Thursday, October 29, 2009

Cause for skepticism

We learn again, today, that the recession is over. I'm not buying just yet. The people exclaiming that the worst is behind us are, by and large, the same people who kept on insisting that a recession was impossible until almost the moment it was upon us. For instance, here's Congressman Ron Paul in his book End the Fed, talking with Federal Reserve Chairman Ben Bernanke on July 18, 2007, two weeks before the collapse of Bear Stearns:

Ron Paul: War, sometimes, is not healthy for a currency for keeping prices down, at least inflation. It's hard to find, in all of history, when war didn't create price inflation because, even in ancient times, countries resorted to clipping coins and diluting values or whatever... And yet, in the seventies, we had consequences of guns and butter. Now we're having guns and butter again (we're having consequences) and it just looks like we may come to a [stagflation situation as in] '79-'80. Do you anticipate that there is a possibility that we'll face a crisis of the dollar such as we had in '79 and 1980?

[At this point, Bernanke maintains that the Fed will maintain stable inflation--whatever that is--so Paul insists he answer the question.]

Ben Bernanke: I'm not anticipating a problem like '70-'80. (pp. 102-3)

Now, it is presently too early to tell whether or not we will see stagflation again, though it remains a possibility. The salient point is that Bernanke could not conceive how such a situation could come about under his reign. Quite obviously, the central bankers didn't have things under control, or they would have been able to steer us past this crisis. There is an argument that they have in fact done so, which we'll get to in a bit; what's inarguable is that they botched things this time around.

I should also add that while I don't think anyone can steer around economic crises by injecting credit into the economy since this is the precise mechanism which causes crises, I take it for granted that the central bankers do believe such a thing is possible. If you're keeping track at home, this means that on the side of possibilities we have an end to the boom-bust cycle, and on the side of impossibilities we have the reemergence of a phenomenon which came into existence as little as thirty years ago.

No one will deny that the crisis caught Bernanke, as well as most mainstream economists, completely unaware. Notes to the meetings at which bankers set monetary policy may be safely hidden (End the Fed, pp. 95-9)--for the good of the people of course--but, until the State finds a way to control it, the Internet provides a record for posterity. One might think, then, that the false prophets who insisted that everything would go on swimmingly--forever--would be ignored. And, in fact, some of them have been regulated to the dustbin of history; but it remains quite advantageous to be optimistic, even over something which one knows nothing about--at least when it comes to the economy.

Perhaps this is merely human nature. We gawk at car accidents; but only if we're not participants. We want to believe that things are getting better, yet this alone is not evidence that things are, in fact, improving. We may hope that the optimists are right. But the pronouncements of those who insist that the worst is behind us, and that the recession is now over, should be met with the same caution which should have greeted those who insisted, scarcely more than a year ago, that the good times would roll on forever.


troutsky said...

"completely unaware"? I would suggest they knew about all the dry powder but kept denying that a spark might exist.

It is the nature of capitalism to oscillate wildly, a central bank has served to flatten the swings. The crisis of over-production leads the tendency for profit to fall. We can always make more than we can consume. And even squeezing all that productivity out of workers wasn't as profitable (due to competition) as speculating. Get used to a bubble economy, it's all thats left!

A Wiser Man Than I said...

It is the nature of capitalism to oscillate wildly, a central bank has served to flatten the swings.

You have to prove that this is the case. Marxists accept this as given, but it's impossible for the boom and bust set off by the Federal Reserve can indict unregulated capitalism.

If we saw a huge bubble in an economy with free banking, then you'd have a point, and the Austrians would have to rethink their theories. But nothing about the present crisis invalidates their approach--so far.