How to Turn a Recession Into a Depression
Red and Blue tribal pundits agree that Herbert Hoover and FDR screwed up when they allowed the money supply to contract, kicking off a deflationary spiral, while Smoot Hawley Tariffs decimated world trade. Opinions vary on whether the New Deal failed to deliver a timely recovery because it was too interventionist or not interventionist enough.
Yet there is more than one way to turn a credit-deleveraging recession and stock market contraction into a prolonged depression. The most effective public policy ever invented for poisoning the economy stems from a failure to appreciate the differences in the way market actors manage risk versus uncertainty.
Knowing the odds and payouts, as well as your own preference for a jackpot over pocket change, would you wager $5 on twenty-seven red at the roulette table? Enough people do to support a multi-billion dollar industry. OK, do you think anyone would play if the house was allowed to change the odds and payouts as well as any other rules of the game after each bet is placed?
That is the difference between risk and uncertainty.
Red and Blue tribal pundits agree that economic recovery can only occur if private capital returns to the market. That’s swell, at least they agree on something. So why is our brain trust in Washington doing every conceivable thing to maximize uncertainty, which only keeps us hiding in our caves hoarding gold?
My partners and I get paid to assess and manage risk when we deploy the money entrusted to our firm to start and grow new businesses. Sometimes we get it right and sometimes we get it wrong. Either way, we don't get paid to sit on the sidelines avoiding risks at all cost. But our investors do expect us to have enough street smarts to walk away from the table when faced with massive and unrelenting uncertainty.
Multiply that behavior times the millions of decision makers that occupy every nook and cranny of our economy, subject us to a barrage of ever-shifting policy pronouncements that may or may not become law, brandish unlimited power to redistribute gains and losses without rhyme or reason, ceaselessly monkey with fundamental accounting rules, empower shadowy officials to make things up as they go along, indiscriminately conflate and then demonize success alongside fraud, and top it off with a fear-mongering campaign designed to work the populace into a frenzy so you can beat the rival tribe into legislative submission, and you have the perfect policy for turning a recession into a depression.
Populist democracy may be wild and capricious but there is hardly an abuse or distortion government can serve up that the market can't figure out how to live with once the rules of the game are set. That’s because nothing is more important to the functioning of capitalism than the rule of law. Even crappy law will suffice, which may be the best we can hope for.
So can we have some and get on with it?
Do you want to get the country moving again instead of wallowing? Then consider this proposal, similar in spirit to the decision to declare a date-certain for our military withdrawal from Iraq. Give us a date-certain when the Congressional circus and its media handmaidens will turn off the uncertainty machine so we can get back to work under whatever set of rules, subsidies, taxes, bailouts, and regulations they choose to saddle us with. Then freeze the plan and shut up.
April 1st might be a fitting date to kick off a Machinations Moratorium. After that, please, no more hearings, TARPs, TALFs, czars, ex-post facto criminalization of business practices, coerced abrogation of private contracts, new and undefined Federal Reserve powers, or "Be Afraid!" speeches from the President.
That doesn't mean Congress has to give up performing legislative theatrics. After all, our elected officials have to do something to stay in the headlines. But how about going back to entertaining the media and polarizing the electorate by fighting over things that only impact a tiny number of people who don't matter, like whether the NEA subsidizes filthy art?