15 February 2009

Post-Bubble Facts of Life:

It was not all that long ago that Mr. Greenspan, Dr. Bernanke and their cohorts were communicating assuredly about post-Bubble "mopping up" policymaking. They mistakenly believed that astute contemporary central banking provided ample knowledge and ("helicopter") firepower to reflate any unfolding bust. There was also the implicit presumption that the benefits arising from the boom far outweighed the manageable costs associated with any possible bursting Bubble.

Today, things are a bloody mess. The Credit system, economy and conventional economic doctrine are all a mess. Washington is a mess. Fiscal and monetary policymaking are messes. A CNBC commentator likened the process to watching sausage being made. I would counter that at least you have a decent idea what the end product is going to look and taste like. And following the theme that the greatest policy blunders were committed during the inflationary Bubble period, I'll suggest to readers that there is essentially no possibility of "good" policymaking in this especially unsettled post-Bubble period. Today's policymakers - of all stripes and persuasions - are poised to become forever tarred and feathered. As much as booms create genius, busts are an absolute cinch for breeding contagious boneheadedness.

The Greenspan/Bernanke Fed's entire fanciful notion of a positive post-Bubble "mopping up" exercise was a myth. And, importantly, we now have ample support for the thesis that risks rise exponentially during the final "terminal" phase of Credit Bubble excess. How about this: the dearth of policymaking competence during the downside of the cycle is proportional to the financial excesses of the proceeding boom? I would be curious to know how the academic, Dr. Bernanke, modeled the political process when he fashioned his hypothetical "mopping up" abstractions.

There are incredible complexities in regard to the process of Credit Bubbles distorting asset prices, patterns of consumption and investment, and income distribution. Epic Bubbles, as the one we experienced, impart profound changes on the social and political fabric. For one, they meddle whimsically with hopes, dreams and expectations.

Importantly, Bubbles inherently evolve into Destabilizing Mechanisms for Wealth Redistribution. These various distortions tend to grow exponentially throughout the life of the boom, creating the imperative to rein in Bubbles prior to their final, fateful phase of destructive excess. Extending the life and vitality of the Bubble only ensures a more problematic scope and greater consequence from the boom-time wealth transfer. And the more protracted the boom the larger the inevitable number of citizens suffering significant hardship - and the more acute becomes public angst. The bigger the Bubble - the greater the outrage and political fallout. And there is simply no graceful, equitable, timely or orderly course when the gale force political winds are gusting redress for the perceived inequities meted out during the Bubble period. Again, I'm not sure how such pivotal post-Bubble social dynamics were factored into "mop up" theorizing.

To be sure, today's Post-Bubble Facts of Life create a serious policymaking dilemma. Unimaginable wealth was shifted to "Wall Street" and their client base during the boom, while millions of regular folk were saddled with unmanageable debt and, now, negative net worth. Those on the right side of the inflationary boom accumulated historic wealth, while millions on the wrong side destroyed their financial health. The runaway boom inflated expectations - and now comes the depressing phase of disappointment and growing despair. Of course the populace is ticked off, spurring politicians to vilify and seek amends and wealth redistribution. In this regard, there are no surprises today to those of us that have studied the post-1929 landscape.

Major Credit Bubbles evolve into ideological battlegrounds. During boom-times, free-market ideologues pound their chests and take too much Credit for the expanding prosperity. Ditto those with the view that tax cuts are always a righteous and unfailing magic elixir. The boom period fashions a positive reinforcing backdrop for the "conservatives," especially as federal coffers are filled to the brim with inflating tax receipts. As we have witnessed, however, the pendulum can swing rather abruptly back the other way. The "liberals" these days feel they have an unequivocal mandate to use big government to rectify our nation's financial and economic transgressions. With unwavering conviction that it's in the best interest of the majority of the population, they seek to impose governmental influence throughout the financial sector and real economy.

Unfortunately, vilification and payback-time become natural impediments to the policymaking process. Of course, "soak the rich" - the class that benefited so conspicuously throughout the inflationary boom - becomes a focal point for the move to redistribute boom-time wealth. Of course, Wall Street "greed" is vilified, with the general public instinctively backing the powerful political movement to re-regulate the financial system. And, of course, fear of financial and economic catastrophe provides a fertile backdrop for the imposition of government influence and control throughout the real economy.

Hopefully, thoughtful analysis of today's messes will alter the conventional doctrine of how best to deal with asset and Credit Bubbles. But it also helps to explain why Washington policymaking these days often appears less than coherent and policymakers less than competent. The harsh reality is that there is a serious lack of understanding on both sides of the isle (as well as throughout the economic community) as to the forces behind today's crisis; the nature of the deep structural damage respectively imparted upon our financial and economic systems during the boom; and the desired policy path to foster system adjustment and repair. Twenty "experts" would ensure at least 20 conflicting plans.

Fundamentally, there's a complete lack of a coherent framework for even an attempt at gauging whether individual policies will be constructive to system adjustment or whether they will instead compound the damage. Without a credible analytical framework, there is not even a beginning point for thoughtful discussion of policy alternatives. Instead, the debate is predictably fought on political fronts. Ironically, in a period beckoning for cooperative bipartisan problem-solving, the process naturally regresses to irreconcilable ideological battles. When our Washington politicians come to a consensus view on the best course for post-Bubble policymaking, they can then move quickly to resolve global religious conflict and the abortion issue.

My instincts are to want to cut Secretary Geithner and the new Administration some slack. Because we could see this coming. The timing was unclear, but I could have easily predicted some years ago that, come the inevitable arrival of the busting Bubble, our Treasury Secretary (in this case, "Secretaries") was going to appear impotent and not up to the challenge at hand. The market expected far more from the Administration's plan. But it is clearly a case of all of us hoping and expecting too much. There is no simple solution, and there's no palatable comprehensive plan. Put the two parties in a big chamber and there won't be any agreement on what to do. Place one party's leadership around a large table and there'll be no consensus. And, quite likely, have the Administration's top economic policy team gather comfortably around a small table in the Oval Office and there will be similar - and perhaps even more heated - disagreement. We're in store for a messy and protracted adjustment period.


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