Excerpt from Bloomberg Editorial: "Buffett's $7M Sacrifice Is Only a Start"
Jonathan Weil editorial dated 8/24/11. Link.
The following excerpt succinctly articulates our economic reality, reiterates this venue's perspective since 2008, and features an excellent use of the word "legerdemain".
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Today the fundamental problem for consumers, banks and governments alike is too much debt. The process of deleveraging is painful. There is no way of getting around this. Yet ever since the current financial crisis started in 2008, the U.S. government has responded by doing all it can to avoid the inevitable reckoning. European leaders have done the same.
Stop Trying
We have tried bailouts, drawing applause from Buffett, whose company owns a 6.67 percent stake in Wells Fargo & Co. (WFC) We have tried federal stimulus spending, which yielded little more than a sugar high. We have tried propping up the stock market and home prices with record-low interest rates from the Federal Reserve, hurting savers as well as retirees and anyone else living on a fixed income.
We have tried covering up banks’ losses, through loose accounting and get-out-of-jail-free cards for bankers who lie about their companies’ finances. The costs have been immense, both to long-term investor confidence and the rule of law. And none of it has worked, except in the transitory sense.
Bank stocks are crashing again, partly because investors don’t trust the balance sheets of Bank of America Corp. (BAC) and Citigroup Inc. (C), to name a couple. While we have managed to keep the financial system limping along, the government refuses to accept that for the economy to get appreciably better it probably will have to get worse first.
To the Rescue
Tomorrow in Jackson Hole, Wyoming, the world will be watching Fed Chairman Ben Bernanke to see if he will ride to the markets’ rescue with a third round of quantitative easing -- printing more money to boost asset prices. At some point, we all must recognize there’s only so much government can and should do to ease our loss of wealth, or to entice investors into risky assets whose returns may well depend on further interventions.
There used to be this quaint notion of a business cycle, where it was widely accepted that good times and bad times came and went, and that the role of government was to ensure that neither got out of hand. For too long we have operated on the premise that bad times are something to be prevented or postponed no matter the cost -- to the point where the choice now becomes framed as one between economic calamity and buying time.
The American people can handle a bad economy, even an awful one. Most don’t have a lot of money to start with. What is unbearable is the current policy of running to aid the world’s biggest, most disaster-prone financial institutions every time they get into trouble, with only afterthoughts paid to what this means for ordinary citizens.
You want shared sacrifice? Let’s start with market regulators forcing the largest banks to fess up to their pent-up losses and come clean with their books, so we can get their red ink behind us as quickly as possible and create a new baseline for sustainable growth. While reckonings are expensive, the cost of forestalling them through legerdemain is always far greater. No doubt this would cost Buffett a lot more than $7 million.
Excerpt from TheAMD.com editorial dated 11/6/08.
Government manipulation of interest rates with the intentional or unintentional effect of materially influencing asset prices is a bad idea.
It was government intervention designed to realize a social agenda that principally contributed to the current problem of overvalued houses. Proposing further government intervention with the goal of supporting prices at an arbitrary level can not and will not work. The only solution to our present predicament is to allow the markets to clear. We must let housing prices reach an equilibrium relative to the supply, demand, credit availability and more conservative mortgage characteristics of the post-bubble economy, as well as the new risk premium perceptions and performance expectations of potential buyers. Much of the housing gains seen since the late 1990s, when sub-prime and affordability mortgages began to distort the market, will be reversed.
There are steps that the government can take to facilitate the stabilization of the housing market and limit collateral damage to both the credit markets and the broader economy. Any action which would attempt or have the effect to prop up housing prices at an artificial value, though, is counterproductive. Such initiatives will only lengthen, deepen and increase the damage caused by the inevitable march to a sustainable equilibrium. The Japanese have provided us with a useful case study on this subject. Don’t stand in the way of the markets clearing. Any government action should be undertaken with a design to facilitate this clearing process and an understanding that substantial economic pain is unavoidable.
Categories: Government Action is Counter Productive, In Defense of Free Markets, Links to Other Articles
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