And Now, the Financial Apocalypse
by J. Orlin Grabbe
When a prominent MIT economics professor
takes leave of his senses, blathering on
like the worst of the stock stuffers of Wall
Street and financial entertainment
television, and when leading academic
scholars and market practitioners proclaim
that a replay of the market "correction" of
1987 is highly unlikely, you know the end is
here. It can't get better, or worse, than
this.
"This expansion will run forever," Rudi
Dornbusch writes in the July 30, 1998, Wall
Street Journal. No, not for another year, or
two years, or five. But forever. That ought
to stick a hot poker up the ass of any bear
within a hundred miles of Cambridge,
Massachusetts, huh?
Meanwhile ex-MIT professor and IMF Deputy
Managing Director Stanley Fischer is off in
Moscow, doling out billion of dollars in IMF
funds to the Russian mafia. Of course they
don't tell it like it is, over at the IMF.
They euphemistically refer to opening the
money spigot as "stablilizing the financial
system" or "buying some breathing room" (a
highly technical economic term that
apparently means not having to do anything
as long as more money is coming in the
door). But the IMF aid allows the Russian
central bank to continue to intervene in the
foreign exchange market in support of the
over-valued ruble, which in turns shores up
Russian banks at the expense of industry and
other sectors of the economy. And a majority
of these banks are owned by the Russian
mafia. Billions for the mafia. But Fischer
somehow can't factor that into his
equations.
Another Cambridge expatriate, ex-Harvard
Professor Larry Summers sits over in the
Treasury department, guzzling diet coke and
hoping to take over the job of the departing
Robert Rubin, who has now devoted several
years to making the world profitable for
Goldman Sachs. Goldman may soon go public in
an IPO--a method of printing money by
issuing stock certificates that could turn
Goldman partners into even bigger
millionaires than they already are. Summers'
most notable recent achievements were
setting Suharto straight on how to correct
Indonesia's economy, and repairing the IRS's
botched computer modernization project. Now
Suharto is gone, Indonesia's economy
continues to disintegrate, and the IRS's
botched computer project promises to become
more botched as we approach the Year 2000.
Is it a special form of Cambridge madness?
Something hovering in the air above the
Charles River?
Back to the stock market. Ah, the stock
market. There is no longer need of sweat of
brow or precision of acumen. Just buy and
hold, invest for the long run, and get ready
to eat the rainbow stew. The stock market
will fulfill your wildest dreams. There is
no such thing as a stock risk premium
anymore, according to some economists.
Stocks are safer investments than T-bills,
bonds, or commodities, and they have higher
returns. What more do you want? Why even
bother to eat breakfast? Sell the food and
buy some stocks. For the
l-o-o-o-o-o-o-o-o-n-n-n-n-n-n-n-n-g-g-g run.
Choo choo. I hear that train a comin'.
"This expansion will run forever."
It is hard to imagine any article with worse
timing than, say, "Asia's Bright Future," by
Harvard Professors Steven Radelet & Jeffrey
Sachs, writing in the November/December 1997
issue of Foreign Affairs . Their chipper
assessment appeared just as financial
markets were collapsing across Southeast
Asia. Of course Asia probably does have a
bright future, much as Europe could have
been said to have had a bright future during
the Black Death years of the 14th Century,
for that appalling time of death and disease
was eventually followed by the Renaissance.
Give or take a century.
But Harvard has nothing on MIT. "This
expansion will run forever," Dornbusch says.
Oh, timing issues are difficult. Almost two
years ago I came to the conclusion that
stocks had reached valuation extremes. I
formed the expectation that equilibrium
forces would now begin to exert pressure in
the direction of more familiar historical
relationships and, consequently, lower stock
prices ("Sell Stocks Now," "Bye Bye, Miss
American Pie"). This was based on the
private observation that stock overvaluation
was comparable to that prevalent in 1929.
Silly me to have believed that 1929
relationships would provide any sort of
container. And even though I suggested a
tongue-in-cheek scenario where stocks (the
Dow Industrials) might rise to 13,000, I
considered it improbable that the Dow would
rise above the then current level of around
6,000. But much to my surprise, the market
thumbed its nose at 1929, and proceeded to
cover almost half the distance to 13,000,
peaking at 9338 (on a closing basis) on July
17, 1998.
As it was, I was a year ahead of the Asian
Crisis and two years premature for Wall
Street's imminent stock meltdown. Call it:
Give or take a couple of years.
But this: "This expansion will run forever"?
Give or take a couple billion years.
