Economics & Research Blog
Turmoil in the Financial Markets... Again.
By Dr. Joe Webb
Published: September 15, 2008
Monday's financial markets perpetuate uncertainty in the markets when there should be none. This is what we know for certain: banks get into trouble when they loan money to people who can't pay it back; the U.S. Federal Reserve likes throwing gas on fires.
This is quite different than some of the intervention that Greenspan orchestrated, though it was inflationary. Greenspan loosened too much on the way to 2000 to be sure that there was enough liquidity to prevent Y2K problems. He then pulled back too much and caused a post-2000 collapse. After 9/11, the injected liquidity allowed markets to stabilize after markets were closed for a week and world political situations were unstable.
This time around, the Fed is forgetting its role in creating a dollar that has the confidence of the markets and citizens. One pundit repeated the old line that holds quite true: capitalism without losses is like religion without sin. Instead of letting these poorly run businesses to die, as they should, and to inspire discipline in the lending and borrowing of money, where the borrower has to prove the ability to play to the loaner, and the loaner has to prove to the borrower that the deal is reasonable, we now have Ivy League MBA finance majors, skilled in Microsoft Excel, concocting theoretical risk management methods that prove to be just houses of cards built on houses of cards built on yet more houses of cards.
Declining oil and commodity prices should not be welcomed as one thinks. They are signs of deepening economic weakness, not a return to price sanity. Prices are thermometers, they are not ends in themselves. The money that went to commodities is now going elsewhere; most are still higher than last year, and higher prices since May are still working their way through production and inventory chains. The inflation data that comes out in a few months may look reasonable but they will be built on debris and carnage.
Monday's industrial production and capacity data prove again that weakening the dollar to increase exports just creates serious problems because they are forced measures, not the natural actions of buyers and sellers.
My economic outlook, rather than one of muddling along at around 2% real GDP is becoming more pessimistic because of these price declines. Government actions will just prolong the problem and make it harder for resources to be reallocated. Muddling may be considered normal for the next five years.
In the end, it's not the bankers and financiers that determine economic vitality. Credit is the grease that oils the machine of productivity. But it is still the production of goods and services that create wealth. When someone thins the oil, like the Fed is doing by feeding inflation, that productivity machine works far less efficiently. Be very careful in planning, and be certain that you are looking at real data and not inflation-distorted data. The Fed is the bartender who waters down the drinks as closing time gets nearer; they're starting to water them down from the first drink served. Beware.
The Federal Reserve issued its industrial activity report for printing Monday; capacity utilization was down -7.5%. Gee, what a surprise: that matches the decline in June and July's printing shipments. August's real printing shipments should be close to awful. Can we get out of it? Our entrepreneurial spirits are being tested. Blaming the economy is not the answer and does not face the larger trends at work.
It is challenging, but the economic webinar next Wednesday will be more “interesting” that I would like it to be. I am quite curious about what I will end up saying. Pass the ibuprofen... don't let anyone see the security blanket hiding under my desk.