Can the Stock Slide Be Stopped?
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
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
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
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.
- The Meaning of Over-Valued
- Are We Entering A Recession?
- The Austrian Theory of the Trade Cycle and Other Essays
- An Excerpt on the business cycle from Mises's Human Action