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Pop quiz: Which of these headlines, all published on the same day, doesn't fit with the others?
- Freight Haulers Slam On the Brakes
- Oil Demand Down; 1st Time Since '83
- Cummins [ (NYSE: CMI ) ] Cuts 2008 Outlook on 4Q Demand Slump
- Jobless Claims at 26-Year High
- Crude Futures End Up 10% As Dollar Sinks
Seems easy enough, and I wanted Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson, the Harvard-educated architects of most of these financial rescue plans, to pass it. No matter how pristine their intentions, the end results of their interventions are turning into ever more economic pain and suffering for ordinary Americans.
That '70s show
There's no clearer sign of the economic troubles we're in than the first four headlines on that list. Oil use is falling, transportation companies are in a world of hurt, and jobless claims are higher than they've been in decades. We're in the middle of a nasty recession, yet in many respects, these rescue efforts are simply prolonging the agony rather than helping to reverse it.
For instance, one of the benefits of a recession is that prices tend to drop. Those lower prices entice consumers to spend again, and spending is what ultimately allows the economy to recover. Yet thanks to Bernanke's attempts to reinflate the bursting housing bubble, the dollar is showing signs of once again weakening versus oil, the fifth headline on that list. If oil once again leaps, that would reignite the nasty inflation that caused us so much pain this summer.
That doesn't bode well for consumer confidence, which sank like a rock as gas prices soared this summer and only started to improve as gas prices dropped. People aren't willing to spend discretionary money if they're scared that they'll need more cash just to keep food on the table. It should be obvious to anyone who didn't graduate from Harvard that lower prices are key to an economic recovery. For instance, consider how well discount retailer Wal-Mart's (NYSE: WMT ) sales are holding up amid the general slump.
Yet as long as Bernanke operates as though lower prices are a larger evil than winding up like Zimbabwe or the Roman Empire, that economic recovery will be delayed. Higher prices? Slower growth? We have a word for that: stagflation.
Expectations drive decisions
In fact, housing might be among the last places to recover. After all, people almost never have to buy a house. They can rent, move back in with their families, find someone looking for a roommate, and so on. As long as people are worried about rising prices on "gotta have" items, buying a house will simply be a less attractive option.
In other words, Bernanke's quixotic quest to re-inflate the housing bubble may perversely be slowing housing's recovery by forcing people to allocate their limited resources elsewhere. Unlike him, the rest of us don't have a printing press with which to turn out legal currency, and we must choose where to put what little cash we have.
Throwing good money after bad
There's also the little matter of the trillions of dollars Paulson and Bernanke have thrown at failing banks and other overleveraged financial institutions. Although there's no reason to believe that the U.S. can throw money at a problem any better than Japan could, they apparently felt obligated to try.
Yet even the direct recipients of all that pork still don't exactly look like paragons of financial strength:
Bank of America (NYSE: BAC ) /
35,000 job cuts; may need to raise billions; dividend at risk
Wells Fargo (NYSE: WFC ) /
Raising an additional $6 billion and may need more; risks a dividend cut
American International Group
(NYSE: AIG )
Still hemorrhaging billions; begging for more bailouts
Even after seeing things stay bad or even get worse after their interventions, Paulson and Bernanke don't seem to believe that their actions could be contributing to the carnage. In fact, they're trying to do more.
Bernanke now apparently thinks it's prudent to solve the financial problems initially caused by excessive debt by having the Federal Reserve issue debt of its own. Apparently, all the dollars he can print still aren't enough. Likewise, Paulson is trying to figure out how to use TARP funds to help struggling automakers General Motors (NYSE: GM ) , Ford (NYSE: F ) , and Chrysler. Since all the previous TARP interventions haven't helped the debt market become rational, why would this one work so much better at rescuing its intended target?
It is beyond time to stop and ask why all of this help is better than letting failures fail. Because right now, the cure feels significantly more painful and expensive than the disease it professes to treat.