Once again we deviate from our scheduled agenda to consider something of immediate significance.
We continue to see a prevailing viewpoint that has a certain pattern:
- The pundit expected government to be powerless to deal with economic challenges.
- The pundit is surprised at a massive reaction by the Fed, using many tools that no one contemplated a year ago.
- The pundit is surprised by aggressive action by the President and the Congress.
- Mistaken in predicting the government response, the pundit now turns to criticizing everything. It will all turn out badly.
It is a simple case of confusing ideology, politics, and investing. Here is a simple fact to consider. It is a fact, not a matter of speculation.
Those in power in government are continually working to prevent further economic distress, using whatever means available.
Anyone who does not get this fact is out of the loop. This fact has been true for government officials of both parties. They are not going to stand idly by and watch a further economic collapse.
Some investors are using a foolish litmus test. They ask whether a pundit had some sort of prediction related to the economic crisis. It does not matter whether the prediction was many years too soon. It does not matter whether the causal mechanism was completely wrong. Anyone who "called the collapse" is a genius.
It is now a new game, and it is called looking forward. The time frame is significant. Even long-term investors should be looking a year or so ahead, and preparing to adjust.
Anyone with real policy responsibility is actively trying to address economic problems. The main purpose is helping actual people, not propping up markets, although the market effect is relevant.
When analyzing public policy, it is important to see the perceived public interest. Support for a "bailout" is not simply the direct help to the companies involved. If there was no impact on the general welfare, there would be no support. This was true of TARP, the Fed policies, and the Stimulus plan, and the help to auto companies. None of us may like the specifics of the plans. That is the nature of compromise. The key is to look at the aggregate effect.
A Conservative Viewpoint
Bob McTeer is a conservative Republican who writes for a free-market think tank. Anyone who is "more radical" than this has, by definition, an extremist position.
Concerning the stimulus, McTeer writes as follows:
But my main message here is that critics of the stimulus bill don't
serve their side of the debate well by judging it against unreasonable
standards. I've heard some politicians say before actual working
cameras that the stimulus package must be judged a failure because
unemployment has risen further since it was enacted. Some have
expressly ridiculed the counter-factual argument regarding what might
Such politicians and pundits are making it harder for me to stay on
their side by insulting my intelligence and the intelligence of the
American people. Their case would be stronger if they stuck to
legitimate arguments, and they wouldn't look so foolish.
McTeer also writes wisely on the subject that we should just let everything fail in the name of Creative Destruction. After some interesting anecdotes that people can really understand, he concludes as follows:
Destruction resulting from a Tsunami, or its financial or economic
equivalent, isn't necessarily creative, and its victims aren't
Bank failures in reasonably normal times might reasonably be blamed
on management. But massive bank failures resulting from a financial
tsunami are another matter.
More people should read his work — the efforts of an expert with hands-on experience with a free-market perspective.
The positive market reaction is coming a bit quicker than we expected. The fiscal and monetary policies have a delayed impact. We will see much more of it next quarter.
There will be some future issues related to withdrawing monetary stimulus and addressing debt. The prevailing public policy viewpoint is that debt is best addressed by increasing income, wealth, and GDP. Excessive leverage cannot be resolved by ending normal lending, something that happened last October. We need to restore a normal economy, stabilizing housing, employment, incomes, and GDP. The percentage debt reduction will follow.
For anyone with a normal time horizon, it is wise to play for the immediate effect. At some future point we can consider the questions of leverage.
For investors stuck in a political or ideological position, they have already missed a good move which has more to come. It is better to be a political agnostic, divorcing one's viewpoints as a citizen from one's investment decisions.