IMF Admits Its Policies Seldom Work

This article about the IMF is several years old, published in March of 2003 by the Telegraph of the UK. It remains nevertheless relevant today as global financial managers such as officials of the IMF and central bankers like our own Fed Chairman Ben Bernanke continue to struggle with a global economic collapse unlike any we've witnessed since the 1930s.

In his book Conquer the Crash, originally published in 2002 and since updated, financial and market analyst Robert Prechter makes a compelling argument against the efficacy of interventions by agencies such as the IMF and central banks. Prechter dismisses this as what he terms the potent directors fallacy, a false belief that central bankers and governments possess the power to steer economic conditions.

I've been reading Prechter's publications since 1987 and I'm convinced he's right about this. The once praised Fed of the Greenspan era is today coming under fire. Compounding matters, the Fed has been highly reluctant to open its books. Why? What is there to hide if they are serving the public?

The fates of the IMF, the Fed, and central banks in general hang in the balance. The next few years will prove enlightening.

How Bad Will It Get?

"Those who don't learn from history are doomed to forget it."

That's a little wordplay on a similarly phrased adage. Never a big fan of history in public school, today I routinely review books and Web articles to educate myself. My father was born in 1913 and his sister my Aunt Mary two years later. As teenagers they lived and survived through economic times so poor we generations who followed can barely imagine them. Dad and Mary didn't speak often of those days, perhaps because they preferred not to bring them back to mind. One clue though to the tough times was that Dad had learned to fix just about anything by the time I was born. And that was obviously out of necessity; money was scarce and if you couldn't afford a new one, you mended the old one. Shoe salesmen did a fine business during the Roaring Twenties, but were forced to adapt for the 1930s, repairing old shoes in lieu of selling new product. Aside from professional tailors Dad was the only man I knew with a sewing machine. Rarely did a repairman visit out house because Dad had taught himself to fix just about anything. He even put on a new roof in his 50s. Mom was similarly frugal and never indulged herself in anything much more than a few pieces of modest clothing and jewelry.

Today I am reading an autobiography by a top-notch American entrepreneur named Sam Wyly. I'm only up to Page 22 so far, yet he's already covered how his own impoverished family survived the Great Depression in Louisiana. Wyly's parents had real game, and this apple didn't fall far from the tree. I'm eager to follow the tale of how he rose from poverty to a guy who founded several famous American companies and became a billionaire in the process. This copy of the book is an expansion of the original with new chapters on two of my favorite topics of today: the crash of 2008 and a vision of the future.

There's really though only so much one can learn from history. It does repeat itself as it's said, but principally in content and not as much in form. That's a key reason why it repeats; people focus on the form. Technology today, for example, is far more advanced than that of the 1930s. Mere survival shouldn't be as difficult. The stock market indexes as well are tracing out different patterns lower than they did in the early 1930s. But the content there is the same: they are headed down. The bear market of the 1930s pared 89% off the value of the DJIA before prices began to rise again for decades thereafter. And federal politicians are notorious for repeating history by enacting bad legislation when things go to pot economically. Our of today are no exception. Beyond that I'm out of my league. Well, with one exception perhaps.

During the 1930s a suffering, desperate, and angry population turned its wrath toward Washington. Anger is specific, and the lightning rod of choice was President Herbert Hoover. Reading his bio, it seems Hoover would have made a fine president during prosperous times, but that was not to be. Displaced individuals and families nationwide set up makeshift shanty towns dubbed Hoovervilles. Anticipating the Obamaville as well, I fired up Google and sure enough came back with nearly 100,000 hits. Come Election Day 2010 that number will likely have grown dramatically.

Tremors From Late 2008

Preface

I originally published this article elsewhere shortly after Election Day 2008. An esteemed Internet colleague of mine had observed that in his industry (commercial real estate) jobs were in trouble and credit was tight, adding, "I've never seen anything like this in my life." That struck a chord and inspired me to compose this article. Although it's over one year old, it is as relevant today as it was then. This republication has a few scattered updates but for the most part it's a verbatim copy of the original.

The content in this article reflects my analysis of what I have observed. It is not to be regarded as fact, but rather as a reasoned opinion open to discussion, and although I will make examples of politicians, this article is not biased toward or against either American political party. 

The Stock Market

Those of us with retirement funds invested in equities witnessed a devastating decline in the values of their nest eggs in 2008. The S&P 500 index stood at 1,562 in October 2007. One year later, it had fallen 46%. Financial reporters and analysts at brokerages have been caught off guard by this event, and continue to remain clueless as to its significance.

Meanwhile, the market has exhibited some highly unusual behavior. On October 13 2008, the S&P soared 11%. October 28 witnessed a similar sharp spike to the upside. Healthy markets do not behave this way, but savage bear markets do. Sharp upward spikes appeared on several occasions during the decline that began in 1929. In 2008, the markets telegraphed a clear message that more carnage will come before prices can resume rising.

