Bubbles, Panics, Manias, Booms And Busts

By: George Noga

The Obama, Geithner, Bernanke and Krugman Bacchanalia

Isaac Newton, perhaps the smartest human ever, propounded a theory of gravity that held until Einstein. Yet even Newton did not understand what goes up must come down. He invested in the South Sea Company while its stock went up and up and up more; he sold at a £7,000 profit. The stock kept going up; Newton invested again, this time losing £20,000 in the inevitable bust. He lamented: “I can calculate the motions of heavenly bodies but not the madness of people.”

In the 300 years since the pricking of the South Sea Bubble, we have come to understand the cause for these inexorable cycles. The Crowd by Gustave Le Bon and Popular Delusions by Charles Mackay illuminated the path to comprehension. Bubbles, panics, manias, booms and busts are caused, pure and simple, by eternal, unchanging human nature as deftly explained by Le Bon and Mackay. Frothy frenzies will be with us as long as people are human. We can’t prevent business and economic cycles because of human nature and we don’t know enough to recognize bubbles in advance; therein lies the mortal fault of the Dodd-Frank bill.

“A recession or bust is the natural response of an economy to a boom or bubble, i.e. it is the cure.”

Providentially, we know how to deal with the aftermath of bubbles once the preordained bust ensues. The key is to understand that a recession or bust is the normal and natural response of an economy to a boom or bubble, i.e. it is the cure. No further attempts at cure are effective or helpful; fiscal stimulus and monetary easing exacerbate the problem. It is the fatal conceit of government to believe it can manipulate a highly complex economy when it can’t deliver the mail. The discoverer of the laws of gravity and, in his spare time, differential calculus could not understand and extricate himself from the South Sea Bubble. How can we expect GS-13s in Washington charged with enforcing Dodd-Frank to do it?

History is rife with examples. The crash of 1921 was worse than the crash of 1929. In 1921 government took no action and the economy, all on its own, rectified the situation within 18 months. In the Great Depression, Hoover’s and Roosevelt’s actions exacerbated and prolonged the crash. The biggest economic and housing calamity in US history was the panic of 1819. Government took no action and the economy was on the path to recovery by 1821.

Economic Bacchanalia with Crystal Meth and Crack Cocaine

The correct economic bromide is government non-intervention. Had government not intervened with obscene levels of fiscal and monetary stimuli, the US already would be into a strong recovery. Economic growth would be higher and increasing; unemployment would be lower and decreasing; the dollar would be stronger and inflation would not be menacing. The expansion of money and credit as in the housing boom always produces an economic high leading inexorably to speculation and bubbles. It is analagous to a week long New Years Eve Bacchanalia followed by the mother of all hangovers.

“Obama, Geithner, Bernanke and Krugman want to revive
the Bacchanalia by distributing the economic equivalent
of crystal meth and crack cocaine.”

Yet our government lords and masters choose to ply us with more pills, drugs and liquor instead of letting our bodies produce a quicker natural cure via the passage of time. Now Obama, Geithner, Bernanke and Krugman want to revive the Bacchanalia by distributing the economic equivalent of crystal meth and crack cocaine, i.e. more trillion dollar deficits and another round of quantitative easing or QE III. When will they ever learn?

Big Brother Barack believes America has become so pantywaisted that every bump and pothole in the economic road must be smoothed to prevent discomfort from inevitable economic cycles. If Obama had followed non-interventionist policies from the beginning of his term he now would be presiding over a growing economy, increasing employment, smaller deficits, a stronger dollar, free trade with Colombia, Panama and South Korea, lower inflation and rosy prospects for reelection. The rich irony is if Obama did nothing, we would be better off and he would be a shoo-in for 2012.

“You have conquered the entire world except New Zealand.”

I’ll end with a favorite commie story. The politburo goes to Brezhnev and says “Congratulations comrade you have conquered the entire world except for New Zealand.” Whereupon Brezhnev retorted, “Surely we can conquer New Zealand; their military is not formidable.” The politburo members replied in unison “We must keep New Zealand free so we will know real prices.” And so it is today. We don’t know real prices for, inter alia, housing, credit, taxes and ObamaCare. Without real prices economic growth is impossible; a fact understood even by commie stooges of yesteryear.

End Note: Greece is again wreaking havoc and for the same reason the US economy is torpid. European central bankers have given Greece massive doses of crystal meth and refused to let the market determine real prices for Greek bonds. Beam me up, Scotty!

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