Market

“Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate… It will purge the rottenness out of the system…values will be adjusted, and enterprising people will pick up the wrecks from less competent people…” That is the advice from a ghost - U.S. Treasury Secretary Andrew Mellon. But this is 2008, not 1928… the climate has changed. This week began with heavy weather - and then got worse.

We are in this crisis because of an excess of artificially created credit at the hands of the Federal Reserve System. The solution being proposed? More artificial credit by the Federal Reserve. No liquidation of bad debt and malinvestment is to be allowed. By doing more of the same, we will only continue and intensify the distortions in our economy - all the capital misallocation, all the malinvestment…

That trade was a ticket to wealth and everybody knew it. During the ’90s…up until 2007…investment banking was probably the best-paid profession in the world…

Schumpeter is important because he developed a theory of business cycles which puts its emphasis on industrial innovations rather than banking. Most business cycle theories put their emphasis the other way, and are essentially monetary. Maynard Keynes is just as much a monetary economist as Milton Friedman when he comes to his explanation of business cycles. This is surely an argument which is going to be reopened…

The share market is not the most important story today. That may be tough for you to believe. After all, the 777 point figure decline on the Dow is the most visible symptom of what’s killing the market. But in terms of percentages, Monday’s 6.9% decline in the U.S. doesn’t even rate as one of the top ten worst one day percentage declines in history. Maybe that will come later this week. It might come in emerging markets. The big story, though, is in the credit markets…