Be Very Afraid

On Thursday, the stock market closed near a nine-month high and there is a growing feeling that the worst is behind us. Some of the same people who failed to predict the crisis in the first place now tell us it is safe to get back in the water.

“No one saw this financial crisis coming,” so say the mainstream press and politicians. Not true! Best-selling authors such as Robert Prechter, Martin Weiss, Jim Grant, and Bill Bonner all predicted, with startling accuracy, our current dire straits.

This fiction—that no one could have foreseen or did foresee our economic circumstances—has to be perpetuated by those who failed in their predictions. If it isn’t, many will ask the obvious question: Why are we still listening to the same individuals who have demonstrated that they are clueless?  And, they are clueless. They are clueless because they are looking through the wrong lens. Einstein put it succinctly: “Whether you can observe a thing depends upon the theory you use.”

Imagine a baseball team on which the starting players were incapable of doing anything but strikeout every time they’re at bat. Next, imagine the manager defending the players by saying, “No one can do any better,” as he conveniently ignores the players on his bench who can hit over .300.

Of course this is a silly scenario. Fans and sports writers would see the absurdity of such a manager’s actions. In any case, the baseball team has an incentive to put a winning club on the field.

Unfortunately, what is impossible to imagine in baseball is all too true in economics. Most fans (the public at large) are illiterate about economics. The media, as in totalitarian countries, are by and by content to repeat the “party line.” And, the management (the politicians) have an incentive to keep the system as it is.

Why would politicians keep in place a system that is destroying the economic vitality of this country? There are many reasons. A central one is that in the system as we have it, the Fed is able to create money out of thin air; the politicians need to keep that going because it is the only way to continue financing ruinous deficits. Whether or not the system is supposed to support that vitality and well-being of the American people doesn’t even seem to be a question. The message delivered by the politicians and chanted by their sycophants in the media is: “Bernanke, Geithner, and Summers are an economic dream team; we are lucky to have them.”

A dream team? In February 2006, Bernanke said, “Our expectation is that the decline in activity or the slowing in activity will be moderate; that house prices will probably continue to rise but not at the pace that they had been rising. So we expect the housing market to cool but not to change very sharply.” Lest you think I have selected one mistaken prediction out of many accurate ones, please spend five minutes listening to this YouTube compilation of Bernanke insisting over and over again that housing prices could not fall.

And speaking of housing, Nobel laureate Paul Krugman is often in the public limelight. Many in the general public shape their economic views around Krugman’s  New York Times blog and op-eds. Krugman, looking through his Keynesian lens, has repeatedly argued that the government, rather than spending too much, is not spending enough. In 2002, Krugman actually called for the Fed to create a housing bubble. He wrote in the New York Times:

To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.

And lest you think this was just temporary insanity on the part of Krugman, Mark Thornton at has complied Krugman’s repeated calls, beginning in 2001, for lower interest rates and for a speculative bubble. How sad that many Americans formulate their views based on the ongoing nonsense from Krugman.

Or, consider the repeated nonsense from CNBC commentators such as Jim Cramer. Here is one compilation of Cramer’s nonsensical forecasts.

It is hard to imagine how this shameless man keeps his platform. Yet, he has a bigger audience than most financial pundits.

Now, consider those analysts and forecasters whose predictions have been most accurate. Today they are saying that we are in the midst of a strong counter trend rally in a possibly catastrophic bear market. Enter these waters at your own financial risk!

Yves Lamoureux recently summed up the current rally saying with a Roadrunner/Wile E. Coyote metaphor:

In his pursuit of the Roadrunner, the obsessed coyote is at the wheel of a dragster. After a few passes on the desert roads, they venture up a mountain.  Drag racing to the top, the smart bird stops and lets the roaring Wile E continue on a rocket launch off the top of the mountain and into free space.

Lamoureux concludes, “Laws of gravity still applies, don’t be a Wile E. Coyote.” I write “be afraid”, rather than “be cautious” because caution will not be enough to keep you out of trouble, when the tide turns again.


11 Responses to Be Very Afraid

  1. QN says:

    Professor B,

    Yes, I am afraid on a multitude of levels. Instant gratification, consumerism and consumption are the ties that bind us to the economic pain we are in and will be the cause of our societal demise as we search for the economic prophets to lead us out of the crisis.

    What is even more frightening is the vulnerabilites that have been introduced and capitalized on due to the pain and fear generated from the consequneces of bad decisions. Bankruptcies, job losses, foreclosures and save & pay plans are not attractive nor fun. However are key outcomes that need to occur to stabilize and equalize the economy for future sustainability.

    Many continue to follow the rhetoric of those with rose clorored lenses it is easy to become enamored with the financial forcasters. Because they feed the public the sugar without the bad medicine advising there are alternative treatment options (spending) as opposed to the dreaded curative treatments (saving and balanced budgets).

    As many are struggling to get by it is easy to overlook the current and proposed legislation that violate our constitutional rights that are in the nane of consumer protection by the government. Playing on anger and fatigue the clueless have figured out the messaging for buy-in as we welcome the assistance from our protective government to bring fairness back to society.

