Crash Course For Bernanke

http://globaleconomicanalysis.blogspot.com/2008/01/crash-course-for-bernanke.html

Crash Course For Bernanke

I am reading an interesting article from October 2000 called A Crash
Course for Central Bankers. The following excerpt seems strikingly
pertinent.

There’s no denying that a collapse in stock prices today would
pose serious macroeconomic challenges for the United States. Consumer
spending would slow, and the U.S. economy would become less of a
magnet for foreign investors. Economic growth, which in any case has
recently been at unsustainable levels, would decline somewhat.

History proves, however, that a smart central bank can protect the
economy and the financial sector from the nastier side effects of a
stock market collapse.

The Japanese Experience

Here is another paragraph from the article.

The downturn following the collapse of Japan’s so-called bubble
economy of the 1980s was not as severe as the Great Depression.
However, in some crucial aspects, Japan in the 1990s was a slow-motion
replay of the U.S. experience 60 years earlier. After effectively
precipitating the crash in stock and real estate prices through sharp
increases in interest rates (in much the same way that the Fed
triggered the crash of 1929), the Bank of Japan seemed in no hurry to
ease monetary policy and did not cut rates significantly until 1994.
As a result, prices in Japan have fallen about 1 percent annually
since 1992. And much like U.S. officials during the 1930s, Japanese
policymakers were unconscionably slow in tackling the severe banking
crisis that impaired the economy’s ability to function normally.

It's amazing that anyone could possibly think that if only Japan had
started cutting rates in 1992 instead of 1994 that it would have made
any difference. Unfortunately for the world, we now get to test out
Bernanke's theories in real life.

The Great Fiscal Stimulus of 1929

Consider The great fiscal stimulus package ... of 1929

Herbert Hoover -- only nine months into his presidency --
assembled leaders from the public and private sectors to create an
economic-stimulus package. Among the measures, Time magazine reported
at the time, was a promise from Congress to offer bipartisan support
for a tax-cut package. Also on the table was an assurance from the
Federal Reserve that it would provide cheaper credit.

Of course, there were a litany of public-works projects, plans for
new corporate investments, and even a promise by Henry Ford to raise
wages at his auto plants.
None of this worked.

Certainly, our economy now has far more differences than
similarities with the economy of 1929, and few expect a new depression
for the decade ahead. But it's also worth remembering that the best
laid plans of presidents, chief executives and senators can sometimes
come to nothing.

Like the fiscal stimulus of 1929 the Fiscal "Stimulus" Of 2008 Is
Doomed To Fail.

Yes, there are differences between 1929 and 2008. However, many
similarities are striking.

Similarities Between 2008 and 1929

* In the 20's, there was a massive overexpansion of manufacturing
capacity. Today there is a massive overexpansion of productive
capacity in China and a massive overexpansion of retail stores in the
US.

* In the late 1920s, bank credit propelled a massive real estate
boom in New York City, in Florida, and throughout the country. We now
have the biggest housing bubble in history.

* In late 20’s credit was expanding at a rapid pace but there was
no need for additional productive capacity. Today GDP is rapidly
falling but credit is still rising (for now).

* In 1929 there was no pent up demand for manufactured goods,
especially autos. Today there is no pent up demand for homes,
restaurants, retail stores, strip malls, autos, trucks, or anything
else.

In 2008 as in 1929, the ability and willingness of consumers to borrow
and banks to lend is under attack not only in the US but Europe as
well. For more on the latter please see Financial Crisis Poised To Hit
Europe.

Four Reasons Bernanke Will Fail

* Changing Social Attitudes About Debt (People willing to walk
away from homes, save more and spend less)
* Commercial Real Estate Crash Underway
* Unemployment Soaring as Private Sector Jobs Contract
* Global wage arbitrage

For more on changing social attitudes please see 60 Minutes
Legitimizes Walking Away From Homes.

Ludwig von Mises: "There is no means of avoiding the final collapse of
a boom brought about by credit (debt) expansion. The alternative is
only whether the crisis should come sooner as the result of a
voluntary abandonment of further credit (debt) expansion, or later as
a final and total catastrophe of the currency system involved."

Final analysis will show that Bernanke can change interest rates but
not attitudes, and attitudes are far more important. Indeed, changes
in attitudes will render all of Bernanke's academic theories about the
Great Depression meaningless.

Greenspan had the wind of consumers' willingness and ability to go
deeper in debt at his back. Bernanke has the wind of boomers fearing
retirement in the midst of falling home prices and impaired bank
balance sheets blowing stiffly in his face. There is no cure for what
ails us other than time and price. And with the aforementioned
attitude changes, the biggest, most reckless, global credit expansion
experiment the world has ever seen is coming to an end. Central banks
are powerless to do anything about it.

Mike "Mish" Shedlock
.

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