First the jeer: Congressman Barney Frank’s ignorance of the basic laws of economics is hard to beat and he is a “superstar” among the ignorant. Recently on CNBC he said:
I think at this point, there needs to be a focus on an immediate increase in spending and I think this is a time when deficit fear has to take a second seat. I do think this is a time for a kind of very important dose of Keynesianism. I believe later on there should be tax increases. Speaking personally, I think there are a lot of very rich people out there whom we can tax at a point down the road and recover some of this money.
Many, of very modest means, are going to be surprised in coming years when they are considered “rich.”
Andrew Lahde is a hedge fund manager who made an 866% gain last year by betting on the subprime mortgage collapse before shutting down his fund. In his farewell letter to his investors he contemptuously explains who was on the other side of his trades:
I was in this game for the money. The low hanging fruit, i.e. idiots whose parents paid for prep school, Yale, and then the Harvard MBA, was there for the taking. These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government. All of this behavior supporting the Aristocracy, only ended up making it easier for me to find people stupid enough to take the other side of my trades. God bless America.
Lahde is also giving us an explanation why many have been so viscerally opposed to the bailout. One function of the market is to separate those, including the rich and stupid, from their money when they make bad investments that damage the economy. Government’s role is not to bailout them out at the expense of everyone else. Until this year, America never had an aristocracy.
In his Wall Street Journal essay “The Confidence Game” James Grant explores among other things the “conceit” of central bankers who thought they could manage the economy. Grant writes:
But it wasn’t the vigilance of monetary policy that facilitated the construction of the tree house of leverage that is falling down on our heads today. On the contrary: Artificially low interest rates, imposed by the Federal Reserve itself, were one cause of the trouble. America’s privileged place in the monetary world was — oddly enough — another. No gold standard checked the emission of new dollar bills during the quarter-century on which the central bankers so pride themselves. And partly because there was no external check on monetary expansion, debt grew much faster than the income with which to service it. Since 1983, debt has expanded by 8.9% a year, GDP by 5.9%. The disparity in growth rates may not look like much, but it generated a powerful result over time. Over the 25 years, total debt — private and public, financial and non-financial — has risen by $45.1 trillion, GDP by only $10.9 trillion. You can almost infer the size of the gulf by the lopsided prosperity of the purveyors of debt. In 1983, banks, brokerage houses and other financial businesses contributed 15.8% to domestic corporate profits. It’s double that today.
Grant rightfully brings up the gold standard. When bringing back the gold standard is part of mainstream conversation, we may be close to the end of this crisis. That day is at least years, if not decades, away.