Tuesday, February 10, 2009

The Road to Economic Hell

Our new Secretary of the Treasury, this morning:

"It is essential for every American to understand that the battle for economic recovery must be fought on two fronts," Geithner said in a speech in Treasury's ornate Cash Room where he unveiled the administration's new plan.

"We have to both jump-start job creation and private investment and we must get credit flowing again to businesses and families," he said.

I'll forgive him his "battle" metaphor, even though the rhetoric of war has been used in every catastrophic expansion of collectivism and the state in the last 100 years. I am more immediately struck by the use of the phrases "jump start" and (albeit as a clumsy mixed metaphor) "flowing again."

"Jump start" is what we do to dead car batteries. Someone unfamiliar with how a car works might view the turning of a non-functioning car into a functioning one merely through the application of those yellow cables as some sort of otherworldly miracle. The application of electric charges makes the car every bit as good as it was the night before, before we forgetfully left the lights on.

Alas, the economy is not a dead battery, nor indeed a single entity of any kind. To be sure, people are pessimistic, and for good reason, but the problem is not one of restoring their psychological health. The problem is not with "the economy." The problem is with a billion individual bad economic decisions, each of which must be resolved by buyers and sellers in its own way. Investors, as I have noted before, have to map out the financial landscape to find out where the problems are, and how deep they are, in an environment in which the Congress and President of the United States are just firing off every gun in the arsenal wildly, no matter the consequences in higher taxes for future Americans, in hopes that some bullet hits the target. Financial uncertainty plus vastly increased political uncertainty is not what one wants for an investment environment.

Our economic troubles boil down to a lot of resource-misallocation mistakes that have accumulated over time. The politicization of the housing and financial markets, a tremendous globalization-driven boom that created huge amounts of wealth but also allowed a lot of in-hindsight fiascos to accumulate, and the postponement of the day of reckoning through a futile Fed-led 24/7 running of the printing presses in the last few years has created an aggregate mess. But while the mess is macro, the solution is micro. The mistakes have to be weeded out. Once upon a time, in the era of great social transformation brought about by industrialization, booms and depressions were common. The government didn't imagine that it could do anything about them, and they were usually (although not always) short affairs.

But it is clearer every day that our politicians see themselves as messiahs. They are convinced, despite the utter lack of any historical evidence, not just that they but that only they can solve the problem. Thus, expect a lot of random political noise - bail out this but not that, no wait, spend another $500 billion, no wait, nationalize the banks, no wait, buy American - to make things a lot more uncertain, and therefore a lot worse.



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