts on domestic banks and sovereign creditors. Call it Cyprus cubed. The Icelanders, a more bold and audacious people than their cousins in Norway, have apparently figured out that their country cannot grow and pay excessive, fraudulent debts at the same time. A choice need be made. We face the same dilemma in the US, but as yet nobody wants to admit that fact.
In simple terms, the Fed has simply run out of bullets. When Rep. Augustus Freeman "Gus" Hawkins and Hubert Humphrey (D-MN) sponsored their eponymous jobs legislation in 1978, the former stated emphatically that the bill would bring full employment within two years. He also wanted the federal government to guarantee a job for every American, a commitment that the Congress was not willing to support – even in the heady days of the late 1970s. Rep. Hawkins did not seek reelection in 1990 and was succeeded by Rep. Maxine Waters (D-CA).
The Humphrey-Hawkins legislation now drives the FOMC’s policy to use zero interest rates to spur job growth. It needs to be mentioned that HH was merely an extension of the post-WWII Employment Act of 1946, which called upon the federal government to pursue "maximum employment, production, and purchasing power." Keep in mind that prevailing Keynesian economic thought in the 1970s held that aggressive government spending could be used to counter cyclical decreases in consumer demand and employment. You still hear such thinking from socialist thinkers such as NY Times columnist Paul Krugman.
Now that the possibility of massive fiscal stimulus has been taken off the table as a means to counter job losses and flat consumer demand, however, the Fed and other global central banks have explicitly embraced monetary expansion as a substitute. The plan announced by the Bank of Japan, for example, to move inflation up to 2% within the next two years via a massive expansion of the money supply shows the complete bankruptcy of economic thinking in the market economies.
Hyperinflation may allow the BOJ to monetize the nation’s massive public debt load, but it will not generate real growth for Japan’s people or the global economy. The same holds true for the US and the EU. But none of our beloved central bankers have the courage to admit the truth to the public. As one Sell-Side analyst wrote this AM: “One of the best pieces of advice I received from some of my Japanese friends is that Abe, not only has a limited understanding/experience of economics and markets, but that he is also-- crazy. I'm not betting against the BoJ for the first time in 20 years.” Somebody tell Kyle Bass to adjust accordingly.
Many Americans forget (or never knew) that inflation was a big concern in the US before WWII and during the 1970s-1980s. The fact of an aging demographic profile for the US population allows the FOMC to pretend that inflation is not a concern, at least for a while. But one must wonder how long it will take for the Fed and our political leaders to realize that no amount of inflation is going to create real jobs and, more important, get real wages to rise. Seeking to support confidence is fine, don’t get me wrong, but confidence without substance in terms of restructuring will only result in economic stagnation and rising prices down the road.
See you in Washington next Tuesday at AEI’s next housing bubble event: “Bubble bubble: Is the housing toil and trouble over?”
http://www.aei.org/events/2013/04/09/bubble-bubble-is-the-housing-toil-a...
- rcwhalen's blog
- 11152 reads
- Printer-friendly version
- Send to friend
- advertisements -

Chris, I'm your biggest fan and have followed you faithfully since Sept. 15 , 2008. You're a towering intelect with a 5 star rated network.
I read "Inflated" twice .
Ever consider the word "yet", the most powerful word in the English language? The dollar is doing better than it has in eight and a half months while gold is breaking down , stocks are on new highs and bond yields are at all time lows. Kyle Bass and Doug Hageman will look like idiots if the Dollar index takes out 84.01 and precious metals fall below last July/ Aug lows.
Consider this: America stuffed the yeild chasing China men who denied their society industrialization for 60 years with all our bad mortgages.
The Eurozone not only will not survive as the second biggest economy on Earth but will go down the toilet with the PIIGS & Cyprus leaving the Dollar the only place to go.
http://www.bloomberg.com/quote/DXY:IND
The BRIC wasn't planning for America to have a shale oil boom and create massive internaly generated cash flow to service $16 trillion in debt. The dollar hasn't broken out "yet" and precious metals have not broken down below the lowas of last summer "YET" and the Baltic Dry Index doesn't suggest that the China Men will be making steel any time soon. http://www.bloomberg.com/quote/BDIY:IND/chart
The fact of the matter is that America took on all commers, and may have possibly become the victors in the global currency wars which is too bad because Obama & his perp walk banksters make me puke.
