Contemporary society seems to regard a state of constant happiness as a right. In the United States, the Federal Reserve is certainly doing all it can to oblige.
Human beings are wired for good news. Hear something pleasing and the brain releases just the right amount of endorphins to instil a feeling of well-being. Overlay this with more good news and soon there is a feeling of euphoria.
Yet pain is part of the human condition regardless of how we feel. It is often said that the bad times in our lives allow us to acquire qualities we would not generally have possessed.
So why is it that economic policy makers are so keen to avoid unhappiness? Don’t get me wrong, if by means of a simple fiscal or monetary policy change disaster can be avoided this should be done; but the role of a central bank is surely not to keep an economy in a state of euphoria?
This is exactly what is playing itself out in the United States at present in the wake of the so-called subprime mortgage crisis. Remember the story? In order to feed their hungry shareholders and keep them happy, investment firms did business in the mortgage markets.
These deals took profits into consideration, but had no regard for the risk they were assuming. As the overheated housing market came under pressure, it exposed many of the deals which is now aptly called the “subprime mortgage crisis”.
Many consumers today own depreciating properties with escalating repayments. Many investment firms own debt books where there are diminishing chances of collection, and have thus taken a policy decision not to lend money. This, even the layman can see, will make for some very unhappy times.
The markets have not been immune to this, and in early 2008 started fraying at the edges. The Fed, in order to avert a major catastrophe, started lowering interest rates, firstly in the form of an emergency cut, and then at sittings of the Federal Reserve Open Market Committee. Yet this intervention has done little to stop ever-mounting concern as evidence continues to emerge of an impending economic slowdown in the US.
Rather than facing reality, the US government continues to prop up the economy, if not by means of housing aids to help consumers, then by pumping cash into the ailing banking system to create the much needed liquidity that banks no longer provide. But still the economy seems to be faltering.
So at which point do US policymakers start to face the inevitable? Sure the markets play nicely along after some good news from them, but this is almost never enough. The inevitable slow down in the markets occur shortly thereafter as investors try and find the true value of companies facing some large dilemmas. This is then short lived as policy makers try another trick, only to repeat the exercise.
Leaders who can create good times and avert disasters are almost always popular. History has shown that we are even prepared to look beyond their moral shortcomings as long as they can help us feel and look good. It therefore comes as no surprise that decision making at this level enters the murky water of right versus popular decision making.
Who should be blamed for this? I have to argue that it is us, or rather the society that we have created. In today’s society it is a bad thing to feel the pain associated with a slowing economic cycle, and should thus be avoided at all costs.
Any leader who reminds us of this pain or could be blamed for bringing on the pain, is thus not necessarily the best candidate for office. We want to live in a state of euphoria.
Would it not be better for the Fed to interfere to a lesser degree thus allowing the economy and markets to find their natural level? This might not make them popular, but it might prove to be a more prudent decision. Their hope at this stage is that by interference they are able to avert a financial disaster. This proving true would make them popular. But what if this fails? Would the second round consequences of their decisions today still make them the correct decisions?
One such a consequence is called stagflation. This is a condition where high unemployment is accompanied by low economic growth and a rise in prices, with no way to compensate the man in the street because interest rate levels are set very low.
It also is a dangerous condition which the US economy is flirting with at present.
So would the good times continue to roll? I sincerely hope so! At least we can all continue to live in a state of euphoria. On the other hand if it doesn’t happen maybe it time to make peace with pain. History has shown us it is inevitable.