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Thursday, March 30, 2023


Hussman Blasts Geithner, Bernanke, Keynes; Why Keynesian Stimulus Always Fails

Hussman Blasts Geithner, Bernanke, Keynes; Why Keynesian Stimulus Always Fails

Courtesy of Mish 

In his latest post, John Hussman takes a well deserved swipe at illegal Fed operations, Geithner, Bernanke, and Keynesian stimulus.

Please consider a few snips from Implications of a Likely Economic Downturn.

…. With regard to "stimulus" plans, my difficulty with last year’s policies is not so much an aversion to government spending as it is a rebuke of the notion that government spending is by its nature stimulative or beneficial to the economy. The issue is how this real value is used. Is it used to advance socially useful outcomes which private individuals, through some failure of coordination, could not achieve? Or is it used to defend bondholders, industries, and institutions with which the policymakers are most closely aligned?

The Keynesian view is that government spending is simply a monolithic letter "G." Keynes cared little about the productivity or lack thereof to which public resources were devoted, even writing " If the Treasury were to fill old bottles with bank-notes, bury them at suitable depths in disused coal-mines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again… there need be no more unemployment." The only difference between Keynes and Tim Geithner is evidently that Geithner prefers to place the bottles a bit closer to Wall Street.

…Meanwhile, I continue to believe that both Bernanke and Geithner’s hands should be tied quickly. If we have learned anything over the past 18 months, it is clear that these bureaucrats can misallocate an enormous quantity of public resources with mind-numbing speed. The diversion of public resources to the bondholders of failing financials – to precisely the worst stewards of capital in society – is not stimulative, but ruthless. A second economic downturn should encourage the repudiation of the policies that Bernanke and Geithner pursued during the first.

Basic ethical principle dictates that policy makers should not burden ordinary Americans to pay the losses that well-informed bondholders voluntarily took when they lent money to failing institutions. From my perspective, it is urgent to recognize that Fannie Mae and Freddie Mac obligations are not legally obligations of the U.S. government, that its backing was always at best implicit, and that even the Treasury’s distressingly generous 3-year promise to bail out Fannie and Freddie only takes those obligations through 2012. Longer-term GSE securities held by the Fed and by investors represent debt obligations of insolvent institutions, yet are still treated by investors as if they are default free. Congress should quickly clarify that FHA obligations are explicit government commitments and GSE debt is not. Traditionally, the Fed’s open market operations have been almost exclusively using Treasuries. Any other securities were purchased on a repo basis only, which meant that the Fed would get its money back predictably, regardless of the quality of the security. Without these, the Fed can unconstitutionally engage in fiscal policy, and has recently done so by purchasing Fannie and Freddie debt outright. Congress should limit the Fed to purchasing sovereign debt of the U.S., with a limited role for sovereign debt of major, fiscally intact trading partners, or it should bless GSE debt explicitly so Americans understand that the U.S. dollar will ultimately become the Reichsmark.

…Interestingly, some observers lament that corporations and some individuals are holding their assets in "cash" rather than spending and investing those balances, apparently believing that this money is being "held back" from the economy. What is preposterous about this is that the "cash" that companies and individuals are observed to be holding is primarily in the form of government securities and base money created over the past couple of years, which somebody has to hold at every point in time until those liabilities are retired. This is not money that is waiting to be spent. It is a stack of IOUs representing resources that have already been squandered, and now somebody has to hold these pieces of paper until they are retired.

In short, instead of directing savings toward investments in real, productive assets that we would observe as physical output, fixed capital, and equipment (and claims on those assets in the form of corporate stocks and bonds), our economy has been forced to choke down a massive issuance of government liabilities in order to bail out bad debt. For every dollar of debt that should have defaulted, we now have two dollars of debt outstanding (the original debt, and a newly issued government security). What appears to be "sideline cash" is simply the evidence of past spending. Again, the crucial consideration is how the government spent the funds in the first place. Rapidly mounting evidence suggests that the answer is "not very well."

