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Monday, June 11, 2012

What's Really Wrong With The Economy

John Hussman makes some good points in his comments this week at Hussman Funds.

He points out that most draw the line on Democrat or Republican beliefs. Dems think we need more regulation and higher taxes, while Repubs think lower taxes and fewer regulations are the key to getting the economy rolling again. But, he argues, both are wrong.

He says that the problem is actually that we have “a warped financial system, both in the U.S. and globally, that directs scarce capital to speculative and unproductive uses, and refuses to restructure debt once that debt has gone bad.” And, he's absolutely right. He explains further,

Specifically, over the past 15 years, the global financial system — encouraged by misguided policy and short-sighted monetary interventions — has lost its function of directing scarce capital toward projects that enhance the world's standard of living. Instead, the financial system has been transformed into a self-serving, grotesque casino that misallocates scarce savings, begs for and encourages speculative bubbles, refuses to restructure bad debt, and demands that the most reckless stewards of capital should be rewarded through bailouts that transfer bad debt from private balance sheets to the public balance sheet.

What is central here is that the government policy environment has encouraged this result. This environment includes financial sector deregulation that was coupled with a government backstop, repeated monetary distortions, refusal to restructure bad debt, and a preference for policy cowardice that included bailouts and opaque accounting. Deregulation and lower taxes will not fix this problem, nor will larger "stimulus packages." The right solutions are to encourage debt restructuring (and to impose it when necessary), to strengthen capital requirements and regulation of risk taken by traditional lending institutions that benefit from fiscal and monetary backstops, to remove fiscal and monetary backstops and ensure resolution authority over institutions engaging in more speculative financial activities, and to discontinue reckless monetary interventions that encourage financial speculation and transitory "wealth" effects without any meaningful link to lending or economic activity.

Like us, he believes we are already in a recession in the US, joining Europe in that mode. We have been kicking the can down the road for a very long time. The edge of the cliff looms. Our leaders are taking us right off the edge of the cliff.

This is exactly why, every day, we describe Wall Street as a casino. It's representative of a whole generation of know-nothing, greedy banksters and fellow travelers, intent only on lining their pockets with taxpayer cash while the middle class sinks into a quagmire of debt they themselves promoted. The amazing thing to us is that there haven't been numerous assassinations of banksters and politicians. Certainly, as a group, we the people need to take back our government, which has been used and abused like a black female slave in Eighteenth Century America.