A Call for a Free Market
worldwide turbulence of recent days is a strong indication that
government intervention alone cannot restore the economy and offers a
glimpse of the risk of completely depending on it. It is time to give
the free market a chance.
crash of 2008, governments have tried to stimulate their economies by a
variety of means but have relied heavily on manipulating interest rates
lower through one form or other of
quantitative easing or simply printing
money. The immediate rescue of the collapsing economy was necessary at the
time, but the manipulation has now gone on for nearly seven years and has
produced many unwanted consequences.
exacerbated the inequality of income around the world. Money has been
artificially allocated by the abnormally low rates to reward speculation and
to discourage savings and longer-term investments that produce real economic
and employment growth.
Federal Reserve, waiting for signs of
inflation to change its policies, seems to be looking at the wrong data.
Actually its policies have been highly effective in the areas stimulated
most heavily, but the low interest rate policies have not stimulated the
broad economy or made most people better off. In fact, it may have actually
hurt those people.
rates have hugely lifted assets largely owned by the very rich, and
inflation in these areas is clearly apparent. Stocks have tripled and real
estate prices in the major cities where the wealthy live have been soaring,
as have the prices of artwork and the conspicuous consumption of luxury
financing has led to a boom in speculative activity, and mergers and
acquisitions. Most acquisitions are justified by “efficiencies” which is
usually a euphemism for layoffs. Valeant Pharmaceuticals International, one
of the nation’s most active acquirers, routinely fires “redundant” workers
after each acquisition to enhance reported earnings. This elevates its
stock, with which it makes the next acquisition. With money cheap, corporate
executives have used cash flow to buy back stock, enhancing the value of
their options, instead of investing for the future. This pattern, and the
fear it engenders, has added to downward pressure on employment and wages.
older adults and those on fixed incomes are getting next to nothing on their
savings. In a typical bank today, $1 million astonishingly yields only about
$2,000 a year. As interest income has fallen for seniors, their spending has
understandably moderated. Thus consumer spending, which would have otherwise
expanded the broad economy, has been sluggish.
intervention has actually increased the risks of severe trouble ahead. Many
pension systems are woefully underfunded because, while their liabilities
are fixed, their fixed-income investments yield far below their actuarial
assumptions. This forces them to take greater risks or to seek other means
to close the gap. Historically this hasn’t ended well.
income gap widens. The rich get richer and most of the country is treading
water at best, not what one would expect from a Democratic administration
ostensibly committed to the broader public.
of the current policy is that investors, rather than doing their own
thinking, have increasingly been taking their cue from the Fed. They are
addicted to stimulus, like a drug. In the short term, markets are gyrating
less on an analysis of fundamentals and more, buffeted by the endless
speculation of the talking heads, on the basis of whether they believe they
can rely on the Fed to enrich them or bail them out.
An even more
concerning trend has emerged in the last few weeks. With huge Chinese
stimulus failing to support its manipulated stock market through currency
devaluation, cash infusions and eased rules, the presumed confidence in the
ability of central banks to control economies has come into question.
Further, there is a growing realization that, by keeping interest rates at
essentially zero, the tools the central banks have available to arrest
another decline are very limited.
should raise rates in September. The focus on a quarter-point change in
short rates and its precise date of imposition is foolishness. Expected
rates of return on new investments are typically well above 10 percent. No
sensible businessman would defer a sound investment because short-term rates
are slightly higher for a few months. They either have a sound investment or
they don’t. The reluctance to raise rates now would likely do more harm than
good as it would suggest to investors that the Fed foresees a more fragile
recovery. This might encourage the businessman to hold off on planned
investments, further undermining the recovery.
David Rocker is the founder and former managing general partner of the hedge
fund Rocker Partners..
The New York Times Company