Don’t Fall for This Washington Insider B.S.

Don’t Fall for This Washington Insider B.S.

Founder Bill Bonner

U.S. stocks were up again yesterday. The S&P 500 has gained 120% since March 2009.

Gold is up too, almost back at the $1,700/oz. mark. We've made money on gold every year since 1998.

What's ahead? Can't tell you that. Don't know. The best we can is to try to eliminate things. We try to figure out what is NOT ahead.

"Inequality is holding back the recovery," writes Joseph Stiglitz in The New York Times.

Inequality is NOT holding back a recovery. Inequality is what you get when the feds manipulate, manage and mangle an economy. They take money from the outsiders... and give it to the insiders.

It's not inequality that is holding back a recovery, it's the insiders!

According to Nassim Taleb in his new book, Antifragile, Sitglitz looked at Fannie Mae just as the credit bubble of 2005-07 reached its peak. In his report he said that "on the basis of historical experience, the risk to the government from a potential default on GSE debt is effectively zero."

In 2008, the odds had gone to 100%. Unless the feds stepped in, Fannie would have defaulted.

Insider Dealing

But Stiglitz is a Nobel Prize-winning economist. So let's see what he had to say now:

There are four major reasons inequality is squelching our recovery. The most immediate is that our middle class is too weak to support the consumer spending that has historically driven our economic growth. While the top 1% of income earners took home 93% of the growth in incomes in 2010, the households in the middle – who are most likely to spend their incomes rather than save them and who are, in a sense, the true job creators – have lower household incomes, adjusted for inflation, than they did in 1996. The growth in the decade before the crisis was unsustainable – it was reliant on the bottom 80% consuming about 110% of their income.

See. If the middle classes had more money they could spend it and then the economy would recover.

So, if you want a real recovery, Sitglitz reasons, you have to get more money to the middle classes.

On the other hand, if the middle classes had more money we wouldn't need a recovery; there wouldn't be anything to recover from. The real problem all along was that the insiders – such as Stiglitz himself – had distorted the economy with EZ money, twisting it into a grotesque new shape.

This lured the middle classes and lower classes to spend more than they had. You could wonder why they had so little... and come up with a lot of reasons. But you wouldn't have to look far to figure out why they spent so much. Credit was too cheap.

The feds – under the influence of people like Stiglitz – believed they could manipulate the economy into performing better than it would if left alone.

Their simpleminded formula was one even a child could see through.

When people buy more stuff... the economy grows more. What do they need to buy more stuff? They need more money or more credit. We can't give them more money. So let's give them more credit!

That is the kind of thinking that brought us to where we are.

But Stiglitz misunderstands the problem. He thinks inequality is the problem... and not just a symptom. He comes up with another flimsy fix.

[We] must all face the fact that our country cannot quickly, meaningfully recover without policies that directly address inequality. What's needed is a comprehensive response that should include, at least, significant investments in education, a more progressive tax system and a tax on financial speculation.

The good news is that our thinking has been reframed: it used to be that we asked how much growth we would be willing to sacrifice for a little more equality and opportunity. Now we realize that we are paying a high price for our inequality and that alleviating it and promoting growth are intertwined, complementary goals. It will be up to all of us – our leaders included – to muster the courage and foresight to finally treat this beleaguering malady.

So you see, we need blah blah... new policies to replace the old policies. More education. More taxes. More... more... more... More of the nation's wealth to the insiders... who will decide who gets what.

Still Too Big to Fail

Enough of Stiglitz... let's go to another person who has conveniently misunderstood everything: Robert Reich.

Mr. Reich is allowed out in public and his remarks are recorded for us by Tribune Media Services:

No president will allow a $2 trillion bank to go under. That would threaten the whole economy.

That is true. It would threaten to give the whole economy a dangerous brush with reality.

So what can you do to prevent another bank crisis... short of letting a correction give Robert Reich and other insiders what they so richly deserve?

The biggest Wall Street banks are now far bigger than they were four years ago when they were considered too big to fail. The five largest have almost 44% of all U.S. bank deposits. That's up from 37% in 2007, just before the crash. A decade ago they had just 28%.

The biggest banks keep getting bigger because they can borrow more cheaply than smaller banks.

That's because investors believe the government will bail them out if they get into trouble rather than force them into a form of bankruptcy (as the new Dodd-Frank law makes possible). This belief itself – a virtual federal guarantee – is worth billions to the big banks. It makes dealing with them less risky...

To make matters worse, with bigness comes more political clout... So now that TARP is over, shouldn't we make absolutely sure we don't need another Wall Street bailout? No bank ever again should be too big to fail.
That's why it's necessary to limit their size and break up the biggest. There's no alternative.

Of course, there is an alternative. Let Mr. Market do with them what he will. If they can survive honestly, what is the harm of bigness? If they can't, why not let them fail?

But Mr. Reich and Mr. Stiglitz share a common goal: to bring economic activity under insider control, where right-thinking economists – rather than willing buyers and sellers – get to decide where the money goes.



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