Advancing Socially Useful Outcomes

There is much more in the article that inquiring minds will want to investigate, including a "3-minute course in Keynesian Theory", much of which Hussman quickly and correctly rebuts.

My one point of disagreement with Hussman concerns whether or not government can "advance socially useful outcomes" and if so at what cost.

I do not believe it is the government’s job to even attempt to do such a thing. Indeed, Fannie Mae and Freddie Mac are the direct result of Congress attempting to advance social outcomes.

By promoting home ownership with hundreds of "affordable home" programs, government drove up the costs. The ultimate irony is home prices are now crashing, thereby becoming more affordable, yet the government wants to halt the slide.

It is difficult to find any major government policies that successfully advanced socially useful outcomes. The one possibility that I can think of the interstate highway system.

However, as the link shows, the original purpose of the highway system had noting to do with enhancing trade or commerce, or creating jobs, but rather a way to quickly move troops and also to evacuate cities in case of nuclear attack.

Now we are paving roads that do not need to be paved just to put people to work quickly (and I might add at ridiculously inflated wages). That stimulus is now dead, and what pray tell did we get out of it?

Unfortunately, the track record of government programs actually achieving real net benefits is horrendous and made much worse by prevailing wage laws, notably the Davis Bacon Act.

Prevailing Wage Lunacy

Please note that Davis Bacon is yet another program designed to advance a socially useful outcomes (increase wages). However, the bill is now bankrupting cities, counties, and states.

I discussed Davis Bacon in Illinois Construction Workers Make $50-68 Hour, Strike for 15% more.

…. Any way you slice it, the whole prevailing wage concept is madness. It guarantees taxpayers pay the highest rate possible for every job filled by a union worker.

If given the chance, people would be lining up for miles for the jobs at $2 more than minimum wage.

There is a three-fold solution to this madness

1. Make Illinois a right-to work-state
2. Scrap Davis-Bacon
3. Require competitive non-union bidding on all projects involving Federal funds.

Please see Thoughts on the Davis Bacon Act for more on the insanity of prevailing wage laws.

In 1999 Ron Paul introduced a measure to repeal Davis-Bacon. Someone needs to try again, and again, and again, until that mad relic of the Great Depression is repealed.

Actually public unions should be banned completely.

Government should try to provide the most services for the least amount of money, not the fewest services for the greatest amount of money.

Sadly, public unions, in conjunction with prevailing wages laws, collective bargaining, and corrupt politicians all combine to insure taxpayers get the least for their hard earned dollars. Adding insult to injury, public unions have the gall to whine about it.

Misallocation of Public Resources with Mind-Numbing Speed

Hussman commented "Bernanke and Geithner’s hands should be tied quickly. If we have learned anything over the past 18 months, it is clear that these bureaucrats can misallocate an enormous quantity of public resources with mind-numbing speed."

I certainly concur, and will up the ante by placing Congress in the same boat. How else do you get a $1.6 trillion deficit?

Why Government Stimulus Fails

Because government is never held accountable for costs, and because only the free market has any real chance of determining economically viable projects, Keynesian stimulus is always doomed to fail, creating "two dollars of debt outstanding (the original debt, and a newly issued government security) for every dollar of debt that should have defaulted".

Common Sense Policies

If Congress wants to do something that makes sense, how about lower wages for government workers (preventing many state layoffs), coupled with slashing corporate income taxes on profits generated and kept in the United States? The latter would promote hiring.

Current tax policy favors moving both jobs and capital overseas. Small businesses who cannot move workers or profits overseas, pay a hefty price.

The idea is to get the most from public spending, not the least. Those in the public sector who can find better opportunities elsewhere can leave.

Sadly, the Obama administration is busy with nonsensical stimulus ideas selected on the basis of speed rather than productivity while raising taxes and placing more burdens on small businesses.

Every one of those is a policy error, and as I have pointed out before, Policy Errors Cause Depressions.

As a direct result of those policy errors, the economy is doomed.

Mike "Mish" Shedlock


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