With so many Americans invested to the hilt, falling stocks can inflict serious financial pain. But far more damaging to long-term economic prospects will be the largest avalanche of economic nonsense to tumble out since the 1987 crash. Hordes of crackpot financial thinkers are already calling for draconian government measures to stop the stock-market slide. There are indeed things that Congress and the Fed can do to alleviate the situation, but they consist in getting the government out of the economy, not involving it more.
Let history record--though this has been widely ignored--that the market meltdown was brought on by the antitrust judgment against Microsoft. This was an appalling assault on the company that has done more than any other to commercialize the information-technology revolution and make it accessible to the masses. It is not coincidence that the April 3, 2000, news of the judgment sent stocks tumbling, and the market has experienced fits and starts ever since.
That is not to say that the judgment against Microsoft is the underlying cause of the crash. But like the Smoot-Hawley tariff of 1930, the intervention took an unstable market setting and gave it a kick down the hill. In fact, George Bittlingmayer of the University of California at Davis has looked at the history of economic downturns in our century and found that many (1907, 1919, 1929, and 1937 in particular) were associated with increased antitrust enforcement.
“Why would corporations make investments when the future of the corporate form was uncertain?” Bittlingmayer asked in a paper delivered at the Mises Institute. “A decline in business confidence is a plausible consequence of volatile, politically charged trust-busting.” He also demonstrated that long periods of sustainable prosperity were associated with a laissez-faire legal environment where mergers and acquisitions were routinely approved and Washington pursued no large-scale antitrust enforcement.
A good first step for Clinton personally, then, would be to call off the attack dogs now ripping Bill Gates and Microsoft. Then Judge Jackson could immediately impose a penalty of $1 and be done with it. This might not put an end to the slide, but it would take away a huge element of uncertainty about what penalties will be imposed on the company. The outrageous talk of dividing Microsoft into three parts would have to end, so innovation and investment in the high-tech sector could proceed apace.
But given the present state of economic opinion, the first instinct will be a call for Alan Greenspan to intervene. But what is he supposed to do? Serious inflation is already showing up in both consumer and producer prices, mainly in oil prices, but in many other sectors as well. Any attempt to flood the markets with more money and credit (which the Fed can indeed do with interest-rate cuts) risks depreciating the purchasing power of the dollar even more. Cranking up the printing press might encourage the stock market, but it risks setting off even higher inflation down the road, as he well knows. The Fed cannot lead us out of this mess.
An objection: During past meltdowns, Greenspan has entered the market to correct sector-specific problems, as with his intervention to save Long-Term Capital Management or specific Asian currencies, and this seemed to work. But when the slide is as widespread as we saw on Black Friday, sector-specific rescues don’t go nearly far enough. And even if such an attempt were temporarily successful, the broadness of the sell-off suggests a degree of malinvestment that is not correctable for the longer term.
Suggesting Fed intervention right now also fails to treat the fundamental source of the problem, which is a monetary policy that has already been too loose. The last time that the money supply was stable (as measured by the St. Louis Fed’s broad-based MZM) was the first quarter of 1995. Since then, the Fed has pursued a policy of relentless expansion, with monetary inflation peaking in late 1998 and early 1999 at an appalling 20 percent annual rate. Money growth slipped but peaked again at the end of last year at 10 percent (in preparation for the Y2K non-event). As is typical in these cases, money growth has been flat in the last month before the stock slide.
What does money growth have to do with the business cycle and the “cluster of errors” that is evidenced in the stock-market downturn? To understand this, go to the works of Ludwig von Mises and his successors in the Austrian School of economics, beginning with Mises’ own 1912 work entitled The Theory of Money and Credit.
Here Mises shows how central banks manipulate the interest rate to inject excessive credit into the economy, prompting unwarranted business expansions followed by inevitable contractions. These credit expansions may or may not reveal themselves in higher prices across the board. For example, the money inflation of the late 1990s hasn’t shown up in prices much at all. Typically the recessions are set off by some event, whether a sudden break in the money flow, an uptick in prices, or a policy intervention attacking a big sector of the economy. Today, we are experiencing all three!
The Austrian School, then, treats recessions as a phase that should only be regretted from the point of view of the individuals invested in the market. In the overall economic picture, a downturn, a bear market, or a recession, is best seen as a necessary corrective to economic errors that have already taken place. What does the Austrian School recommend on getting out of a business slump? Certainly not gunning the money supply again, as is being recommended by many today. The key is to do no further damage. Let interest rates arrive at a market level and otherwise let events take their course.
Old-line Keynesian economists will be quick to blame the downturn on Clinton ‘s budget surpluses (leaving aside the question of whether they exist at all). But this theory is as full of holes as the macroeconomic aggregates on which it is based. It is not surpluses which spawn recessions but, more often, deficits that tempt central banks toward creating money to buy the debt. There is no such thing as “fiscal drag,” but that won’t stop big-government partisans from claiming that Clinton can spend his way out of this one.
Fiscal policy can be a useful countercyclical policy in only one sense: tax cuts can help dig an economy out of a slump, and do so as quickly as any measure available. On April 15, 2000, Americans are paying the highest percentage of the national income to the government that has ever been recorded. The time for a massive tax cut is long overdue. Doing so would inject new wealth in an economy starved for authentic, as versus credit-driven, investment.
Again, considering the state of opinion, there are other faulty steps the political class will consider. One is restricting margin trading, as if speculation itself is a cause of stock-market swings. In fact, speculation serves the purpose of helping prices find their true level, and those willing to face treacherous margin calls are doing the rest of us a favor by assuming risks the rest of us don’t want to bear. Finally, all temptations toward protectionism should be resisted. Trade barriers are the surest path to making a bad situation infinitely worse.
In the end, the right policy to take toward a falling stock market is to end the government intervention in the economy that caused the underlying problem in the first place, and otherwise do nothing. If a recession has arrived, it can only be made worse by the usual measures that politicians and central bankers employ in a vain attempt to cover up their past errors.
