EC The Difference Between Good Economics And Bad

On the other hand, in Congressional testimony (those with whom oversight of the Fed resides) and in media appearances, Fed members apply vacuous counter-factual arguments. “Had we not taken forceful action, things would be much worse,” always goes uncontested by elected officials. Uncontested because wealthy individuals and corporations are their primary source of campaign funds. Re-election odds for incumbents correlate well with market direction.

Secondary Consequences

The other issue, the one we write about here, is how that policy response sets the table for other problems. Henry Hazlitt, in his profound book, Economics in One Lesson, describes it this way.

“…a main factor that spawns new economic fallacies everyday…is the persistent tendency of men to see only the immediate effects of a given policy, or its effects only on a special group, and to neglect to inquire what the long-run effects of that policy will be not only on that special group but on all groups. It is the fallacy of overlooking secondary consequences.”

Hazlitt immediately continues-

“In this lies the whole difference between good economics and bad.”

The Federal Reserve’s pragmatism is driven by the influence of wealthy men, corporate executives, and political donors. By insisting that every action be taken with no regard for long-term effects makes certain the influencers’ wealth is protected.

Using the opening quote as an analogy, the Fed has become a notoriously overprotective helicopter parent to the stock market since the financial crisis, shielding it from every hazard. Just as in the case of child-rearing, their actions are responsible for producing an extraordinarily petulant and fragile system.

Drawing again from Wendy Mogel –

“If a child is distressed and sees Mom react with panic, he knows he should wail; if she’s compassionate but calm, he tends to recover quickly.”

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Edward Simon 2 months ago Member's comment

Lately, there has been an increase in chatter on the net about returning to value investing, or at least that "value" stocks are currently presenting themselves as good investing opportunities because of their relatively low prices. Do you think this is a trend that will gain traction?

Bruce Wilds 2 months ago Contributor's comment

It is only massive and unsustainable deficit spending that continues driving our economy forward. The bottom-line is that we are in the midst of a "false economy" and it is only by the grace of this huge deficit spending that we are not languishing at the bottom of a deep economic pit.

Today late cycle indicators are on the rise, moderating growth, tightening credit, declining earnings, the peak of consumer confidence, rising inflation and more. Deficit spending is not a silver bullet without consequences and with each step forward we get closer to the end of the road.

This is why investors would be wise not to accept America's recent GDP as verification the economy is hitting on all cylinders. The article below argues government spending is a poor substitute for the free market in allocating capital to where it is most effective and it is not economic growth but simply a method of borrowing from the future.

Beating Buffett 2 months ago Member's comment


Moon Kil Woong 2 months ago Contributor's comment

However, I am fiscally conservative. The US messed up pumping the economy for all the years it was expanding. For that, there is no excuse and is the definition of poor planning and economically destitute behavior. We need to learn or put more constraints on central bank actions when we aren't in crisis or in an economic downturn.

Republicans and Democrats are to blame and Congress should take back their power from the central bank, the Presidency, and manage the fiscal aspect of their Constitutional duty better. Simply put, the fault and error of the Treasury has been committed years ago and is the opposite of anything resembling fiscal constraint or good economics. You don't stimulate and carry low interests rates in an expanding economy. Revoke their degrees and make them attend basic economics courses again please.