These economists are not getting it right. They are getting it wrong, time and time, and time again. So what is the new dogma?
Norbert said recently in research notes “the world is in trouble.”
“I believe that the rescue packages brought on have been so costly for so many governments that the exit from this fiscal policy will be very painful, very painful indeed,” he said. “Some of us are already talking about a W-shaped recovery. I’d probably talk about a triple-U-shaped recovery because there are so many stumbling blocks here to get out of this.”
Interesting, an investor who made a fortune riding the market down recently made a huge purchase in B of A.
Hedge fund manager John Paulson, who earned a fortune by betting against financial companies after foreseeing the credit crisis, bought a $2.7 billion stake in Bank of America and took stakes in other lenders during the second quarter, according to a regulatory filing.
So what does this fund manager that economists like Taleb don’t? A trader at the hedge fund that I work at said the following:
If you are bear you only have to be right once, and then you are they are the new messiahs
In my predictions for this year I said it would be the land of perception, and that analysts would not be able to hit the broadside of a barn. So far so right. But why is this happening? Why can’t economists and people get it right?
Because people don’t follow history. You hear the reference to the Great Depression and how things are oh so close to that. But personally I don’t agree we are in a Great Depression. We are more in a situation like 1825. What’s 1825?
The Panic of 1825 was a stock market crash that started in the Bank of England arising in part out of speculative investments in Latin America, including in the fabled imaginary country ofPoyais. The crisis was felt most acutely in England where it precipitated the closing of six London banks including Henry Thornton‘s bank and sixty country banks in England, but was also manifest in the markets of Europe, Latin America, and the United States. An infusion of gold reserves from Banque de France would save the Bank of England from complete collapse.
What was unique of 1825 is that it was the first known recession of the industrial world. It was based on easy credit, and then one day to the next credit was not available. 1825 was a very similar situation to what we are experiencing today. In 1825 the English bank became the lender of last resort, and when the central bank was about to collapse the French bank gave gold bullion to England, thus saving the English economy. This crisis is on the radar of the Fed, but an insightful analysis was given by delong.
When politicians wash their hands of a financial system in crisis and fail to intervene on a large scale, things do not turn out well. The most notable example was 1929–1933, when, at least according to Herbert Hoover, Treasury Secretary Andrew Mellon persuaded Hoover that "even a panic is not altogether a bad thing” because "it will purge the rottenness out of the system.”
Did 1825 turn out better? We think so. George IV was not executed on Tower Green. Lord Liverpool’s head was not carried about London on a pike. The spinning of cotton into thread in Britain in 1826 was 11 percent lower than in 1825—the first serious industrial recession—but it bounced back and grew 30 percent from 1826 to 1827.
The lesson here is that Bernanke is not wrong, and that the central banks and governments are doing the right thing. But of course the dogma is that this is wrong because like so many the thinking is that “a good panic will purge the rottenness out of the system.” Sort of reminds me of blood letting practiced in the middle ages. Of course I am not one for bailing everybody out, as I have my limits, but in a crisis scenario you have to act differently.
Oh yeah it was Taleb who said:
"I don’t think that structural changes have been addressed," he said. "It doesn’t look like they’re fully aware of the problem, or they’re overlooking it because they don’t want to take hard medicine."