More and more it becomes clear that the big collapse in 2008 was an aberration that resulted primarily from a severe shock to confidence and a huge and sudden increase in the world’s demand for safety and liquidity, all triggered by fears of a collapse of the global financial system. Central banks were slow to respond to the unprecedented increase in the world’s demand for money, and this resulted in a widespread selloff of all risk assets and massive deleveraging. Central banks eventually figured things out, and the return of liquidity has allowed prices of risk assets to recoup most of their losses. The collapse in monetary velocity which precipitated the recession has begun to reverse, and most economies around the world are again growing. The recovery is still in its early stages, however, and so there appears to be lots more room to the upside.
There have actually been two dramas playing out over the past year or so. One was the mechanical one that resulted from the shock to confidence and the huge increase in the demand for liquidity and safety. The other was the shock to long-term expectations that resulted from Obama’s radical pursuit of a hard-left agenda that left investors struggling to comprehend the ramifications of a massive increase in government control over the economy and one new spending program after another. The expected burden of taxes began to soar; the anticipated efficiency and potential growth rate of the economy began to plunge; and the future solvency of the US government began to dissolve. The worst part of both dramas combined in a Perfect Storm to produce the equity market collapse of early March 2009.
Since then the economy has managed to heal many of its wounds, and the political scene has changed dramatically. We are now eight months into a recovery, and Obama’s two signature initiatives, cap and trade and healthcare reform, are in a shambles. The Democratic Party appears to be completely out of touch with the mood of the electorate, which was never prepared for a hard turn to the left. The balance of power in Washington has shifted dramatically, and investor and consumer confidence is returning. (Whatever is bad for Washington is often good for individual liberty and free markets.)
way too much emphasis on “confidence” it’s what the media talks about when they cant find anything real to discuss. The banks screw themselves with the bad loans they dished out paying the underwriters cash at closing and not caring if anyone could pay the back loaded loans. Then they get the trashed houses back and dont have a plan how to sell them.
