And Now, the Financial Apocalypse

When a prominent MIT economics professor takes leave ofhis senses, blathering on like the worst of the stockstuffers of Wall Street and financial entertainmenttelevision, and when leading academic scholars and marketpractitioners proclaim that a replay of the market"correction" of 1987 is highly unlikely, you know the end ishere. It can't get better, or worse, than this.

"This expansion will run forever," Rudi Dornbusch writesin the July 30, 1998, Wall Street Journal. No, not foranother year, or two years, or five. But forever. Thatought to stick a hot poker up the ass of any bear within ahundred miles of Cambridge, Massachusetts, huh?

Meanwhile ex-MIT professor and IMF Deputy Managing DirectorStanley Fischer is off in Moscow, doling out billion ofdollars in IMF funds to the Russian mafia. Of course theydon't tell it like it is, over at the IMF. Theyeuphemistically refer to opening the money spigot as"stablilizing the financial system" or "buying somebreathing room" (a highly technical economic term thatapparently means not having to do anything as long as moremoney is coming in the door). But the IMF aid allows theRussian central bank to continue to intervene in the foreignexchange market in support of the over-valued ruble, whichin turns shores up Russian banks at the expense of industryand other sectors of the economy. And a majority of thesebanks are owned by the Russian mafia. Billions for themafia. But Fischer somehow can't factor that into hisequations.

Another Cambridge expatriate, ex-Harvard ProfessorLarry Summers sits over in the Treasury department, guzzlingdiet coke and hoping to take over the job of the departingRobert Rubin, who has now devoted several years to makingthe world profitable for Goldman Sachs. Goldman may soon gopublic in an IPO--a method of printing money by issuingstock certificates that could turn Goldman partners intoeven bigger millionaires than they already are. Summers'most notable recent achievements were setting Suhartostraight on how to correct Indonesia's economy, andrepairing the IRS's botched computer modernization project.Now Suharto is gone, Indonesia's economy continues todisintegrate, and the IRS's botched computer projectpromises to become more botched as we approach the Year2000.

Is it a special form of Cambridge madness? Somethinghovering in the air above the Charles River?

Back to the stock market. Ah, the stock market. Thereis no longer need of sweat of brow or precision of acumen.Just buy and hold, invest for the long run, and get ready toeat the rainbow stew. The stock market will fulfill yourwildest dreams. There is no such thing as a stock riskpremium anymore, according to some economists. Stocks aresafer investments than T-bills, bonds, or commodities, andthey have higher returns. What more do you want? Why evenbother to eat breakfast? Sell the food and buy some stocks.For the l-o-o-o-o-o-o-o-o-n-n-n-n-n-n-n-n-g-g-g run. Choochoo. I hear that train a comin'.

"This expansion will run forever."

It is hard to imagine any article with worse timingthan, say, "Asia's Bright Future," by Harvard ProfessorsSteven Radelet & Jeffrey Sachs, writing in theNovember/December 1997 issue of Foreign Affairs. Theirchipper assessment appeared just as financial markets werecollapsing across Southeast Asia. Of course Asia probablydoes have a bright future, much as Europe could have beensaid to have had a bright future during the Black Deathyears of the 14th Century, for that appalling time of deathand disease was eventually followed by the Renaissance.Give or take a century.

But Harvard has nothing on MIT. "This expansion willrun forever," Dornbusch says.

Oh, timing issues are difficult. Almost two years agoI came to the conclusion that stocks had reached valuationextremes. I formed the expectation that equilibrium forceswould now begin to exert pressure in the direction of morefamiliar historical relationships and, consequently, lowerstock prices ("Sell Stocks Now," "Bye Bye, Miss AmericanPie"). This was based on the private observation thatstock overvaluation was comparable to that prevalent in1929.

Silly me to have believed that 1929 relationships wouldprovide any sort of container. And even though Isuggested a tongue-in-cheek scenario where stocks (the DowIndustrials) might rise to 13,000, I considered itimprobable that the Dow would rise above the then currentlevel of around 6,000. But much to my surprise, the marketthumbed its nose at 1929, and proceeded to cover almost halfthe distance to 13,000, peaking at 9338 (on a closingbasis) on July 17, 1998.

As it was, I was a year ahead of the Asian Crisis andtwo years premature for Wall Street's imminent stockmeltdown. Call it: Give or take a couple of years.

