The Dark Ages for Economics

The economics profession is in a bear market. The practitioners of the dismal science, with their economic theories that do NOT work, seem determined to push their profession into a death spiral from which it will never recover.

For example - with modern-day economists, if something doesn't show up in the economic data, it doesn't exist.

The prime example of this is the housing bubble. According to most mainstream economists, it did not exist. That is until it burst and nearly brought down the entire financial system.

And their 'prescription' for getting out of the economic mess (that they did not see coming) is for the United States to accumulate trillions and trillions more dollars of debt.

Their 'prescription' to cure a debt problem with more debt does not make sense. But then who said economists had any sense.

Think of it this way - a person has lung cancer due to his pack-a-day cigarette habit. The economists 'cure' would be like a doctor telling that person that to cure his lung cancer, he must now smoke 4 packs of cigarettes a day!

And just look at the 'cure' prescribed by economists for our ailing banking system.

They opted for the 'Japanese' model of trying to save our banks, even though it has NOT worked. Japan has been mired in a recession for two decades and their financial system is still shaky.

Economists should have opted instead for the 'Swedish' model from the early 1990s which Sweden used to save their banking system.

The Swedish model forces insolvent financial institutions into receivership, senior management is fired, the shareholders wiped out and the debt written down to zero. The assets get sold off or spun out as a new public entity with the government helping to recapitalize the banking system. This would allow the financial system to start lending again.

What we would have gotten for our trillions of taxpayer dollars was a well capitalized, low leveraged, low debt financial sector, capable of making loans and driving the economy forward.

Instead what we have are self-interested financial institutions (with the same management in place) who are not lending and not writing down debt (due to the government allowing them to use 'fantasy' accounting) and capturing the lion's share of any wealth that is left as bonuses.

Why didn't the economists chose the Swedish model? Probably because in that model both shareholders and bondholders are wiped out, which is how capitalism is supposed to work - you have winners and losers.

But the losers would have been Wall Street bankers and since so much of modern economic thought comes from Wall Street, 'punishment' for Wall Street was not even considered. So the 'socialist' bankers and their economists decided to save the banks and their own asses, rather than the banking system.

I believe history will not look kindly on the modern-day economics profession. They will be lumped together with physicians of the Dark Ages whose cure-all for diseases was to use leeches. Just substitute debt for leeches and you have the cure-all prescribed by economists today.

Now that I think about it, the term leeches is more appropriate than I originally thought.