You’ve probably heard the adage, “When the US gets a cold, the rest of the world gets pneumonia.” The adage comes from the fact that world economies intertwined and the US, being the largest, influences a lot of what happens in the rest of the world. Early in this economic downturn several financial experts attempted to argue that there had been a significant decoupling of world economies. They argued that while issues were deteriorating in the US, other countries, especially China, wouldn’t see the downturn because their economy was much more stand alone. While the evidence is obvious that these folks were wrong, Marc Faber does a good job of reconstructing events and deconstructing the decoupling myth, in yesterday’s WSJ.
Admittedly, Faber is known as Dr. Doom. He has had a perspective on US financial management that is less than complimentary. That said, Faber’s analysis is still spot on.
Faber’s key descriptive paragraph of the events of this downturn is here:
In 2008, a collapse in all asset prices led to lower U.S. consumption, which caused plunging exports, lower industrial production, and less capital spending in China. This led to a collapse in commodity prices and in the demand for luxury goods and capital goods from Europe and Japan. The virtuous up-cycle turned into a vicious down-cycle with an intensity not witnessed since before World War II.
As important as the tear down of the decoupling theory is Faber’s take on what caused this bubble to burst and what is to be learned from our experience. As to what was the cause, Faber says:
Sadly, government policy responses — not only in the U.S. — are plainly wrong. It is not that the free market failed. The mistake was constant interventions in the free market by the Fed and the U.S. Treasury that addressed symptoms and postponed problems instead of solving them.
Faber rightly identifies the Fed’s easy credit monetary policies following the Dotcom bust as the fuel for the next bust. By keeping rates artificially low for too long, Faber argues:
The complete mispricing of money, combined with a cornucopia of financial innovations, led to the housing boom and allowed buyers to purchase homes with no down payments and homeowners to refinance their existing mortgages.
Read the whole article. Faber is correct in his analysis and he is correct on what he sees from the folks who are attempting to “do something” to resolve this problem:
So what now? Unfortunately, Fed Chairman Ben Bernanke and Treasury Secretary Tim Geithner were, as Fed officials, among the chief architects of easy money and are therefore largely responsible for the credit bubble that got us here. Worse, their commitment to meddling in markets has only intensified with the adoption of near-zero interest rates and massive bank bailouts.
Faber’s suggestion for what should be done?
The best policy response would be to do nothing and let the free market correct the excesses brought about by unforgivable policy errors. Further interventions through ill-conceived bailouts and bulging fiscal deficits are bound to prolong the agony and lead to another slump — possibly an inflationary depression with dire social consequences.
All the Fed, Treasury and Congress have done in this downturn is to cause more fear and uncertainty. They have done nothing to change the arc of the events that they all were a part of creating. By implementing programs like today’s housing bailout, US financial institutions and businesses will be even less likely to put themselves out to take risk. After all, who’s to say that tomorrow Congress won’t decide that their business needs to have contracts revoked, rewritten or renegotiated by force. Until the Fed, Treasury, Congress and President Obama quit making “the rules of the day” don’t expect the US economy to improve or recurrent, wasteful spending to slow down.