Bear markets come in all shapes and sizes. Every once in a while a huge bear comes to town. 1840 witnessed such a bear and an ensuing depression followed by a war. Another huge bear ravaged Wall Street in 1929. Again, depression and war. Huge bear markets are bad news indeed.

The Economy

My analysis is that we are entering economic conditions that will parallel those of the Great Depression. The past two decades witnessed an explosion in credit, and the pendulum is now swinging the other way. Things that go up always come down. The higher they go, the harder they can fall when toppled. We've been hearing a lot about "bubbles" in the news, and bubbles burst with disastrous consequences.

One interesting aspect of today's economy is a rare syzygy in prices of stocks and commodities: they are all falling. Many commodities are off 50% from highs of the past year. Even gold, which is the closest thing to real money has fallen. An "outside-of-the-box" interpretation of this is a bull market in dollars. Imagine that you had sold your 100 shares in XYZ Corp. in November of 2007 and converted them to dollars. At the lows of March 2009, those same dollars could buy 200 or more shares of XYZ. Unfortunately, investors have conditioned themselves to believe that stocks are the best investment vehicle, and no one should settle for a few measly percent in a CD or a money market fund. My guiding principle is that plus 1% is better than minus anything. Anyone fully invested in cash or cash equivalents over 2008 has not only kept his or her savings, but also seen the purchasing power of those dollars appreciate as prices have fallen.

Looking forward there is reason to expect the meltdowns to continue. What I hear far too little about is the market in credit default swaps. This market has been described as arcane and unregulated. But, to borrow a phrase from our former president, make no mistake about it: it's huge. A reporter for Time magazine covered this godzilla in March of 2008 in this article titled Credit Default Swaps: The Next Crisis?. The implosion at AGI in 2008 was the direct result of their executives playing with fire and grossly overlegeraging positions in credit default swaps. On September 20, President Bush, speaking at a press conference, said

At first I thought we could deal with this -- deal with the problem one issue at a time. We made the decision on Fannie and Freddie because there was systemic risk to our mortgage markets. And then obviously AIG came along -- and Lehman came along and it was -- it declared bankruptcy; then AIG came along and it -- the house of cards was much bigger, beyond -- started to stretch beyond just Wall Street, in the sense of the effects of failure. And so when one card started to go, we were worried about the whole deck going down, and so therefore moved, and moved hard.

Mr. Bush's ineptitude in answering questions at a news conference worked in our favor here, as he unwittingly revealed what Washington knew at the time about our precarious position but didn't admit. Feckless efforts by the government notwithstanding, the house of cards continues to fall.

The Decline of the Private Sector

The private sector is saddled with many problems of its own making. Corporate executives are grossly overcompensated, while employees (formerly known as "personnel") have become just another "resource". Corporations outsource their labor offshore. Consumers are no angels either. Many drive themselves foolishly into debt to support extravagant lifestyles with purchases of $400 jeans, $3,500 television sets, and gasoline-guzzling SUVs. There was a brief respite in the gluttony around January 2009, but one year later the loathsome adverts for automobiles have returned to television. Tennis superstar Maria Sharapova has been pitching a high-end line of women's clothing. And just this week entrepreneur Steve Jobs unveiled the next expensive high-tech gadet from Apple, a gizmo called an iPad that retails for $499.

Forty years ago, our parents bought us lawnmowers and snowshovels and bikes for delivering newpapers, and encouraged us to go out and work to earn money in the neighborhood. Today's parents equip their kids with video games, cellphones, and ipods. Are parents today instilling a "play ethic" in lieu of a work ethic?
In my days as a young student, our public schools were all about education, and my peers and I received top-notch teaching. We were properly forbidden to bring our toys and snack food to class because they would become distractions. We learned to how think and calculate without electronic devices. We learned the parts of speech and how to parse a sentence. This is a far cry from the state of affairs today. In my experience as an SAT prep instructor over the past few years I've witnessed the effects of a once-excellent system that educators have left to fall into decline. Many students when asked to identify the subject and verb of a sentence respond with a blank stare. Many are weak in math and somehow think that their calculators are magic. One evening as part of the math curriculum I presented a problem whose first step was to understand what was being expected. Two boys immediately began to punch numbers into their calculators, leaving me to wonder what the devil they were up to. The only explanation that made any sense is that this is how they respond in school when confronted with a problem they can't solve and want to appear busy so the teacher won't call upon them and embarrass them. Parents and their children have conspired to allow the kids bring their cellphones into class on the pretext that they might need to communicate in an emergency. In all my years of public school, I never had such an emergency, and were one to happen the normal communication channels such as telephone land lines were certainly adequate. So what do the kids do with those phones? They text each other during class and miss the lesson.

