Is Monetary Stimulation a Sensible Economic Policy?
What Saved the Dow? Sensible Economic Policies … As of the closing bell on Tuesday, the Dow was trading at 14,254—well above the previous all-time peak of 14,198, which the market reached on October 11, 2007. With investors increasingly optimistic about the economy, nearly four hundred issues on the New York Stock Exchange hit new highs. Sticklers will point out that, after accounting for inflation, stock prices are still more than ten per cent below their previous peak, but that's quibbling. Any way you look at it, during the past four years the market has made a remarkable recovery from the post-Lehman crash.- New Yorker
Dominant Social Theme: If not for monetary debasement, the stock market would have foundered.
Free-Market Analysis: This New Yorker article offers us tribute to monetary policy. But certainly there must be a question about manipulating stock averages up using increased money flows. The article ends by challenging free-market types to "acknowledge the success" of politics and the financial system generally in rebounding from the financial crisis and posting such stellar numbers.
Well … as free-market types, we are perfectly willing to throw in a word of caution when it comes to where the market has been and where it is headed – Dow Jones, Nasdaq and similar US markets anyway. It seems to us that valuations of industry have increased validity when they are subject to investor sentiment rather than Federal Reserve monetary inflation.
In fact, the question becomes – as this article does not seem to notice – whether inflated averages are viable or ephemeral: That is, are they a valid indicator of performance or merely evidence of the power of the printing press. Here's more from the article:
… Take a quick historical quiz. How long do you think it took the market to regain its high after the stock-market crash of 1929? Five years? Ten years? Fifteen years? Twenty years? Keep going. On September 3, 1929, the Dow closed at 381.17, a level it didn't see again until November 23, 1954. That's twenty-five years, two months, and twenty days—more than a quarter of a century. The stock market's recuperation from the Great Depression took almost five times as long as its recovery from the Great Recession.
No big surprise there, you might say. September, 1929, marked the peak of a stock-market bubble, and the Great Depression was a lot more serious than the Great Recession. In the early nineteen-thirties, the unemployment rate reached about thirty per cent, there was widespread hunger, and some serious thinkers believed capitalism was imploding. By the summer of 1932, the stock market had fallen by almost ninety per cent.
Whilst that's all undeniable, nobody should understate the transformation in sentiment over the past forty-eight months. On March 2, 2009, six weeks after President Obama took office, the Dow closed at 6,626.90. In the six months after the collapse of Lehman Brothers, it had fallen more than four thousand points. Compared to its October, 2007, peak, the market was down about fifty-four per cent—the biggest decline it had suffered since the Second World War. Between 1973 and 1975, the Dow dropped forty-five per cent. In October, 1987, it tumbled by a third. But this fall was deeper than either of those.
If, in early March of 2009, you had said the market would rebound to a new high within four years, few would have believed you. With consumers and employers panicking over the ongoing financial crisis, the Gross Domestic Product was falling at an alarming rate, and the economy was shedding more than seven hundred thousand jobs a month. On Wall Street, analysts and investors had roundly booed the initial effort by Tim Geithner, the new Treasury Secretary, to explain how he intended to end the panic.
At the risk of beating a dead horse, and enraging some devotees of Andrew Mellon's approach to economics, it's perhaps worth remembering what turned things around: activist government policies. A combination of government bailouts (which originated in the Bush Administration), emergency-lending programs from the Fed, and bank stress tests organized by the Fed and the Treasury Department stabilized the financial system. The Obama Administration's stimulus program put a floor under the economy at large. And cheap money—a result of the Fed's ongoing efforts to flood the financial system with cash and keep interest rates ultra-low—eventually led to a recovery in stock prices and housing prices, which was what Ben Bernanke and his colleagues wanted to see. In the nineteen-thirties, the initial policy response was very misguided. With Mellon at the Treasury, there were virtually no stimulus programs; meanwhile the Federal Reserve stood by and allowed many banks to collapse. As a result of this inaction, the economy spiraled downward until F.D.R. entered the White House.
This is a standard Keynesian analysis of monetary history. The trouble is that it doesn't go back far enough. It is well known by this time that the newly minted Federal Reserve of the 1920s created the bubble of the Roaring Twenties by printing too many dollars. The reasons for this are somewhat unclear – and may be either malicious or malign, or a combination of both – but the result is not. The Roaring Twenties gave way to the Great Depression of the 1930s.
The article implies that it was activist polices of FDR and now the Obama administration that "saved" their respective financial systems. But the current central banking system is the cause of the problem as well as the solution.
To use a trite metaphor, when the yo-yo going up and down is making you dizzy, put down the yo-yo. The incessant expansion and contraction of the economy based on constant over-printing of money is not healthy for society and is destructive to savings.
For this reason it is doubtful that free-market types will happily endorse the Dow's current higher highs. Every tick upwards makes it more difficult to ascertain what is the result of industrial value and what is the result of monetary policy.
This leads to a further distortion that has to do with how people invest. If investors perceive – as indeed they must – that the market is being unduly influenced by outside forces, then this can lead to a kind of casino mentality where those involved invest for the short term based on external circumstances rather than fundamentals.
If markets are supposed to be a store of value, and are to be treated as such, then less stimulation rather than more ought to be a considered policy. How can policymakers rail against the casino-mentality of larger investors while manipulating the market regularly via central banking super dollars?
It's a contradiction that must be addressed via sounder – or at least more sensible – monetary approaches.
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