On one side, are the forces of a natural market correction…following a long, long period of expansion. The easier money gets, the more people tend to misspend and mis-invest it. Then, inevitably, their mistakes must be corrected. That’s what bear markets and recessions are for.
But the feds don’t like bear markets or recessions. And at least since the Keynes outlined his general theory back in the early 20th century, they’ve believed that they don’t have to put up with them. Keynes took a page from the Old Testament. Government should act like an enlightened Egyptian Pharaoh, he didn’t say, but should have. It should run surpluses in the fat years and deficits in the lean years…thus flattening out the pattern of boom and bust.
Pharaoh was no dope. He stored up grain for seven years, when the harvests were bountiful. Then, when the seven lean years came, he released the grain to the people. Problem solved.
Keynes believed that modern government could do the same thing. But Pharaoh was not running a democracy. He had no voters to answer to. So, if he wanted to store grain in the fat years, he could do so.
In theory, the US government could do the same. But, in fact, it never runs significant surpluses. There are too many people who want too much bread and too many circuses. And you don’t win votes by denying the voters what they want. So, in practice, the feds run deficits even in the fat years!...
But Bernanke didn’t see the famine coming. Neither did Geithner. Or Greenspan. Or any of the other savants Pharaoh interpret his dreams. None of them expected hard times. None of them warned the public. None of them encouraged the government to save money for the recession. Nassim Taleb asks why Bernanke was reappointed after he clearly failed the most critical test.
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