But this: "This expansion will run forever"? Give ortake a couple billion years.

Why will the U.S. economy likely "not see a recessionfor years to come"? Because, Dornbusch asserts--I'm notmaking this up: "We don't want one, we don't need one, and,as we have the tools to keep the current expansion going, wewon't have one."

So there you have it. We don't want it. We don't needit. We won't stand for it. And we can keep it fromhappening. "We" are in charge. The forces of nature willdo "our" bidding. No, I don't know who "we" are. I guesshe means Cambridge professors.

The gods don't like human hubris. They have a way ofcutting down those with excessive pride. Whom they willdestroy they first make mad. And Rudi Dornbusch, at leaston the evidence of the Wall Street Journal article, hasalready become a raving lunatic. What stage is next?

There is a line of logical fallacy called post hoc ergopropter hoc: "after this, therefore because of it". Thefallacy that because one thing occurred after somethingelse, the earlier event was therefore the cause of the laterevent. And Rudi Dornbusch seems to have fallen into it.

When Dornbusch says "we", I don't think he means youand me. Certainly he doesn't speak for me. So who is hetalking about? About economists, plausibly. The ones heknows from Cambridge, equally plausibly. Rudi can certainlylook over at the IMF and the Treasury, and many other places,and see some of his colleagues at work.

But where is the evidence they are doing an amazingjob? ("We have the tools to keep the current expansiongoing.") Or even a commendable job? Or even a competentjob? I can't find any.

The reasoning seems to be: "We were put in charge. Andthen the economy expanded. And the stock market went up."Right. And Bill Clinton made the trains run on time. Posthoc ergo propter hoc.

No danger the party will end, Dornbusch tell us:"First, there is no inflation." That's right, of course.There is a massive deflation going on in Japan and otherAsian nations. I'll leave it to Dornbusch to explain whythat's a positive development.

"Second, the government's coffers are overflowing withbudget surplus." Oh? How is that? Dornbusch must mean:in "surplus" as long as we falsely add in the net positivecash flow on the Social Security account, which is stillscheduled to go bankrupt in 2020. The last I checked, thestock of outstanding government debt was getting larger, notsmaller. You can't lie to me about a government "surplus."

Finally, this gem: "Thus, only natural causes, and notthe Fed, can bring the economy to a standstill.Fortunately, we have the monetary and fiscal resources tokeep that from happening, as well as a policy team thatwon't hesitate to use them for continued expansion."

By "policy team" I assume Dornbusch means the dickheadsin the administration. Now I understand. They'll pass alaw against recessions. Clinton will go on TV and feel ourpain, and it will all go away. The Village will gathertogether so that each and everyone will have their "fair"share of a rapidly diminishing communal pie.

Yes, the gods are hard at work, inciting a bunch ofjerk-off politicians (and also Cambridge economists?) torecreate the Soviet Economy here in the U.S. The oh-so-successful Soviet Economy.

Like the Black Death, the disease of hubris has spreadeverywhere. Robert Liton, director of economic studies atBrookings, and Anthony Santomero, director of the FinancialInstitutions Center at the Wharton School, convened a littleconference of academic scholars and market practitioners,and now inform us: "A correction may come--and may even bein process--but a repeat of the hair-raising events of 1987is highly unlikely" (Wall Street Journal, July 28, 1998).

Now this could be simply interpreted as saying thatmany of the attendees have lost their hair since 1987. Butif so, this is an excessively subtle point. Liton andSantomero go on to give a list of innocuous, evenirrelevant, reasons why 1987 supposedly won't happen again.About the only thing they don't do is promote the notionthat circuit breakers, or temporary halts in trading, havean positive effect in making a market meltdown lessprobable.

They instead cite material from Lawrence Harris whichknocks the notion that circuit breakers are useful. Butthey never get around to criticizing the consensusbelief in the supposed "high improbability" of a repeat of1987. For academicians must also have their fantasies. Andone of these is: Events like 1987 will not be repeatedbecause they have been studied.

Studied or not, the imminent market meltdown will comequickly. Probably in two waves down. A "correction", arelief rally, and then the massacre. We'll see how the"policy team" makes it all go away.

"Some would talk foolishly about the benefits ofcreative destruction," Rudi Dornbusch writes. Yes, like me,for example.

Sorry, Rudi. You don't have a clue. Let the ruinationbegin.