It is not the role of the government to remedy these problems. Only when corporations, consumers, parents, and educators embrace acting responsibly again will economic prosperity return. Unfortunately for the American people, our federal government is hell-bent on tampering with the private sector without any grasp of the consequences of doing so.

Washington

Washington has two crippling problems. (By "Washington" I refer to the president and Congress.) First, it believes a myth that it has the power to "fix" or control the private sector economy. Perhaps the Greenspan era was responsible for that. Unfortunately, the purported wizardry of Greenspan's Fed was merely a consequence of the prosperous times it lived in. Financial analyst Robert Prechter explains in this excerpt from his book Conquer the Crash:

People think that the Fed has "managed" the economy brilliantly in the 1980s and 1990s. Most financial professionals believe that the only potential culprit of a deviation from the path to ever greater prosperity would be current-time central bank actions so flagrantly stupid as to be beyond the realm of possibility. But the deep flaws in the Fed's manipulation of the banking system to induce and facilitate the extension of credit will bear bitter fruit in the next depression. Economists who do not believe that a prolonged expansionary credit policy has consequences will soon be blasting the Fed for "mistakes" in the present, whereas the errors that matter most reside in the past. Regardless of whether this truth comes to light, the populace will disrespect the Fed and other central banks mightily by the time the depression is over. For many people, the single biggest financial shock and surprise over the next decade will be the revelation that the Fed has never really known what on earth it was doing.

The second problem is that in its haste to fix things it cannot fix, Washington has become prone to hatching plans to spend large amounts of money without thinking them through carefully.

Fed chairman Ben Bernanke is a student of the Great Depression and believes that had President Hoover's government acted quickly and decisively, the depression could have been averted. For this to be true, however the myth mentioned above would have to be fact.

One curious recent development is the beefing up and expansion of coverage by the FDIC. A product of the previous depression which witnessed many bank failures, the charter of the FDIC is to ensure that no depositor whose account doesn't exceed the coverage limit (formerly $100,000) will lose a penny if his or her bank fails. So far the FDIC has a spotless record. The recent bolstering by the feds was advertised as boosting confidence. I read it as fear of a spate of bank failures. Once again, Washington is expecting to be able to avert problems in the private sector, and once again it will be proven innefective. The exemplary record of the FDIC is due merely to the fortune that so far it has never met a daunting challenge. A bank failure here, another there is no sweat. Thousands in a short span of time though will exhaust the limited resources of this agency and wash it away like a sand castle on a beach in a rising tide. Fortunately for savers, not all banks are created equal. The prudent thing to do now is to identify a bank that is financially sound and will not need to avail itself of the services of the FDIC, and keep the money there.

The FDIC experienced a spike up in failed banks during 2008. 2009 saw an even greater escalation. The FDIC's Deposit Insurance Fund (which is funded by member banks and not taxpayers) had been drained severely to the point of near bankruptcy. The burden could soon fall upon taxpayers.

Those who believed that then president-elect Barack Obama would bring hope and change were due for a rude awakening. Mr. Obama is a product of the Washington machine and will march closely with his allies in Congress, all of whom subscribe to the aforementioned myth. The new president continues what President Bush had become fond of: abetting Congress in fiscal bungling.

What to Do?

This is a complex question, and one I cannot address here as each individual's financial situation is unique. My recommendation to everyone is to buy a copy of Conquer the Crash and read chapters 14 to 34. Prechter covers many angles for positioning one's self financially before the big waves crash on the shore, some of which you will find applicable to your own situation. Should you invest in bonds? Collectibles? Real estate? When would be a good time to get back into stocks? How do you find a safe bank? No one knows for certain how bad things will get, and indeed some actions could turn out to be overkill. But why take the risk? CTC is only a thinking person's guide though; we are all ultimately responsible for the decisions we make and must interpret any guide to apply it to our own circumstances. That being said, this book is the only one I've seen that seriously addresses the potential of a devastating economic collapse and how to blunt its effects on your possessions and savings. Chapters 1 through 13 are an interesting and informative read explaining money, stock market crashes, deflation, and depression in layman's terms.

Conclusion

If my analysis is correct, what we as a nation are soon to experience will be a tumultuous collective experience, reshaping the lives of rich and poor and in between alike. The oncoming economic event is akin to a hurricane. The people who will survive it best are those whose preparations are made before the strongest winds begin to blow. If history is a guide, we can also anticipate another world war in a decade or so.
Difficult times lie ahead, but those who prepare will help to lead the nation through them. We will be called upon to assist our fellow Americans, and we must be fit for the task. New York Times columnist Bob Herbert reminds us that economic strife affects all Americans including the poor. Those of us blessed with abundance remain duty bound to assist fellow Americans in need as their plight continues.