Birdscribe said:
One interesting response I heard this morning on CNBC came from Rep. Barney Frank, who suggested a second economic stimulus check. When skeptical, free-market uber alles, eye-candy anchor Trish Regan asked him where the money would come from, Frank didn't miss a beat, saying on Sept. 10, 2001, we didn't have any money, but all of a sudden, found hundreds of billions to invade Iraq.
So taking some from that would hardly be missed.
Even Larry Kudlow, who is the standard-bearer for free-market, low-regulation, low-tax economics, didn't completely rip Frank's idea, save for Frank's suggestion that a raise in taxes on upper-income folks would help pay for it.
Oh lord no, Bird. Barney Frank is a moron. First off, the money we have spent since 9/11 is money we don't have. Spending more money we don't have isn't a solution. It will just exacerbate the misery by making prices rise even more. If you try to fuel the economy, you are pouring gas on the inflation problem.
What Frank is suggesting is akin to Paul Volcker's supply shock, which you know made things worse. It's just trying to control the economy instead of controlling inflation, the way Volcker was. The problem is, when you try to control one, you make the other worse. This is the inherent dilemma with stagflation.
You can't manage the economy, period. Monetary policy has short-term effects. Even Keynsians agree with this. The economy is like a giant battleship. You can maybe steer it a little (although I will argue to the death that you do it by creating problems as bad, or worse, as the ones you are trying to fix). But trying to slam on the brakes and reverse course makes it capsize.
These are smart men, Ben Bernanke included, but all the smarts in the world can't give them the power to do the impossible.
Bernanke modeled something when he was at the Brookings Institute that correlated every major U.S. recession since Nixon with a combo of oil price increases and the Fed raising the Fed funds rate. It wasn't genius. It just provided more proof of something most people could see.
It is exactly what happened again while he was Fed chairman. They were raising rates for a few years to try to manage the economy and oil prices started to rise precipitously in 2007. The economy slowed, helped along in part by the housing bust, and we are now starting to get hit with the dual whammy of a recession and inflation.
Bernanke hasn't performed very well so far (but no Fed chairman ever really does, because it's their job to screw around with things they can't control). Based on the work he had done at Brookings, for some godforsaken reason he actually thinks that by lowering rates, as he has done, he could stave off the recession. What he has likely done, though, is spurred on more demand, which is probably one of the more significant factors that is driving oil prices to an all-time high.
It's the stupid short-term fixes that create much worse long-term problems. So now an inevitable recession is probably going to be a very severe recession. And trying to heat up an anchored economy, as he has done, just makes the inflation worse, too. Is it worth a half year of slight relief that creates two years of worse misery?
The best way out is to do nothing. Barney Frank--and just about every politician--won't do that. It's their job to pretend they can dribble a football. And neither will the Fed chairman, because he'll get hammered for sitting tight, even though he knows it's the right thing to do.
