Policymakers Are Blowing Bubbles Again [Dow Jones Industrial Average(INDEXDJX:.DJI), Vanguard Total Stock Market ETF]

bearbull21Chris Ciovacco: Investors Must Know How We Got Here And Where We Are Going.

Policymakers Are Blowing Bubbles Again

Many hard-working Americans are scratching their collective heads about the following questions:

  1. Why have stocks performed in a manner that seems to be out of step with the relatively slow pace of economic expansion?
  2. Why has the economic recovery failed to gain traction, even though the peak of the financial crisis occurred almost six years ago?
  3. Are policymakers inflating bubbles again?
  4. Will the markets revert back to the bust portion of the boom-and-bust cycle we have been in since 1997?

Learning From Nixon’s Wage And Price Controls

If you believe in the free enterprise system and its ability to efficiently allocate productive resources, the blurb below falls in the “I can’t believe they did that” category. From the Cato Institute:

Remember “TARP,” “Too Big to Fail,” “Government Motors,” “pay czar,” the buzzwords of the Bush-Obama era? They reflected a disturbing trend toward presidential interference in economic life. Forty years ago this week, President Richard Nixon showed us just how dangerous unchecked executive power can be to the free-enterprise system. On Aug. 15, 1971, in a nationally televised address, Nixon announced, “I am today ordering a freeze on all prices and wages throughout the United States.” After a 90-day freeze, increases would have to be approved by a “Pay Board” and a “Price Commission,” with an eye toward eventually lifting controls — conveniently, after the 1972 election.

Unfortunately, many political decisions and government acts are designed to help those in power stay in power. To stay in power, you have to get reelected. Notice how Nixon’s actions came prior to the 1972 election.

Choice Made To Focus On The Short-Term

When the S&P 500 was plummeting in the second half of 2008, policymakers had some tough decisions to make:

Option A: Let the financial crisis run its course and allow:

  • Bad debts to be purged from the system via defaults, and
  • Asset prices to find their true bottom based on supply and demand.

Option B: Try to stem market and economic declines with a focus on reducing short-term pain rather than what is best for the economy in the long run.

In 2008, the cries of “we have to do something or we will get killed in the next election” were much louder than the pleas of “let’s not make the same mistakes again”. Policymakers around the globe, including the Fed and U.S. government, decided to intervene in the markets in a manner that had not been seen in quite some time.

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