    But you know what – life is not fair and is the reason for innovation and ingenuity as people learn how to adapt and respond to adversity and injustices. Life is hard too but I found a way to work 3 jobs during undergrad studies to pay my way and then work full-time and attend a program full-time. I made it work, it was a struggle and yet I expected nothing from the government and I did not believe I was entitled to a break. And yet many have dismissed my achievements as being just lucky as opposed to the responsibility of an individual to positively contribute to society.

    And that there in lies the issue. Many have lost the value and drive of contribution and have fallen into the vaccuum of consumption which equals the negative vortex of consumerism.

    Yes I’m afraid that I am being forcefully dragged by suction into that dirty vaccuum cleaner bag all in the name of cleaning up to encourage economic stimulus and financial stability.

  2. QN,

    The words you write are poignant. Your observation: “And yet many have dismissed my achievements as being just lucky as opposed to the responsibility of an individual to positively contribute to society” identifies one of the societal attitudes that will make an economic recovery difficult.

  3. Tesh says:

    Not only are the rank and file citizens illiterate and incontinent, but they want to remain so. Challenging their world view won’t accomplish much until they want to change.

    In scriptural terms, it’s the difference between choosing to be humble and being compelled to be humble. Only one prompts lasting and effective change.

  4. Tesh,

    I forget who it was that quipped that “the only spiritual food is humble pie.” I won’t bet on that collective change of heart coming before it is too late. As you say the collective will right now seems to be to remain ignorant.

    This gives another reason to be very afraid. Collectively we may not be willing to be humble, but we will be all too willing to be frightened. And I shudder to think what will happen as the collective fear level goes up.

  5. Mike says:

    I am afraid, it seems like the government wants an economy where we are not allowed to take risk. Even now laws are being passed to limit bonus paid to those taking high level risks. Risk vs. reward is one simple principal in finance. In the name of safety of the government is limiting risks. This is a slippery slop to socialism and it seems like we are about to head right on down to the bottom.

    Dr.B I am not sure what you mean by “to late” before the next crash? before we become a socialist country? Before the new world order takes over:P I am sure social moods are much like economics everything runs in cycles. Right now the mood is we want everything for free with no accountability and no risks. The next recession social mood maybe different every man for himself.

    My brother who is an Obama fan asked me how else would someone fix this mess he is doing everything he can! I told my brother thats the problem he should be doing nothing. If the government had to do something maybe its primary job of enforcing contract laws would of been a good place to start. And to fixing the mess I told him never under estimate a person ability to survive.

  6. Mike,

    I think you are spot on when you write: “Right now the mood is we want everything for free with no accountability and no risks.” Of course as you recognize that is not possible. So when I write “too late,” I mean too late to avoid the consequences which will inevitability be a far worse economic crisis then we have experienced to date. The result of that will be unprecedented levels of fear and blame, which in turn will have terrible and unpredictable consequences. These consequences will move us much farther from a free society.

  7. James D says:

    Its already too late. We see in economic circles the same thinking that has lead us to be an increasingly obese country. Eat and don’t exercise; don’t worry, your doctor will fix it. Now we have load on debt and don’t save; don’t worry, the gov’t will spend us out of this.
    There are basic principles our ancestors understood, like doing the work up front to get what you want at the end. They tilled fields and planted crops and fertilized and watered for months before they got the food they were working for. Sure, its a slower and less pleasant method, but they understood it and made it work for them–they developed crop rotations and canned their food to make it last.
    The last time we got off that track gave us the Great Depression, and it forced those lessons back upon us. Now I’m not in any way in favor of the good ol’ days; I like modern medicine and the internet and such. But those basic lessons don’t fail, no matter how the times may changes. But we bought into the snake oil the economic pundits spouted at us about having it all; now we wonder why we have a stomache ache.
    People seem to have forgotten that we got by just fine before massive gov’t spending and growth that started in WWI (yes, the first one). I hear people wonder what gov’t will do next. My question is what will they (the people wondering) do next? As the popular graffiti reads “Stop believing in authority and start believing in each other.” When we stop listening to the crap our elected officials are spouting and start listening to the common sense that tells us that things that are too good to be true usually are, we’ll start down the path to real recovery. It won’t be fast or glitzy, but it will serve us much better in the long run. Until then…

  8. Jim,

    Thanks for your astute points and the great show stopper question: “I hear people wonder what gov’t will do next. My question is what will they (the people wondering) do next?”

  9. James D says:

    I realize that gov’t is the largest single player in the game and that anything it does influences everything else, but have “we the people” become so focused on our “bread and circuses” (or is it “fast food and reality tv”) that we fail to realize that as a collective we can influence gov’t, both economically and politically? How do we take back our power? Its ours, not theirs (though they certainly don’t think so). All of it. The power, the money, the economy, all of it. Time to kick ’em to the curb and do for ourselves again.

  10. QN says:

    James D

    Could not agree more! Many have forgotten the collective power.

    As I just posted to my social networks:

    Make a visit to your United States Senator and Representative during the month of August and tell them to REPEAL the Stimulus Package, NO NEW Taxes and NO New Healthcare Spending.

    Don’t know who they are then visit and

  11. Tesh says:

    I’ve pestered my “representatives” more than once. They don’t appear to be listening, and I’ve heard of those who have canceled town hall meetings because they fear unruly protesters. You know, the people they work for?

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