Well, here we are again. On Wednesday, an elderly dwarf will capture the attention of the entire financial world as she bleats out whatever she and her minions believe will shore up the house of cards they have created. In a sane and just world, the aforementioned bridge troll would be an untenured economics professor at a mid-tier liberal arts college, but as it is now, Yellen is one of the most powerful humans (more or less) on the planet.
We are six years………..six.……..years……….into this madness, and it shows no sign of stopping. Why should it? After all, statists and central planners have been doing a bang-up job of making the rich richer (which, in spite of the weary “dual mandate” trotted out in front of a smirking Congress, appears to be the only true raison d’etre behind the Federal Reserve).
What if it had gone differently? What if, six years ago, in the throes of the financial crisis, the political leaders in D.C. had decided that enough was enough, and they were going to seize the opportunity to make real and meaningful positive changes? (OK, stop laughing; seriously, stop it; I’m trying to write a post here; bear with me, because this is a fantasy piece, after all). So instead of doing what they did, just imagine with me events more along these lines:
+ Executives are aggressively prosecuted and, where possible, imprisoned – Executives were kicked in the ass during the (much, much tinier) S&L Crisis in the late 1980s; why not do the same now? Angelo Mozilo might look good in an orange jumpsuit; it would complement his flesh tone. Some argue they didn’t break any laws. I am highly confident that, given enough resources, a skilled team of aggressive prosecutors could find a meaningful number of executives and a sufficient docket of salient laws that were bent or broken. For God’s sake, at least give it a shot.
+ 2008 and 2009 bonuses have a special 99% surtax – It was galling that, for instance, the giant bonuses to AIG employees got paid out (Congress whined there was nothing it could do). If the bonuses had to be paid, fine, go ahead and pay ’em. But please take note that all bonuses paid by financial service companies from September 19, 2008 to December 31, 2009 are subject to a special 99% income tax.
+ Goldman Sachs and Morgan Stanley go bankrupt – Yep, just like Lehman. They would probably both ultimately survive in some form, but a far smaller and more benign form than before. Oh, and those payments from AIG Financial Services? Sorry, AIG is bankrupt. They are going to pay out 0 cents on the dollar. Sorry about that. The 100% payment that Goldman actual got………..let’s just say that it didn’t take place, because it shouldn’t have taken place.
+ Confiscatory and Targeted Asset Tax – Basically go after the bad guys. Dick Fuld? Time to pay back all those ill-gotten gains. Same for Joe Cassano. Claw back as much as possible, since God knows the country needs it worse than the 1%.
+ Glass-Steagall Reinstated – Not all of FDR’s laws were bad, after all, and this gem needed to come back. Let’s just pretend that it did, back and even better (and more thorough) than before.
+ Foreclosures Got Foreclosed – Can’t make your mortgage payment? Bought off more than you could chew? Tough titties. The house gets foreclosed. Everyone has to play by the same rules. No mortgage “relief”. No hanging out in the house for years until the bank finally gets the right to boot you out. If you can’t afford it, you can’t afford it. Ta-ta.
+ D.C. Gets Out of the Business of Business – Fannie Mae? Shut it down. Same for Freddie Mac. Oh, and hey you guys at the Federal Reserve: it isn’t your job to push up stock indexes. Your friends may be suffering (if “suffering’ means having a net worth of $50 million instead of $500 million) but you are out of the business of artificially propping up business.
+ America Gets Educated – Americans need to understand why it’s time to take some bitter medicine for the country’s long-term good. There are two aspects to this: shame and knowledge. The “shame” aspect is to make very clear who the nitwits were in government who put us in this position (like, oh, Chris Cox and Phil Graham leap to mind). The “knowledge” aspect is to educate in a systematic, consistent, and long-term fashion the American public to explain (probably in a fairly dumbed-down fashion, but explained nonetheless) the roots of what happened, why the next few years were going to be tough, but how it would be essential for us to hunker down as a nation and get through this, having learned our lessons.
Now, in the above scenario, the equity markets would have probably kept suffering, even after a dead-cat bounce in 2009. They would have ground lower and lower, perhaps bottoming at 5,000 on the Dow. But, oh, around about now, a base would start forming, and by 2016, the healing would be firmly in place. We’d probably start a new era of real, honest growth and strength.
But back to reality: none of this happened, and little of it had a real chance of happening. Instead, we have completely papered over the problem, performing the equivalent of covering a cancer patient with band-aids. The upper crust have gotten to enjoy six solid years of a faux prosperity, thanks to their buddies at the Fed, and the cataclysm that will unfold will someday finally be understood as having been utterly preventable.
So let’s all get ready for Yellen to continue this little farcical nightmare in which we’re all living. There will come a day when the markets stop respecting the little lady and her printing press. Whether that day of reckoning is this week or years from now remains to be seen, but at this point, we can really only conclude this: the bad guys completely got away with it, and America as a whole has been played the fool.