Long melodrama of financial folly

To the extent we temporarily humble ourselves by taking a lesson from history, it might be possible to see the current economic tumult in a different light. Economic panics have occurred every few years; they usually last a couple of years and are followed by an even more manic run-up of the markets. The modern use of central banks to infuse money into the system often leads to inflationary price increases on the heels of responding to political demands for a cure to a recession. But, sometimes the cyclical fluctuations portend bigger events are in the offing.

When an economy transitions from agriculture to industrial or, as might be the case today, from a post-industrial to an information economy, we often bear witness to major depressions or hyper-inflation, followed by war and revolution. It's when a tsunami hits instead of "surfs up!'.

After WWII we had severe recessions in 1948, 1953 and 1957. After WWII, billions of $$ of public debt were being monetized by the Fed, interest rates had been suppressed and the gold standard was being diluted. This had all followed cyclical expansions in 1924, 1936 and 1955. The Great Depression and WWII were obviously big punctuation marks in a long narrative.

Now, I would argue we crossed a big divide in the 1957-58 time-frame. Not only was this when the Salk polio vaccine would become generally available but, society would, also, begin to shift gears from the patriarchal, republican Eisenhower post-war years, to a more modern era characterized by John F. Kennedy, television and a man on the moon. But, there is one background story that needs telling.

In 1958, AT & T, America's largest employer and pension plan trust decided, for the first time, to make investments in the stock market rather than just hold US securities and bonds in their portfolio. In this same year, Lehman Brothers,(the same major Wall Street investment bank that recently failed in the 2008 financial meltdown) launched the biggest IPO in mutual fund history. In the months that followed Lehman sold 16 million shares, using a nationwide network of 640 brokerage firms. It is interesting that this mutual fund had originally been a private fund created by Lehman and 28 wealthy Ford executives after the death of the anti-semitic Henry Ford.

Thus began Society's lurch towards the use of the stock market to underwrite pension plans. The concrete began to set-up in the mid-1970s with the enactment of ERISA which turned over billions of dollars of pension and health benefit dollars to the labor unions resulting in everything from the financing of Las Vegas to today's investments in real estate, hedge funds and the stock market.

All of this has pivoted on two countervailing forces, that often work in tandem. First, was the freeing of the U.S. from the gold standard and the enabling of the Federal Reserve(eg. Allan Greenspan) to expand the money supply, and influence the economy through monetary policies. The second has been the ever-increasing concentrations of wealth in the upper 5% tier of society and the pensions of the Fortune 500 and labor union dominated organizations. These forces live by virtue of credit fueled by low interest rates and an ever-increasing money supply. Recession only slows the steady advance of inflation that leads to $50,000 automobiles and $500,000 homes. . The enthusiasm for the coming of this modern manic-recessive, bi-polar world was best expressed by Sumner Slichter, a Harvard economist who wrote in the fall, 1957, Harvard Business Review that creeping inflation was not to be feared because rising prices reduced the impacts of panics(recessions), wages would steadily increase and technological progress would advance. He brought music to the ears of the political establishment who felt it also contributed to a vibrant trade union movement.

Unfortunately, when the masses are at the heights of delusion and mania there always seems to be one odd fellow who wants to play the role of Cassandra. It was best expressed by Malcom Bryan, a past president of the Atlanta Federal Reserve Bank and an adviser to the American delegation at Bretton Woods (which set in motion the elimination of the gold standard and government's massive meddling in economic affairs). Here is classic Bryan:

"So, the proposal (Slichter's ideology), is on the one hand, that we take from the naïve or the trusting and, on the other hand, that our defalcations be effected on the installment plan, lest doing the job all at once, we might be caught at it. Let us be clear what is being asked, when we are now urged to a policy of either intentional or connived-at-inflation, is that we sell our honor. What altar of expediency is high enough and what bribe is great enough to absolve us from such perfidy? If this language be deemed unduly pungent, what other language shall be used? I believe that no greater delicacy of expression is warranted if we speak out of one side of our mouths to give ingratiating reassurances and out of the other side of our mouths to plan the undoing of men we have enticed and are enticing.

The integrity of our conduct is critical. Even if we ignore past savers(pensioners) in money forms, which would be a great scandal, we at least have a responsibility, binding in conscience, to present and future savers(pensioners) in money forms. If a policy of active or permissive inflation is to be a fact, then we can rescue the shreds of our self-respect only by announcing the policy. That is the least of the canons of decency that should prevail. We should have the decency to say to the money saver(pensioner), "Hold still, Little Fish! All we intend to do is to gut you!""

The short term injection of trillions of dollars of government-created money into the global economy to ward off recession will have long term unintended inflationary consequences. The effects we are experiencing today are the culmination of decades of decision-making that pushed us over the precipice onto a slippery slope; that we now find ourselves on the precipice should be no big surprise. Government offers us only a branch to self-arrest our fall into the chasm. If the characters in the drama were moral it would be a 'tragedy' in the classic sense. But, these individuals are amoral at best and therefore, it is comedic, a farce, a melodrama complete with villains. The popcorn on the table is being spilled on the floor with the peanuts. You have just finished the first act of a very long opera.