I wish there was a cogent way to explain this point of view
-- a point of view that is distressingly common among market
commentators and politicians -- that didn't resolve back to the title of
this article. But.... there isn't.
As of 2007, the
Fed was unprepared for what was to come, though not mainly for the
reason most commentators are highlighting. The initial reporting on the
transcripts has focused on whether or not the Fed saw the financial
crisis coming, and most find that the Fed did not. But the Fed also
missed something much more important.
For all the
attention the financial crisis gets in the story of the latest
recession, it isn't that important to understanding our current weak
economy. The reason that more than 12 million people are unemployed,
that workers no longer quit their jobs or get raises, and that economic
prospects are dim for the foreseeable future, has to do with the
financial health of consumers, not the health of Wall Street.
[Related -Upbeat Forecasts For US Housing Sales In March]
The article goes on to conclude...
the transcripts from 2007 makes it clear that, even though it didn't
understand the extent of the problems, the Fed was looking at the
financial system as the main source of concern. Households, suffering
from the housing-bubble collapse, were a secondary priority. An economic
elite more in tune with broader prosperity could have caught the
severity of the recession earlier, and made a case for the
demand-stimulating monetary policy needed to recover from it.
[Related -Happy Birthday, Moore's Law - Pearls of Wisdom for Investors]
This is in fact pining for that which never was.
The simple fact of the matter is that since 2000, and to some extent even before then, the economy was floating on a false premise.
Look at the below chart:
From the late 1990s through 2007 there was anywhere from 2-6 times as much debt taken on in a given quarter as there was expansion in the economy.
There was no actual economic "growth" created through productive output -- it was all financed through promises to pay tomorrow for hamburgers today.
In fact this pattern began in earnest in the early 1990s.
is the "big scam" among writers and pundits when it comes to "doing
more" and "stimulating the economy"; they all proceed from a false
premise, that the problem is a transient lack of demand and if we simply
add more stimulus economic response will come in the form of greater
output and ability to pay.
The facts say that this is not
what happens -- and it is particularly not what happens when you lower
interest rates and make borrowing cheaper. Instead, what expands is
systemic leverage, or promising to pay tomorrow for hamburgers eaten today.
This was lampooned so many years ago, of course, by the cartoon character Wimpy who
first appeared in the 1930s! It seems that in 1931 cartoonists were
very much willing to lampoon the idiocy of the 1920s in terms of debt
expansion, but we seem to have forgotten that lesson.
make matters worse the government has dramatically raised the costs of
hiring people. Obamacare, for example, has turned the employment world
on its ear, especially when it comes to the lower end of the scale. How
many 27-year-olds are about to get a nasty surprise when they are
expelled from their parents' health insurance and find that (1) their
own policy costs $5,000 a year, (2) their boss has cut them to 28 hours a
week (from 40) because at 30 they must provide that insurance, a gross
pay reduction of 30%, (3) at $15/hour (a pretty good starting wage)
they're now grossing $21,000 a year and (4) they
don't qualify for any sort of "assistance" as they make too much money,
but roughly 1/4 of their gross, before taxes, must either be paid for
that "insurance" or they get fined for not having it!
always force resolution of distortions that are foisted upon it. It
may take time before it happens, as the madness of crowds is not to be
But it always happens.
problem we have in the economy today is that the so-called "demand" in
the economy since the early 1990s was not real. It never existed in
terms of organic output and thus trying to revert to what was is
impossible, as what "was" didn't really exist. That ever-increasing
alleged demand was predicated upon an exponential series that ran to
exhaustion in 2007 and collapsed.
It is the previous level of organic
demand that is being returned to, which is much less than what which
was allegedly "experienced" in the 1990s and 2000s -- not the "previous"
figures that were driven by debt leverage expansion.
The entire point of the policies of the Federal Government and Federal Reserve have been aimed toward refusing to recognize this mathematical reality and the economic outcome that must come from this adjustment.
The sooner we face reality the better the outcome will be.
this is, and will remain, a relative term, for in comparison to the
fraud-laced "prosperity" that was claimed for the 1990s and 2000s the
factual economic output that is sustainable in real terms, less that
fraud, is considerably lower than that which we previously "enjoyed" --
just as Wimpy could not have possibly maintained his corpulent status
but for his scamming hamburgers via bogus promises to pay for them next