I doubt that David Francis is schooled in Austrian economics. But the writer at Foreign Policy makes a heck of a lot of sense in a recent post at the magazine's Passport blog.
In light of all the recent "cash infusions" and "liquidity injections" on the part of the Fed and other central banks, Francis says it's time to give it a rest. If a recession's coming, let it come:
The market needs to correct itself. The central banks have to come to terms with the fact that a recession is possible if not likely no matter what they do. Here are a few reasons to let the markets be:
Wall Street is not going to be happy not matter how much cash is infused or how low interests rates go. The Fed's rate cut on Dec. 12 is the perfect example of how spoiled Wall Street has become. It gets a cut, and it trades the market down 300 points because it wasn't big enough. This follows an autumn during which the market traded up irrationally on hopes of a rate cut. Wall Street needs to start expecting that the good times it has had over the last few years can't last forever.
Gee, sounds like the sort of thing folks have been saying at the DR since, well, since the 2001 round of interest rate cuts short-circuited the sorely-needed cleansing of malinvestment from the 90s. But wait… Francis has more:
Buyer beware. Investors bet on instruments backed by subprime mortgages because they were risky; they could make a lot of money or lose a lot of money. For a while, they made buckets of money. Now, they're losing it. It is not the job of central banks to bail out that made bad investments.
Buyer beware II. The same principle applies on the homeowner side, apart from those who were suckered into these kinds of loans (and now it looks like the right kind of protections are being put in place). Many subprime borrowers were homeowners who wanted to upgrade to a bigger house or borrow against the value of their house. They took out these loans betting that the value of their homes would continue to rise. When housing prices started to plateau and eventually decrease, these owners got stuck with payments they couldn't make. Others should not have to pay for their mistakes.
What Francis describes here sounds a lot like the "zoo capitalism" our own Bill Bonner's been writing about in recent days. In place of the jungle where risk abounded, what passes for capitalism these days is like a zoo, where all the fearsome beasts are caged and risk is supposed to be unheard of.
Recessions are painful, but, just like good times, they don't last forever. They're an ordinary part of the market cycle. The actions by the ECB and Fed are simply prolonging the inevitable, whether it be a recession or simply a brief correction. Either way, it's time to let the market take its natural course.
For more on that, and in case you missed it, yesterday's DR picks up the theme from here.