Fade the consensus.
Chris Whalen says: "See you in Washington next Tuesday at AEI’s next housing bubble event"
His membership and/or invitation from AEI is about all you need to know about this walking tub of fat. You'll just want to know if he scoops up lard to eat every morning with his hand. If so, that handle to the AEI conference room door is gonna be slippery. Have fun AEI shitheads and warmongers.
http://baselinescenario.com/2009/07/15/consumer-financial-protection-peter-wallison/
http://baselinescenario.com/2008/12/16/community-reinvestment-act-housing-crisis-aei/
Blah blah blah.
Any rational author that doesn't promote ending the Fed is shilling propaganda for them. Whalen included.
Truth always wins long term, and there is absolutely zero truth to finance Inc at the fascist present. Price discovery is moot, assets are moot, politics are moot, this bullshit time to live is moot.
Fraud (fiat) money is dead.
Change you can believe in.
Jim Willie about sums it up:
"Some important messages should be heard. At the macro level, the entire financial system has become hopelessly sclerotic. The chronic Western financial crisis is more like a monetary war for elites to retain control of the production of money, the setting of rules, the process of confiscation, while they desperately attempt to preserve the fiat currency system with the USDollar as its flagship. That ship should fly the Skull & Crossbones as its flag. The refusal to liquidate the big insolvent banks stands as the quintessential message of corruption and control to execute the Fascist Business Model, which will result in systemic failure. With MF-Global and Robo Foreclosure Fraud and Cyprus Bank Taxes, layered atop the QE to Infinity, the fascist bankers are finally unmasked. They were never defeated in the 1940 decade. They migrated to the banks in Switzerland, London, and New York. The big banks no longer serve as capital formation engines. They no longer serve as business investment partners. They are pure predators. At a micro level, they are giant hollow reeds ripe with bond fraud, phony accounting, insider trading, replete with financial market parasite functions. They are not credit engines for commerce, but rather carry trade platforms and money laundering centers."
Money and Credit Creation that exceeds the growth in GDP is, ipso facto, Financial Fraud.
The Financial Industry's claims against real (non-paper) assets therefore are a fraud.
Here is my question on this topic. Okay so we have amassed such great debt, both nationally and worldwide, which from my understanding is that debt is actually paid down from GDP growth, taxation, and other forms of acceptable governance. Okay, so we are at an impass of stalled GDP growth, because GDP is driven by consumption which consumption is linked to resources which resources are not infinite, so technically whether we are there now or shortly there, GDP is at its max limit correct? So that means that we can not have any more growth, proven by well the laws of physics, but yet we add trillions in debt each year.
Now with this sitaution basically we are at a point where our GDP is at where it's going to stay, so the fact that our growth is exponentially larger than our means......its just doesn't work.
I am a young guy, with limited banking or economical experience, but without a form of debt forgiveness or complete systems destruction, this just can not work out correct? Mathematically and by well just not being retarded any person would come to those terms, at least in my opinion.
Not really. The price mechanism ensures efficient allocation of resources according to their level of scarcity. The physical upper limit of resource availability is not as relevant as it may appear. The Club of Rome, for example, came to the wrong conclusion already in 1974 by predicting that mining of certain resources, such as silver or zinc, would come to an end, way before the year 2000. Big mistake, because their predictions did not include the price mechanism, which would ensure that the reserve estimates of the big mining companies would be revised upwards as the scarcity, and therefore the price, would up. GDP growth is NOT limited by either the physical upper limit of the reseource availability or by the level of debt.
Debt is GDP neutral (for every $ debt there is a $ savings) as long as existing debt is rolled over. The accounting identity 'Government Deficit + Private Sector Balance = Trade Balance' will ensure that the economy is in equilibrium as long as free market forces are allowed to do what theyt do best. The problems start to pile up and GDP goes down the drain when market forces can no longer work: for example the gold standard preventing the GDP adjustment through external capital flows, as it did in the Great Depression. Or, for that matter, as it does now in Europe, just replace the gold standard by the common currency without fiscal adjustment between the surplus and deficit countries.