Why will the U.S. economy likely "not see a
recession for years to come"? Because,
Dornbusch asserts--I'm not making this up:
" We don't want one, we don't need one, and,
as we have the tools to keep the current
expansion going, we won't have one."
So there you have it. We don't want it. We
don't need it. We won't stand for it. And we
can keep it from happening. "We" are in
charge. The forces of nature will do "our"
bidding. No, I don't know who "we" are. I
guess he means Cambridge professors.
The gods don't like human hubris. They have
a way of cutting down those with excessive
pride. Whom they will destroy they first
make mad. And Rudi Dornbusch, at least on
the evidence of the Wall Street Journal
article, has already become a raving
lunatic. What stage is next?
There is a line of logical fallacy called
post hoc ergo propter hoc : "after this,
therefore because of it". The fallacy that
because one thing occurred after something
else, the earlier event was therefore the
cause of the later event. And Rudi Dornbusch
seems to have fallen into it.
When Dornbusch says "we", I don't think he
means you and me. Certainly he doesn't speak
for me. So who is he talking about? About
economists, plausibly. The ones he knows
from Cambridge, equally plausibly. Rudi can
certainly look over at the IMF and the
Treasury, and many other places, and see
some of his colleagues at work.
But where is the evidence they are doing an
amazing job? ("We have the tools to keep the
current expansion going.") Or even a
commendable job? Or even a competent job? I
can't find any.
The reasoning seems to be: "We were put in
charge. And then the economy expanded. And
the stock market went up." Right. And Bill
Clinton made the trains run on time. Post
hoc ergo propter hoc.
No danger the party will end, Dornbusch tell
us: "First, there is no inflation." That's
right, of course. There is a massive
deflation going on in Japan and other Asian
nations. I'll leave it to Dornbusch to
explain why that's a positive development.
"Second, the government's coffers are
overflowing with budget surplus." Oh? How is
that? Dornbusch must mean: in "surplus" as
long as we falsely add in the net positive
cash flow on the Social Security account,
which is still scheduled to go bankrupt in
2020. The last I checked, the stock of
outstanding government debt was getting
larger, not smaller. You can't lie to me
about a government "surplus."
Finally, this gem: "Thus, only natural
causes, and not the Fed, can bring the
economy to a standstill. Fortunately, we
have the monetary and fiscal resources to
keep that from happening, as well as a
policy team that won't hesitate to use them
for continued expansion."
By "policy team" I assume Dornbusch means
the dickheads in the administration. Now I
understand. They'll pass a law against
recessions . Clinton will go on TV and feel
our pain , and it will all go away. The
Village will gather together so that each
and everyone will have their "fair" share of
a rapidly diminishing communal pie.
Yes, the gods are hard at work, inciting a
bunch of jerk-off politicians (and also
Cambridge economists?) to recreate the
Soviet Economy here in the U.S. The oh-so-
successful Soviet Economy.
Like the Black Death, the disease of hubris
has spread everywhere. Robert Liton,
director of economic studies at Brookings,
and Anthony Santomero, director of the
Financial Institutions Center at the Wharton
School, convened a little conference of
academic scholars and market practitioners,
and now inform us: "A correction may
come--and may even be in process--but a
repeat of the hair-raising events of 1987 is
highly unlikely" (Wall Street Journal , July
28, 1998).
Now this could be simply interpreted as
saying that many of the attendees have lost
their hair since 1987. But if so, this is an
excessively subtle point. Liton and
Santomero go on to give a list of innocuous,
even irrelevant, reasons why 1987 supposedly
won't happen again. About the only thing
they don't do is promote the notion that
circuit breakers, or temporary halts in
trading, have an positive effect in making a
market meltdown less probable.
They instead cite material from Lawrence
Harris which knocks the notion that circuit
breakers are useful. But they never get
around to criticizing the consensus belief
in the supposed "high improbability" of a
repeat of 1987. For academicians must also
have their fantasies. And one of these is:
Events like 1987 will not be repeated
because they have been studied.
Studied or not, the imminent market meltdown
will come quickly. Probably in two waves
down. A "correction", a relief rally, and
then the massacre. We'll see how the "policy
team" makes it all go away.
"Some would talk foolishly about the
benefits of creative destruction," Rudi
Dornbusch writes. Yes, like me, for example.
Sorry, Rudi. You don't have a clue. Let the
ruination begin.
The bay-trees in our country are all
wither'd
And meteors fright the fixed stars of
heaven;
The pale-faced moon looks bloody on the
earth
And lean-look'd prophets whisper fearful
change.
These signs forerun the death or fall of
kings.
--William Shakespeare, Richard II
August 2, 1998
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