Thursday, September 22, 2011


In other fields, when bridges do not stand, when aircraft do not fly, when machines do not work, when treatments do not cure, despite all conscientious efforts on the part of many persons to make them do so, one begins to question the basic assumptions, principles, theories, and hypotheses that guide one's efforts.

-- Professor Arthur Jensen, psychologist and psychometrician

Theories about genetic intelligence differences and economics have this in common: when they don't work according to the prevailing ideology, practitioners aren't inclined to question the theory. They just act on the idea that what hasn't worked before will work if tried again, because, well, the alternative is out of bounds.

As I write this, the markets are in a ghastly sell-off largely because the quacks controlling the U.S. government economic policy can't help repeating themselves. IBD says:
After meeting for two days to discuss the economy, the Fed announced it would "twist" long-term rates relative to shorter ones. That entails buying $400 billion in 6-year to 30-year Treasuries by June 2012, while selling $400 billion of Treasuries maturing in three years or less. This would be the Fed's third major bond-buying program in less than three years. This program is similar to the "Operation Twist" that the central bank undertook in the early 1960s.

"Further aggressive moves are likely. The Fed is likely to expand its balance sheet again later this year, in another round of quantitative easing," wrote Gus Faucher, director of macroeconomics for Moody's Analytics, in a note. "The central bank could even move beyond purchasing Treasuries, to purchasing corporate debt and even equities. It could also reduce the interest rate on reserves in an effort to encourage bank lending."
Since the 2008 debacle, the Fed has pursued an almost uninterrupted policy of pumping "liquidity" into the market while keeping interest rates so low that they are effectively less than zero when inflation is factored in. All that pumping seems only to have flooded the carburetor. Liquidity may have been a problem in 2008, but the system is today full of money (albeit much of it created ex nihilo by the Treasury); it just isn't being used by the private sector for what the government wants it used for, making loans and hiring people.


Ben Bernanke is famously a student of the Great Depression and has "learned" one thing from it: the crisis was caused by money supply drying up. It's possible that if he stepped into a time machine and went back to 1932, he might have succeeded in stopping the bleeding. But this isn't 1932. It's a different world and a different kind of financial rout. That doesn't stop him from doing the only dance steps he knows.

A downside of the zero-interest-rate religious belief is that it leaves savers high and dry. People who've worked and invested to make money over the years, and would now like to protect its purchasing power, have no riskless option left. Treasury bonds won't lose their nominal value if held to maturity, but they aren't earning any significant yield meanwhile and their real-world value is liable to be trashed by inflation.


But that's par for the course. The Fed and the Treasury have convinced themselves that the world will end if any large institutions, particularly banks, fail regardless of how worm-eaten they are. If conservative investors, especially those who are retired and who can only earn from their savings, get whacked -- too bad, collateral damage.

Our "leaders" are trapped in a tape loop. Endless minor variations on the same theme. I can't stand to listen to Obama's speeches, but from what I read of them, each is a cut-and-paste job, a new slant on his basic idea that "the rich" (anyone with an income of more than $200,000) is robbing the poor box. (Lest you think this is self-serving, I can assure you that I make well under $200,000 a year.) Bernanke and Geithner have only a Pavlovian response that the worse things get, the more government intervention is called for.


I'm no apologist for corporations; they have plenty to answer for, and reasonable regulations (such as those for worker safety and environmental responsibility) are, well, reasonable. But they aren't hiring, and in some cases actually moving operations out of the country, because they are over-regulated, know not what loony government law will hit them next, and above all, they understand that they have an enemy in the White House. The Fed and the Treasury may not be their enemies, but they deeply believe in central control of the economy. They're trying to stimulate the economy while micro-managing it. To return to the automobile metaphor, it's like flooring the gas pedal while keeping a heavy foot on the brake.

When treatments don't cure, can't any of our economic mad scientists acknowledge that the assumptions behind them might be wrong?


2 comments: said...

Well said all around. I believe Bernanke and the monetarists have the depression dead wrong. I wrote a blog about it here and I hope you find it informative.

Rick Darby said...


I like your analysis very much. By comparison, my posting is just shooting from the hip -- necessarily oversimplified.

Great line from your post:

"It should be obvious why the Keynesian big government theory has been popular with government officials since its origination in the 1930s. It lets them spend money they don’t have, as if this were some courageous and far-sighted measure, rather than a demagogue’s natural instinct."