"Bloodletting" Economists

Economic Theory, Then & Now

The U.S. is now 234 years old, and yet over half the nation’s money supply was created since Helicopter Ben took over the flight controls four years ago.

--David Rosenberg; Chief Economist, Gluskin Sheff

It's hardly a saving grace for today's financial mess, but it HAS been gratifying to see an entire generation of muckety-muck economists abruptly lose their hubris regarding their colleagues of yore.

As epitomized by the last two Fed Chairmen, Alan Greenspan and Ben Bernanke, the prevailing mindset amongst contemporary economists has been that their Depression-era peers were little more advanced than medieval doctors, who went in for bloodletting and other harmful quackery.

The reason for that belief?

Those in charge during the Great Depression ignorantly presided over a collapse in the money supply, with a consequently ruinous effect on credit availability, debt repayment, and wages and prices generally (indeed, the Depression was characterized by a devastating deflation).

Fighting the Last War?

Fast forward to today.

"Helicopter Ben" Bernanke and the U.S. Treasury have now injected -- depending on how you count -- somewhere on the order of $10 trillion in liquidity into the U.S. economy.

And that's just since 2008.

Zero percent interest rates. TARP. Son of TARP. Federal guaranties. Bailouts. Direct equity infusions. Subsidized mortgage rates. Quantitative easing. And on and on.

The result?

No Great Depression II, but certainly not a robust recovery. And at the cost of trillions in potentially crippling, new U.S. debt.

In fact, by printing so much money, Mr. Bernanke has ushered in what economists call a "liquidity trap": monetary policy has eased so much -- in fact, to 0% -- that further easing has no effect.

In fact, it's impossible (cue, quantitative easing).

Back to the ???

So, where do we go from here?

Not necessarily 'back to the '30's.

Personally, I'd settle for the '50's.