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 Mises.org 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.