If inflation is N% and they are paying N%-X interest on the government debt they eventually pay down the debt. They have done this before and will do it again.
Exactly! What we're facing is the wholesale bankruptcy of sovereigns, which isn't supposed to happen. But it's here nonetheless and the supposed cure only exacerbates the disease. What happens next is obvious. The only uncertainty is how long it can be postponed by can-kicking.
The main problem with NeoLiberals during their Reign of Terror is the fact they REFUSE, absolutely REFUSE, to admit their wrong.
When The Markets, and or Society, eventually implode due to their pumping of erroneous facts which justified corporate looting of governments around the globe (including ours).....only then will assholes like Krugman, Hubbard, and Delong actually realize they are morons whose economical theories resulted in thousands of deaths, lifetimes of misery, and a collective insult of intelligence of citizens, everywhere.
Dude, did you know that Stiglitz wrote a sham puff report for Fannie attesting to their sound footing? I believe he made only $10k for that one. There is *no* mainstream eCONomist who is unscathed.
chris,
i think with cheap money for this long what we will find is that by the time bennie gets something like a recovery, things will be so far along into the WRONG things, in other words the MAL INVESTMENT will be so far along that we will get a dislocation crash just with everybody getting reinvested into something that makes sense. i mean, KMR is at 35x 2014 earns, CLX is at 19x 2014 earns and growing revenue at 9 freaking percent. if he manages to keep SPX here it won't go anywhere for 5 years to catch up with valutations and i just don't think anybody has the stomach to hang around that long.
It looks like we are going to have an all Goldman Sachs MMA cage match between Mark “Brutal Reckoning” Carney and Mairo “Whatever it Takes” Draghi. Learn more about the Bashup in Brussels. http://tinyurl.com/c4dlrdt
I think the assumption that there is intent to fix anything is a mistake... call me a cynic, but it seems the world has become one big fire sale... and that intionally...
Nothing significant has been "fixed". It has all been pig lipsticked or swept under the rug.
Who is that quoted sell-side analyst, and how could ANYONE be solvent after "betting against the BoJ for ... 20 years" ?
Ben Bernanke is beginning to resemble that Marshal Applewhite guy who persuaded his followers to join him for a ride on the comet Hale Bopp. He even seems to have developed the same crazed look in his eyes. He grasps at pathetic straws to show his policies are working though one wonders if he is trying to convince us or himself. That this is the guy who drove the economy into the ditch you might think that after 5 years trying to get us out he might admit he has failed and allow someone else get behind the wheel instead of gunning in the engine, spinning the wheels and hoping he will somehow reach Hale Bopp.
A lot of good reminders here, thank you.
I remember the inflation of the 1970's, and the 15% rates.
What is odd to me is that higher rates, such as 7%, would encourage people to save and provide real capital, no?
Interesting that the FED says they are trying to improve employment and control inflation when ZIRP and all their QE only sends the capital to banks and other dark pools while increasing commodity prices.
In reality, the FED is hindering employment and increasing inflation by not raising rates, and continuing to print money and give it to banks for free.
The Trillions in corporate cash stays there - it doesn't go to hiring or salaries it goes to bonuses and stock dividends.
The Trillions in bank cash is not lent or loaned or used for hiring - it is used for gambling in the FED guaranteed casino.
I'm astounded that otherwise intelligent people such as Bernanke are blind to it, or so dark in their hearts and corrupt it is intentional. It is one or the other. You can't blow $6+ Trillion dollars and not be either an utter fool or diabolical liar.
The Keynesian hubris is it's immoral use of taxpayer money to guarantee banker profit; and it is ripe for a tragic downfall.
You forget that the Fed is financing government. Try rolling nearly $17 trillion without them. Every percentage point higher rates go adds an extra $170 billion to that roll. Short of the U.S. pulling a Cyprus or Argentina, the Fed cannot stop.
Thanks for the frank analysis.
However I think this might have been an understatement: "there is still a vast pile of assets that are not being fixed."
That vast pile may have become 40% of the US economy by now, "40%" being the contribution of the financial industry to the US GDP. I don't think it can be fixed ever. And so goes the US.