I don't agree.
The discussion we are having is like talking about how the dinosaurs died. Everyone is talking about tree fungus, viruses, hoof-in-mouth disease etc - and everybody is disregarding the fact that we had a direct hit by a asteroid the size of Manhattan that created most of the Gulf of Mexico.
The FED is the asteroid.
IMHO, it makes more sense to see things as part of the FED cycle:
1) The FED leaves the economy alone.
2) Growth industries emerge. Technology is almost always the leader here.
3) The economy gets strong.
4) The FED is composed of about a dozen economists. None of them have ever run a major business in their life. None of them are responsible to congress. The FED decides it is a good time to kill the economy (or, in their words, "cool off", "Slow down", "wring out the excess", etc). There is no inflation in sight but they have "theories" and "hunches" that something bad might happen. These are academics. In academia you live to be published and consequently they are very interventionist. Sitting quietly by and letting a market economy work is impossible for them. Since they don’t have to get approval from any elected official, they simply do whatever they want. The FED basically feels that the only economy that can exist is a economy that is constantly being government-managed.
5) Since the FED is responsible to absolutely nobody, they raise interest rates way up and take the money out of the banks by selling treasuries, etc. Venture capital dies instantly. Start-ups that depend on financing instantly die. Business plans based on reasonable interest rates die.
6) The entire growth sector of our economy collapses (surprise!). All the growth businesses and venture capital plays die. Enormous projects are killed in mid deployment and the businesses doing the projects are left with the bill.
7) The news media turkey-trots around saying "the bubble has burst", "the market got ahead of itself", "it was all corporate greed", etc. This is understandable because there are no journalists. Almost all news delivered to the public comes from advertising agencies. They are in show business - the opposite of journalism.
8) Congress, whose duty it is to oversee the FED, simply turns a blind eye because nobody wants to sit on a committee that oversees the FED (there is no money to give away and you will be sitting on a committee that someday will vote to raise interest rates). Politicians, like the media, get much more out of flogging corporate greed. A committee where you, as a politician, can wag the finger at evil CEOs makes great press. Solving the problem by actually overseeing the FED is political death.
8) A painful process of bankrupting and reconstructing the growth sectors begins. Since time is going by, new technologies are slowly beginning to emerge.
9) Go back to 1)
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We are between step 7 and 8.
The current FED cycle has gone like this:
In the middle 90's it became apparent that there was extremely strong demand in both business and public markets for broadband deployment. All the giant telcoms and a zillion small businesses went full tilt in deploying this technology. A zillion new businesses sprang up to take advantage of the new Internet world.
For those that favor a market economy, things were working just as it should. One of the basic characteristics of a market economy is that it allows dramatic new changes to occur in your society very quickly by shifting massive amounts of capital to the desired new technology. The market will sort out the good from the bad.
When automobiles first were invented, for example, lots of money went into horn makers because they were useful and they were going to be required on cars. When the auto manufacturers put the horn into the car it killed the horn market. That’s how the market sorts things out.
In our case we had the same thing. There were companies with a PE of over 3,000 and mostly just on hype and a prayer. The advance-decline ratio was falling off a cliff as you would expect it to. Then the professors at the FED felt they had to intervene and crush this exuberance even though there was no inflation. They had a hunch things were out of whack. The market people point out that the market was doing what it should do and it was correcting itself. Take Amazon as an example. Before the FED intervention AMZN went through its whole cycle. It came public with a great story. It went up 1,200% in a year. Then the public got tired of waiting for profit and sold it back down. The same would probably have happened to all the other story stocks. A lot of market people feel that had the FED not intervened we would still have businesses like pets.com and others but they would be penny stocks. The telcom industry would not have been hurt and still be booming. We would be years ahead of where we are now.
In summary: The FED, like the asteroid, killed the market. Don’t blame it on crazy corporate people. Don’t blame it on airhead Walt-Disney phrases like “the bubble got us!”.
The only good news is that the FED is probably out of the market for a few years.
The driving force we need, the desire for broadband, is still there.
People that say their computers are too powerful are like people who used to say “One megabyte! My god! That’s way overkill! What could you possibly do with all that wasted memory!”.
Imagine taking a pen-like object out of your pocket. Like a car antenna you can extend it up. You can then scroll a screen out from the object. You quickly have a large screen in front of you that you can interact with wirelessly. In your home an entire wall lights up and you can talk to somebody in Mongolia while the translated conversation is stored in text form.
Are we there yet?
We haven’t started. |
