Ivy League Idiocy

What a ride! Yesterday’s market action makes four consecutive 400+ point daily swings for the Dow, the first time in history the index has registered such extreme behavior.

The VIX Index – sometimes referred to as Wall Street’s “Fear Gauge” – has more than doubled in the past month, from a reading of less than 20 to over 40 this week. That’s a lot of fear, a lot of uncertainty and a lot of upset stomachs…all things not usually associated with “recoveries.”

Of course, Fellow Reckoners have rightly come to scoff at the mere mention of the word “recovery.” They know it’s a joke, a farce. They know it isn’t real, that it is a rhetorical conjuring trick cooked up by self-serving clerks inside the beltway to bolster consumer confidence and paper over cracks in the economy.

And so, they buy gold because they expect the opposite of a recovery. They anticipate a long and bumpy road ahead. They figure the worst is not behind them, but yet to come. So they prepare accordingly. They buy gold and they are happy. Good for them.

Your editor arrived in Spain a few days ago after a couple of weeks in the U.K. We were in Ireland for one wedding, then Scotland for another. And we stopped by London too…just before looters and hoodlums took to the streets there, wrecking everything in sight and feeling proud of themselves for having done so. Our little trip, a “partial PIIGS tour,” if you will, has given us a glimpse into a kind of dystopian future, a look at what may be on the cards for the rest of the west. Take Limerick, Ireland, for example, a sleepy little town of about 100,000 souls. The economy there has ground, almost completely, to a halt. It seems there are more stores with “for sale” signs on them than not. We’re probably exaggerating there, but it’s pretty grim just the same. Construction sites sit abandoned, scaffolding and tarpaulins hang off half-completed buildings like saggy-bottomed swimming trunks on a skinny old man. And it rains all day. Miserable.

“They started building an opera center down town,” one man told us. “Like we needed a bleedin’ opera center, here in Limerick! Then the money dried up during the crisis. Work stopped. Well, now it’s just a huge hole in the ground. You can see it right as you drive into town. It’s a bleedin’ embarrassment is what it is.”

The pubs, perhaps not surprisingly, are still full. After all, people need a place to drown their sorrows…and nobody drowns their sorrows better than the Irish. Some folks go to church. Most go to their local. We saw a menu in one joint with a page dedicated to “recession-busting cocktail specials.” We tried a few to see whether they worked. Nope. Still raining outside. Still no work on the opera site.

Strangely enough, however, prices in Ireland are still relatively high. We don’t know how the gainfully employed can afford to live there…never mind the perennially unemployed. A taxi to the airport – about 25 minutes out of town – cost us almost 35 euros. A quick calculation…that’s about two bucks a minute! In some parts of the world you can get a decent hotel room and a good hangover for half that amount. What are these people still doing here in Limerick, we wondered? Not riding in taxis, most likely.

Ireland, like her Club Med cousins down in the Mediterranean, is doing it tough. Her banks spent the early 2000’s lending money to people who couldn’t afford to repay it. That’s no way to run a bank. Eventually, those who couldn’t make their payments didn’t. Debts hung around banks’ throats like iron neckties. Then, rather than letting the profligate go bust, making way for fresh and enterprising businesses to take their place, the government stepped in to save the day. As usual, they ruined it. Now the whole country is broke.

Likewise, the economic landscapes in Spain and Italy inspire little confidence for investors. And, just as the Irish government sacrificed the many (taxpayers) to save the few (banks…which effectively went bust anyway), the ECB and the IMF are putting the whole European union in front of the firing squad in order to direct bailout funds towards countries that demonstrably cannot balance a budget. The result, we predict, will be the same as in the Emerald Isle.

Why, good folk wonder, would supposedly smart people do such obviously dumb things? It’s a fair enough question, and one we hear a lot. Some contend that politicians are ruining their economies on purpose, a conniving way to further impoverish and enslave the masses. Sounds a bit conspiratorial…though we wouldn’t put it past them. More likely, those we think of as smart may not really be so…or at least not in the way – nor in the specific fields – in which they claim to be. Isaac Newton was a brilliant astronomer, for example…but he was also an avid believer in alchemy. We don’t doubt gravity because lead doesn’t turn to gold…but nor do we study alchemy at school just because an apple falls from a tree.

Likewise, few would doubt that Ben Bernanke, a Princeton PhD., is an intelligent guy. But that doesn’t mean he’s not also a moron. Maybe it just depends on the subject. Listen to him talk, for instance, about the state of the economy…

Here he is in May of 2007, precious months before the nationwide collapse of the subprime mortgage market across the US.

“…given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.”

His words. No kidding.

Throughout 2008, Bernanke remained adamant that the American economy was robust enough to stave off a recession. On January 10 of that year he declared, “The Federal Reserve is not currently forecasting a recession.” A week later, “[The U.S. economy] has a strong labor force, excellent productivity and technology, and a deep and liquid financial market that is in the process of repairing itself.” And then again, on June 9, “The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so.”

Of course, as all non-economists knew too well, the pains of severe economic downturn had already begun to set in. Real gross domestic product (spurious a measure as it is) began contracting in the third quarter of 2008. By early 2009 it was falling at an annualized pace not seen since the 1950s. The rest of the story you know.

Just to be clear, the goal here is not to make a fool of Mr. Bernanke. The man is clearly capable of doing that all by himself. The point, rather, is that smart people sometimes do and say stupid things. That goes for Ivy League grads as well as Irish politicians and Italian bankers. Being no stranger to mistakes himself, your editor has no problem with acts of private idiocy…and the valuable lessons they yield. They are tolerable to the extent they are inevitable. But public idiocy, idiocy that impacts the fate of entire nations, idiocy that, not being subject to market forces tends to yield no lesson whatsoever…well, that’s just politics.


Joel Bowman,
for The Daily Reckoning