For years, public officials and the punditry class have taken George Costanza’s advice to appear busy by looking frustrated and upset. It gives the false impression that you’re immersed in your work while not really doing or achieving anything. That is sort of how the government reacts whenever the economy tanks: spend lots of your tax dollars, give speeches, and partake in photo-ops with little results.
Anytime a recession grips the nation, there are always calls for the federal government to initiate a public-works project, the central bank to inject stimulus into the financial system, and the consumer to spend more. It is rare for politicians to channel the spirits of former Presidents Warren Harding or Calvin Coolidge and commentators to study the words inside Economics in One Lesson. The real cure for a downturn is to do nothing at all and let the market rein in malinvestment, excess, and ineptitude.
But don’t tell that to the financial experts who keep coming up with grandiose experiments to spur growth.
With the economy near full employment and inflation tame, the Federal Reserve is taking a gander at its strategies and tools. Ostensibly, artificially slashing interest rates, printing money, and bailing out foreign banks are not sufficient measures for the Eccles Building. So, what other kinds of bullets could the central bank possibly fire off in the next downturn?
Peter Morici, an economist and columnist, has a few recommendations. And they have something to do with helicopters, Fed accounts, and piles of cash.
The author of more books than you will likely read in a decade recently penned an article for MarketWatch titled: “The next time the economy tanks, the Fed should give people, not banks, free money.” He proposed the Fed give away cheap money to working-class Americans rather than extending easy dollars to those near the spigot, primarily financial institutions and the government.
“Essentially the Fed would be financing (monetarizing) an increase in the national debt to stimulate the economy but cutting out the middleman — new federal spending on roads, bridges and the like, which take so much time to effect.
“Then when dark clouds gather, instead of giving money to banks to squander on big salaries, deposit a tidy sum in the account of every American to spend or pay down debt.
“That would get the economy rolling again — quickly.”
Is this what the conversation has boiled down to? For libertarian economists of the Austrian persuasion, it is a monetary policy that would do more harm than good.
During the financial crisis a decade ago, the Eccles Building pulled the trigger on unconventional big guns. The money supply exploded, interest rates were near zero, and reckless deficit spending was facilitated. Even more egregious was Ben Bernanke and Co. bailing out foreign banks and multinational corporations to the tune of $3.3 trillion through the Term Auction Facility (TAF), a program that increases liquidity in credit markets.
Now, one of the most respected economists in the United States is suggesting the Fed fly a helicopter and drop bags of Andrew Jacksons and Benjamin Franklins for tens of millions of Americans.
The obvious counterargument is a financial one. But there is another point that needs to be made: moral hazard.
In a study published in the Journal of Financial Economics, it was determined that bailouts incentivize banks to be reckless in the future. Well, duh.
When the government and the Fed decided to bail out JPMorgan Chase, Wells Fargo, Goldman Sachs, and Morgan Stanley, it established a horrific policy of privatizing the profits and socializing the losses. It turned these outfits into gambling joints, where employees could be reckless without fear of being held accountable. Taxpayers would be forced to foot the bill one way or another.
Wall Street has claimed it learned its lesson, but the facts and figures say otherwise. In recent years, banks have started to offer no-down-payment mortgages, approve riskier loans, ease underwriting standards, and leverage stock buybacks. This is just the tip of the iceberg.
Imagine if John Q. Public were afforded the same benefits as the elite. The results would be just as bad.
Thanks to zero interest-rate policies (ZIRPs) of the last decade or so, Americans have borrowed more than they could afford. Today, credit card debt is at a record $870 billion, 46% of households spend more than they earn, half the country lives paycheck to paycheck, personal savings rates are in the 3% to 6% range, and many consumers go back into debt when they pay off their obligations. These numbers do not exactly elicit confidence in the consuming public.
Because of everyday Americans’ financial plight, there was a lot of condemnation of Wall Street getting a bailout. But it wasn’t due to the poor economics. The complaints were: “What about me? Where’s my bailout?”
Generally, people want something for nothing – damn the consequences and forget morality. If Americans see a sign that reads “Free Money,” they will not ask where it came from and what it costs. They will take the cash, splurge on television sets and ripped jeans, and, when their wallets are empty, will return for more. As this becomes a habit, they will engage in riskier behavior, expecting another party to bear the costs of those risks – that is your moral hazard.
Like The Picture of Dorian Gray, we will pursue pleasure, not rectitude and responsibility: “You will always be fond of me. I represent to you all the sins you never had the courage to commit.”
Curing a Disease
This is the longest bull run in modern U.S. history, but the good times will not last forever. Baby ’37 will not be dancing in the streets. Eventually, malinvestments, excesses, debt, and incompetence become too much for the economy to bear, so the market intervenes and institutes a recession. Unfortunately, the government imposes itself and prevents the recession from remedying what ails the economy. Think of it like the iconic Sylvester Stallone line from Cobra: “You’re a disease and I’m the cure.”
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