Friday, February 6, 2009

Restructured, Not Revived

And another from Mr. Bonner:

....aren’t the feds’ new plans to save the economy little different from their last plans? Bailouts, stimulus, tax breaks, new, looser credit...aren’t these the same things that were used not only for the last 18 months...but in the Great Depression in the ’30s...and in Japan in the ’90s? Have they ever worked? Nope. Never.

Of course, there’s a good reason they don’t work. As we explained yesterday, you can’t really buy your way out of a depression. Because the problem is deeper than that. The economy is not just taking a rest. It is dead. It needs to be restructured, not revived. And for that, the old structures must be destroyed. That’s what Schumpeter’s ‘creative destruction’ is meant to do.

But the feds don’t appreciate it. They talk “change,” but the only change they want is for things to go back to the way they were. So, they’re trying to stop the correction. And they’re using every worn-out trick, every blunderbuss weapon and every claptrap theory they can think of. Bailout the banks...create a ‘bad bank’...nationalize the banks...stop the foreclosures...send out checks...lower interest bridges to nowhere – they’ll do it all. But it won’t work.

All these measures are designed to encourage order to support the old structures. But more consumption is just what the economy doesn’t need. It is in trouble because people have spent too much. Now, they have to cut back...and when they do, every enterprise, speculative investment, and household that depended on excess consumption is in trouble.

Ah yes, dear reader...that is where we are. In trouble. At the beginning of a depression. The old structures must be swept away to make way for new ones.

“So, what’s the solution?” asked a colleague this morning, after we explained why the stimulus programs cannot work. “The solution to a depression is a depression,” we replied.

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