The Trickle-Down Case for Indulging Wall Street

Colbert Interview with Eliot Spitzer

I'm not a Stephen Colbert regular, but I did catch his interview the other night with "disgraced former New York Governor Eliot Spitzer" (that's now Spitzer's official moniker, by the way).

Colbert's cut-to the chase question: even if Wall Street is full of inept crooks and greedheads, as most everyone outside of Wall Street now agrees, isn't short-circuiting their gaudy gravy train just a case of "cutting off our noses to spite our faces?"

In other words, Colbert asked, don't Wall Street-types spend their multi-million dollar bonuses on drivers, cooks, tailored clothes, second (and third, and fourth) homes, expensive restaurants, etc. ???

And if that spending vanished, wouldn't all those other individuals and businesses suffer?

I have a two-part answer to that.

First, to the extent that it's necessary to stimulate our economy (to offset the catastrophic financial damage Wall Street engineered), my preferred instruments for doing so . . . would hardly be the very same people who caused the catastrophe.

Not only does that offend any moral person's sense of justice, it literally encourages more of the very same behavior!

Personally, I would like to now spend a few years without the term "moral hazard" dominating the Op-Ed pages and blogosphere.

Give it to "the Bernie's!"

If the goal is simply to put money in the hands of people who will spend it, why not pluck Bernie Madoff, Bernie Ebbers (Worldcom), Jeff Skilling (Enron), and other scoundrels from their jail cells and bestow upon them the billions being showered on Wall Street?

To paraphrase Ben Stein's stump speech, let's instead lavish the money on the people who are the true backbone of this country: the servicemen and women serving abroad, and especially their families sacrificing back home.

And while we're at it, let's earmark a little of Wall Street's money to care for soldiers who've sustained life-altering combat injuries.

Second, it's far from clear that handing out financial "goodies" -- to anyone -- is advisable.

Just as there's no free lunch, there's no such thing as "free stimulus."

Basically, it's just added to our national credit card -- a credit card balance that already comes to something like $35,000 for every man, woman, and child in the U.S.

If open-ended, poorly targeted stimulus (deficit) spending worked, Japan's economy would be the world's most robust now.

Instead, Japan is entering its second (or third) "lost decade," depending on who's counting.

The bottom line?

Saddling our economy with crushing debt to enable -- and then mitigate the consequences of -- still more Wall Street greed and misbehavior is to compound one mistake with a second, equally big one.

The Fed & Unintended Consequences

The Fed, Commodity Prices & Economic Recovery

Twelve hundred miles (give or take) from Wall Street, me thinks that a not-so virtuous cycle has emerged regarding the government's various and sundry efforts to nurse the economy back to health.

The dynamic goes something like this:

Step 1: the Federal Reserve and Treasury essentially borrow and/or create money -- at this point, trillions of it -- then direct it where they think it's most needed (not necessarily to me or you . . . but that's another post).

Step 2: the markets ("Mr. Market") take note of all that deficit spending, and drive down the dollar while pushing up commodity prices.

Step 3: elevated commodity prices retard recovery.

To take just one example, at $80 a barrel, oil is likely twice what supply and demand would otherwise dictate at the moment. Meanwhile, "stores of value" like gold -- now around $1,100 an ounce -- drain money that would otherwise fund economic growth.

Step 4: the Federal Reserve and Treasury, noting anemic growth, serve up another helping of stimulus cum deficit spending (see Step 1).

How long can this go on?

As many commentators have now noted, eventually one of two things happen: 1) economic recovery kicks in, and the government can taper its rescue efforts; or 2) the U.S. bumps up against the natural limits of its ability to borrow (not a bright line).

The "canary in the coal mine" for this kind of kind of fiscal/monetary tightrope is Japan, which is a good 15 years ahead of the U.S. on its trajectory of boom, bust, and (non)recovery.

The lesson for policymakers would seem to be, "don't do what Japan has done."