Federal Reserve

The “Free Market” Is Dead

By David Stockman  |  January 17, 2019

To seek to organize society is just as crazy as it would be to tear a living plant to bits in order to make a new one out of the dead parts.

– Ludwig von Mises, Socialism: An Economic and Sociological Analysis (1922)

Jay Powell has now proven himself to be Janet Yellen in trousers and Ben Bernanke with a decent head of hair.

The Donald’s man is just the latest straw boss leading the wrecking crew also known as the Federal Reserve.

He’s gone soft, and Bubblevision is excited.

That’s because monetary central planning amounts to a permanent wet dream at both ends of the Acela Corridor.

It allows Imperial Washington to bury the nation in public debt. And it subsidizes Wall Street with easy money and inflated asset prices.

These bubble-making operations are destroying broad-based capitalist prosperity and democratic governance in America.

But, still, there’s overwhelming economic and political support for this notion that 12 members of the Federal Open Market Committee know better than the millions of traders, investors, and speculators making decisions in the free market.

So, we rely on the FOMC’s superior wisdom to determine all the following (and then some):

…the right price of funds in the money market, i.e. the federal funds rate

…the correct levels and shape of the U.S. Treasury yield curve

…the proper risk spreads in the corporate bond and mortgage markets

…the suitable capitalization rates for real estate

…and the appropriate price-to-earnings for equity securities.

Our monetary central planners’ massive intrusion in the financial market price discovery process presumes omniscience.

And it presumes that the free market would always and everywhere come up with the wrong answers on those issues and everything else related to our financial and economic system.

In other words, our Keynesian overlords behave as if free-market capitalism is fatally flawed.

What’s going on here? It’s as if they’re working exclusively for Wall Street…

Well, free market pricing implicitly works damn-near perfectly in product and labor markets. And there’s near-universal opposition among economists to wage, price, and profit controls on Main Street businesses.

Meanwhile, the “invisible hand” can’t get it right when it comes to financial asset prices – even for a week, even for a day.

So, the Fed visibly, constantly, pegs, nudges, and open-mouths rates and prices…

While in purely mechanical terms the free market could actually set the federal funds rate, the 10-year U.S. Treasury note yield, and the S&P 500 Index level, those answers – based on prevailing fundamentals – would be wrong… for Wall Street and Imperial Washington.

The market would tell us that gross domestic product growth is subpar… That “breadwinner job” creation is punk… That wage growth and wealth-creation in Flyover America is dormant… That we’re sliding toward recession, perhaps even depression…

With their actions, though, our monetary central planners suggest Wall Street is one giant market failure.

About This Rally…

Here’s David Rosenberg of Gluskin Sheff, tweeting some common sense:

One reason to view the renewed risk-on rally as a technical bounce rather than fundamental is because we’re staring at a global recession. It’s not just me – the crew at Consensus Economics (seemingly out of consensus) sees sub-3% world GDP growth for the first time since ’09.

Markets are corrupted by monetary central planning. They’re confused. And the road back is going to be treacherous.

We’re looking at a major re-pricing for all financial assets. And thousand-point intraday or day-to-day swings are part of that equation. Those can be frightening… for “buy and hold” investors.

I have a different approach, one that combines strategy and tactics into a plan flexible enough for you to survive and thrive amid the coming chaos. It’s called “The Stockman Model.”

All we’re after is a little stability, perhaps a chance to pocket a windfall when opportunity presents…


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David Stockman

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David Stockman

David Stockman is the ultimate Washington insider turned iconoclast. He began his career in Washington as a young man and quickly rose through the ranks of the Republican Party to become the Director of the Office of Management and Budget under President Ronald Reagan. After leaving the White House, Stockman had a 20-year career on Wall Street.MORE FROM AUTHOR