In typical politician fashion, Treasury Secretary Tim Geithner fearmongers by implying that if Bernanke doesn’t get reappointed then the stock markets will tank. Geithner may be right that the market will gyrate if Bernanke is not reappointed as the market dislikes uncertainty. However, this statement is nothing more than politics as usual and lacks any real understanding of the markets or what a horrible job Bernanke has done over his tenure. This statement only proves that DC should dump Geithner along with Bernanke.
The market certainly fluctuates from day-to-day. Eventually, the price of the market is driven by earnings. If earnings are good, then the market performs well. If not, then the market declines in value. Hopefully, our Treasury Secretary and the politicians understand this. Of course, fear always trumps logic when it comes to politics, which is precisely why we are in this current predicament.
The fact that Geithner is stumping for Bernanke also proves that the Treasury Secretary doesn’t understand what caused this mess in the beginning. Bernanke claims to be an expert on the Great Depression of the 1930’s, yet he fails to to grasp the real reason this mess occurred. Bernanke believes the Depression occurred because the Federal Reserve failed to provide enough liquidity after the initial stock market crash of 1929. Deflation reigned supreme due to this lack of liquidity. If the government had reflated the dollar and economy, the Great Depression would not have been the Great Depression.
Steve Keen, an Austrian economist from Australia, clearly shows that this is not the case. The real reason the Great Depression developed is the debt level in the economy became too burdensome. Keen points to Irving Fisher’s seminal work from 1933, “The Debt-Deflation Theory of Great Depressions” for proof. Fisher, who catches a lot of heat due to his prediction half way through the market crash of 1929 predicted that “stock prices have reached what looks like a permanent plateua,” developed his reasoning to understand how he could have been so wrong with this market prediction. Fisher makes the following points about depressions (quoted directly from his paper):
“(1) Debt liquidation leads to distress selling and to
(2) Contraction of deposit currency, as bank loans are paid off, and to a slowing down of velocity of circulation. This contraction of deposits and of their velocity, precipitated by distress selling, causes
(3) A fall in the level of prices, in other words, a swelling of the dollar. Assuming, as above stated, that this fall of prices is not interfered with by reflation or otherwise, there must be
(4) A still greater fall in the net worths of business, precipitating bankruptcies and
(5) A like fall in profits, which in a “capitalistic,” that is, a private-profit society, leads the concerns which are running at a loss to make
(6) A reduction in output, in trade and in employment of labor. These losses, bankruptcies, and unemployment, lead to
(7) Pessimism and loss of confidence, which in turn lead to
(8) Hoarding and slowing down still more the velocity of circulation. The above eight changes cause
(9) Complicated disturbances in the rates of interest, in particular, a fall in the nominal, or money, rates and a rise in the real, or commodity, rates of interest.” (page 342)
Please read the whole post by Mr. Keen to get the whole picture, but it is pretty clear that this pattern seems to be shaping up today. It isn’t just Fisher and Keen that make these claims. In “This Time Is Different”, destined to be a classic, authors Carmen Reinhart and Ken Rogoff examine over 800 years of financial crisis’ and discover that governments mismanagement of debt is a constant symptom.
So Geithner should stop with the fear mongering and take some time to really understand why we are in this predicament. Maybe he will see that the markets will do better with a Fed Chairperson who understands why we are in this mess, rather than one whose premise is faulty.