Richard Posner — The Bailout Saved The Economy!

Well, in my own mind, only until this bear market rally tanks, but I’ll get to that later. But here he goes:

The bailout worked. At a relatively modest, though by ordinary standards very large ($17 billion), cost to the government, the auto companies were kept out of bankruptcy until the acute psychological phase of the economic crisis had passed. Last December, and indeed until sometime in March, government officials, the media, and the public were understandably fearful that the economy was in free fall and might land somewhere near where the economy had landed in March 1933 (25 percent unemployment, output 34 percent below the GDP trend line, 18 percent deflation). Such a fear can constitute a self-fulfilling prophecy, because by causing consumers and producers to hoard cash rather than to spend, it can push the economy into a very deep downward spiral. That fear has now abated.

He’s following what some might call the “voodoo magick” economics, what Reason is alluding to is the “animal spirits” economics, and the general world knows as Keynesian economics. Centering around the understanding that we live in a credit-based economy entirely resting on fiat currencies and fractional reserve banking, the old question of MV=Py becomes very important. Posner is suggesting that because V was already in trouble, the bankruptcies in October/November of last year would have been devastating, but that today they’re much less significant.

He’s suggesting that the economy is based on confidence (as it’s been said all confidence games are), and that to allow the firms to go bankrupt when confidence is low is far worse than allowing it to happen when confidence is high. And it makes sense, if we’re in a recovery. But if we’re in a bear market rally, as I believe, and if you accept some of the negative impacts of the terms of the bankruptcy packages, I think the harm is yet to be felt.

So where are we? Do we take a DJIA that’s rallied to 8400 points from the March lows, largely on the backs of a financial sector rebound, as a sign of a recovery? I doubt the news from the Stress Test that banks need to recapitalize to the tune of $75B should be seen as good. In fact, Bill King writing for The Big Picture blog suggests that this is playing out according to Wall Street & Geithner’s plan, but that once they get a hold of that capital, the next shoe drops:

It is crystal clear that the scheme over the past two months has been to drive financial stock prices higher so banks could raise capital. Mission accomplished!

The Fed and the solons have accomplished the task of providing an environment, with ample patsies, for banks to raise needed capital. But once banks have procured that capital, watch out.

If Wells Fargo needs to raise $15B, it is far cheaper to raise it at $25 then $7. So once again solons via crony capitalism and smiley-faced fascism utilize massive rigs with taxpayer funds to bailout the elites.

Stocks are at their most overbought level since September 2007 as measured by the Commodity Channel Indicator (moment indicator). And S&P 500 stocks are at their most overbought level since 2006 as measured by percentage of stocks above 50-day moving averages (92%, 460 S&P 500 per Bloomberg).

So where are we headed from here? I can’t say, but look at something that Posner said:

…government officials, the media, and the public were understandably fearful that the economy was in free fall and might land somewhere near where the economy had landed in March 1933 (25 percent unemployment, output 34 percent below the GDP trend line, 18 percent deflation).

Now, count the months from October of 1929 to March of 1933, and then count the number of months from October of 2008 until now. If this thing is going to get worse to 1933 levels, it’s unreasonable to think it would have occurred this quickly. Oh, and while we’re at it, look at what the Dow did over the beginning of that period:


Gee, what does that look like, starting in Nov 1929 and ending in April 1930? A bear market rally.

And despite the common narrative, all during Herbert Hoover’s administration he was desperately trying to find ways and interventions into the economy that would stop the slide. He was rewriting the rules of the game surprisingly similar to the way that Obama is today, showing all investors that their gains or losses were due to their ability to play the political markets. He was disincentivizing investment by constantly changing the rules, and thereby the odds of success in any given market play.

So Barack Obama’s policies are antithetical to investment, antithetical to sound business planning, and ensured to kneecap any attempt at recovery that our economy hopes for. If you’re looking for reasons to worry about the future of this economy — looking for justification that this is not a recovery and a bear market rally — you simply have to combine a few facts:

  1. Fundamentally, the bull market of the late 90’s and early 00’s was partly due to an extraordinary increase in financial system leverage.
  2. This bull market was pumped up by fractional reserve banking and a completely unsustainable rise in asset prices that fueled the above leverage.
  3. We are now at a point where leverage is unwinding and asset prices are still declining.
  4. Government props have supported a rise in financial sector stocks, but fundamentally the stress tests prove that banks need to raise capital based on even mild financial shocks.
  5. Any continued weakness in the economy will skewer this current rally.
  6. Asset prices, foreclosures, and jobs data show no signs of getting better, only (at best) signs of slowing their decline.
  7. Obama’s financial system meddling (auto bailout, TARP shenanigans, etc) is sure to provide more weakness than expected.

Richard Posner, and all the other cheerleaders, believe that if only they keep confidence high, all the fundamental problems in the economy will dissipate and we’ll start a recovery. But the fundamentals aren’t going away. The economy is over-leveraged just like it was in the late 1920’s and early 1930’s, and that leverage must unwind before we can reach a recovery, a recovery based on saving and investment rather than spending and debt. Posner thinks the collapse has been avoided by slowing down the decline, but in essence we’ve only delayed and extended the inevitable.