We Need Some Financial Pain
This op-ed in the Financial Times by the Polish finance minister, “Intolerance of small crises led to this big one,” makes a point that I have been thinking about and strongly agree with. We need some pain to shake out the aftereffects of the financial crises that we have been through. Fed chairmen, particularly Greenspan and Bernanke, have tried to keep their political masters happy by avoiding any economic pain, except that which blindsided them, like that accompanying the popping of the tech bubble and the housing bubble. This op-ed makes the correct point that they were blindsided by these crises precisely because they trying so hard to smooth out the smaller bubbles preceding them. There is no free lunch. If you pummel the economy, as the bankers did in the housing crisis, you hurt it, and it can’t pop back up like nothing happened. If it appears to (as it has recently), it probably means that you’ve done something bad to it that will come back to haunt you sometime, in a few months or maybe if you’re lucky, in a few years. The obvious possibility is that you will sow the seeds of inflation, and that when those seeds sprout, you’re going to have a big mess on your hands, made worse by postponing it for years. On the other hand, you might get deflation, like that which produced the “lost decade” in Japan, about to become two lost decades.