Money Management and the Economy

Thursday, September 25, 2008

Inanities in a crisis

You aren't smarter than the market. It really is that simple.

The media is filled with plain silly inanities these days as everyone is focused on the crisis du jour on wall street. Here is one that grabbed my eye:

"The Depression itself was a dynamic sequence. It wouldn't have happened if the Fed hadn't insanely tightened credit in response to the stock market crash, rather than the correct policy of easing interest rates."

First, that monetary policy lead to the depression is a highly controversial explanation favored by money-supply ideologues. But the Fed did not have a policy of "tightened credit". They simply couldn't expand the money supply by printing dollars because, at the time, each dollar had to be backed by gold bars at Fort Knox.

Where the government did act to make the problem worse was cutting federal spending in response to reductions in tax revenue. Essentially the folks in charge ran government like a business, cutting expenses in response to reduced revenues, instead of using their almost unlimited borrowing power to stimulate the economy by keeping right on spending.

Finally, this ignores the central cause of the depression. People couldn't afford to buy the products they were producing. When the market crashed, as every speculative bubble will, businesses had enormous inventories of unsold goods. Think about what would happen today if every industry had the same oversupply that the housing market has. The housing market is in a depression now. That was the state of everything going into the great depression.

Of course blaming the great depression on low wages, cuts in government spending and market speculation are not messages that are very welcome in today's business environment. So we hear inanities about monetary policy that just coincidentally seem to justify the government stepping in to bail out the speculators when bubbles pop.

But that is just one example of what is turning into a propaganda fiesta with the media whacking pinata's and spewing out some businesses message. A recent NYT story described falling real estate prices and sales as "necessary" in order for the market to clear out the inventory of homes. Now you might ask how falling sales will help clear out the excess inventory. The answer is that it obviously doesn't. In fact, falling prices combined with falling sales indicates the opposite, the problem is getting worse and we are a long way from the bottom. Even with lower prices, the number of customers for homes continues to decline and the supply of homes available continues to grow. Of course that is not a good message if you are trying to get people to open their wallets and buy an overpriced house. Thus, whack! and the real estate industry's message comes flying out of the media's pinata.

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