海角大神

Well, August washed up. It was the worst month for US stocks in almost a decade. And yesterday didn鈥檛 help. The Dow couldn鈥檛 manage a rally. It rose just 4 points.

The British newspaper, the Telegraph, has the story:

鈥淚t鈥檚 pretty clear the US economy has hit a wall,鈥� said Barry Knapp, head of US equity strategy at Barclays Capital. 鈥淭he macro picture is dominating and, right now, it鈥檚 not clear what鈥檚 going to get the market out of this spot.鈥�

Those fears took centre stage again during the final day of trading.

In New York, markets enjoyed some brief respite from the blizzard of weak data as reports on the US housing market and consumer confidence proved better than feared. The Conference Board鈥檚 index of consumer confidence climbed to 53.5 last month from 51 in July, while the latest reading from the respected S&P/Case-Shiller index showed that home prices were up 4.2pc in June compared with a year ago.

The day鈥檚 rally proved short-lived, however, after the minutes of the Federal Reserve鈥檚 latest meeting returned investors to the summer鈥檚 familiar themes. Fed chairman Ben Bernanke has spent the past few weeks facing increasing pressure from markets to publicly declare he will do more to fight the prospect of a second recession if the recovery stumbles further. According to the minutes, some members of the Fed鈥檚 Open Market Committee saw 鈥渋ncreased downside risks to the outlook for both growth and inflation鈥�.

That admission left the Dow up just 4.99 points at 10,014.72 for the day, while the S&P ended the day up 0.41 at 1,049.33.

As predicted on this page, both Martin Wolf and Paul Krugman are taking the low road. Not that we wouldn鈥檛 take it too, were we in their position. They urged the Obama team to undertake massive programs of 鈥渟timulus.鈥� Now that the stimulus hasn鈥檛 worked, they say it wasn鈥檛 massive enough.

And thank God the administration at least took some of our advice, they add. Otherwise, things would be a lot worse!

In today鈥檚 Financial Times, Wolf refers to a recent paper by Alan Blinder and Mark Zandi. The two use a 鈥渟tandard macro-economic model鈥� to determine that without the feds鈥� intervention the decline in GDP would have been three times worse and unemployment would have risen to over 16%. And, can you believe it, we would have had a federal deficit of $2.6 trillion.

Oh man, oh man鈥�we鈥檙e so grateful to Wolf, Krugman, Summers, Obama, Bernanke and all the other savants who protected us from such a dreadful fate.

But wait a minute, this 鈥渟tandard macro-economic model鈥� sounds great and all鈥�but we can鈥檛 help but wonder. It can predict precise outcomes based on federal policy inputs, right? That is, if the feds were to do such and such鈥�it tells us what will happen, right? And Wolf says it鈥檚 鈥渟tandard,鈥� so we imagine that you can get it at any Wal-Mart or filling station. So, the Obama team must have had it two years ago, right? We can鈥檛 help wonder if this was the same model they used when they forecast that unemployment wouldn鈥檛 go over 8% 鈥� if Congress agreed to the stimulus bill the administration proposed. Must have been a different one鈥� Because Congress did pass the stimulus bill and unemployment rose over 9% anyway.

And it鈥檚 still over 9% 鈥� almost 2 years after the stimulus effort got underway.

So, maybe this 鈥渟tandard macro-economic model鈥� is full of鈥� But let鈥檚 imagine that it isn鈥檛. Let鈥檚 allow our imaginations to take flight鈥�to soar鈥�to loose themselves from the gravity of worldly cares or practical reality. Let鈥檚 imagine that these economists have a clue!

Imagine that the feds had done nothing 鈥� which was more or less standard policy for the nation from its founding in 1776 up until the middle of Herbert Hoover鈥檚 term in 1930鈥�and for all the years that preceded them鈥�all the way back to the founding of Rome. Now, let鈥檚 imagine that Blinder and Zandi are right. Without fed intervention, GDP would have sunk 12% 鈥� three times more than the actual loss鈥�and half the loss of the Great Depression. Well, that would have been a disaster, right?

Well. Maybe not. It might have been a blessing. The point of a correction is to correct. The Blinder/Zandi study tells us that the economy had mistakes equal to 12% of GDP. Okay鈥�well, maybe the correction overshoots. Who knows? But think of the crazy years of the Bubble Epoque鈥�when lenders were giving unemployed people a mortgage for 110% of the inflated value of a house. Think about the Private Equity deals based on growth assumptions that were hallucinatory. Think about the hundreds of trillions鈥� worth of derivatives based on complex formulae that were phony and silly? Think of all the decisions made on the assumption that consumer credit would continue to expand as it had from 1949 to 2007. Was one of every 8 of them too optimistic? Too ambitious? Too unrealistic? We鈥檇 be surprised if there weren鈥檛 more errors鈥�far more than 12% of GDP.

Now ask yourself鈥�what good was done by failing to correct those mistakes? By failing to wash out the excess debt? Failing to allow insolvent banks to go broke? Failing to permit worn-out, uncompetitive businesses to die in peace?

We don鈥檛 know how many mistakes there were. We don鈥檛 know how far GDP SHOULD go down. And we don鈥檛 know what would have happened if willing buyers and sellers had been allowed to sort themselves out in the age-old ways 鈥� by panic, default, bankruptcy, restructuring, and reconstruction.

We don鈥檛 know. We鈥檒l never know. But there is no reason to think we鈥檇 be any worse off if we鈥檇 found out a year ago. A 12% drop in GDP might have been just what we needed. We could be on the road to prosperity now, rather than looking at another 5 to 15 years of stagnation, decline, and desperation.

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