Tuesday, January 21, 2014

American Apathy

Josh Brown reiterated a common theme that many people feel towards Wall St on his blog today:

Josh here. I’m okay with this. I’ve already made my peace with the fact that nothing was really and truly going to be different and that systemic risk / Too Big To Fail was here to stay. It’s fine.

The reality is that banks have armies of lobbyists and paid-off congresspeople and there is quite literally no one with the money or incentive to relentlessly fight back from the other side. We’ll just have to watch helplessly as these motherf*ckers blow themselves up again and take a big chunk of the economy down with them. Can’t be avoided, it’s like extreme weather.
 Is this reality though?  Believing that this is the way the world works ignores the fact that TARP vote failed the first time around.  If Congress were truly bought off, TARP would have quickly passed and not even have been news.  Add the fact that it was not just the banks that were bailed out, but the auto industry as well and it seems that Congress's goal was for the economy to get back on track as soon as possible, preferably before the next election.  This is not a conspiratorial tale of shady handshakes and puppet politicians.  TARP/low interest rates/QE/cash for clunkers are symptom of the overarching syndrome: short term growth over all else.

In fact, look at how the fiscal and monetary powers-that-be react any time the economy gets the sniffles.  They come to the private sector's aid like an overprotective parent of a kid who's destined for lifelong therapy.  Deficits go up and interest rates come down to drive economic growth ASAP, by any means necessary.

2008 was extra bad and thus the boo-boo kissing went the extra mile.  Economists of every stripe know--to boost short term growth, all you need to do is increase money supply.  Every recession/deflation is caused by too much debt of some kind.  People take on debt when times are good, expecting the good times to roll, making the debt not that difficult to pay off.  When shit hits the fan, everyone stops spending and tries to pare down that debt.  Thus, to get people to spend again, we needed to get rid of the debt.  And the easiest way to make debt irrelevant is to inflate.  No PhD necessary to understand this simple dynamic.  

Bernanke did his part--low rates makes money cheaper to borrow.  When short term rates went to zero, he went to work on the longer term rates and thus QE was born.  Our government did the fiscal version of making money more plentiful, by issuing stimulus packages out the ass.  While deficit hawks went rabid arguing against this fiscal irresponsibility, they missed the point: this is the only play when your goal is to get your economy growing again, as quickly as possible.  

Congress bending over backwards to help Wall St isn't proof that the lobbyists are in control or the politicians are spineless.  Think of it from a Congressman's point of view: if the economy doesn't start getting better in a few months, I'm out of a job.  If I vote for this TARP thingy, maybe Armageddon would be averted and the economy can start growing again.  Would you have risked the entire American economy to collapse for the next few quarters, just to show Wall St who is boss?  The choice was this: either bail them out or risk entire industries disappearing as almost every company, large and small, require short term financing provided by these Wall St firms.  

And then the obvious question becomes: why not start regulating them heavily now, after the crisis is over?  Regulations, by definition, will place more costly burdens, particularly on the smaller firms.  Paradoxically, large firms love onerous regulations as they provide an artificial moat to keep smaller and probably better run competitors out.  Even disregarding this, this will impede short term growth as financing will have to become more expensive, essentially passing on the cost of regulatory compliance.  Not only is this unpalatable for investors demanding quarterly blowout earnings and politicians needing to get reelected, this runs the risk of simple game theory.  If American firms suddenly become arthritic due to being regulated like utilities, foreign banks will start to look more attractive for companies needing capital.  God forbid a generation of Ivy League kids wanting to work for Societe Generale.  We are way too too proud to let that happen.

As always, it boils down to what we really want.  It turns out that we really want short term growth, at all costs.  It's obvious that the way we choose our investment portfolios--picking the ones that have the best recent performance--is the way we pick our economic model.   This is the consequence of that decision.  

Josh Brown ends his blog with this:

Not that anyone seems particularly worried right now. Not anymore. 
What’s for dinner, anyway? And which Super Bowl party should I attend? Does the dog need to go for a walk?  
American apathy. 
Never mind the fact that Bill Hicks did a similar bit 20 years ago with the Kennedy assassination and American Gladiators instead of Wall St and Super Bowl dinner.  This is a great summary of today's zeitgeist: not that people are actually apathetic, but people who wish that the world worked in another way believe that everyone else is apathetic.

Of course this is just my narrative, as susceptible to biases and fallacies as anybody else's.  Take it with a grain of salt.