Monday, April 30, 2012

What's Good About the Bad Goldilocks Economy

Like welfare queens at the corner store swiping a government sponsored debit card for a pack of smokes and a forty of malt liquor, many day traders and other short term speculators on Wall Street complain that we have a Bad Goldilocks economy. It's not growing fast enough to reduce unemployment, boost consumer demand, and spur on the bull market. It's also not so sluggish as to induce the Fed to run its monetary printing presses overtime. In other words, there's no easy money to be made, nor is there a government handout to be had. Life stinks, because getting money may require hard work.

And that's the good thing about the Bad Goldilocks economy. There are no shortcuts or bailouts. The private sector will have to make it on its own, the old-fashioned way, by working and taking risk. That's what we need. No economy grows organically from never-ending government support. Repeated infusions of government bailouts promote dependency and capital hoarding, rather than investment and hiring. Many major American corporations are sitting on shiploads of cash, waiting for another gift from Uncle Ben, and not spending because they don't see a sure bet. Nothing could be more detrimental to America's economic future than this kind of cash hoarding. It doesn't finance innovation, create jobs, or produce operating profits.

The Fed's dilemma with the Bad Goldilocks economy isn't just the risk of recession if it doesn't act and the risk of inflation if it prints more money. In the past four years, the Fed has taken the most morally hazardous route in its history. Its repeated interventions have reduced many on Wall Street and in corporate America to Pavlovian passivity, waiting for the next wave of money printing. Such is not the stuff of which prosperity is made.

Bad Goldilocks gives the Fed an opportunity--to cut the money printing umbilical cord it affixed to the economy and the stock market in 2008. The private sector needs to learn that its next profit opportunity won't come from another round of government intervention. It needs to re-learn how pull up on its bootstraps. The best Fed may be a low profile Fed (if that's not an oxymoron). If the economy seems headed for a major belly flop, further intervention may be needed. But Goldilocks is good, giving the Fed a chance to ween the private sector off bailouts and handouts. We're not talking about doing anything radical like raising interest rates or reducing the Fed's Brobdingnagian balance sheet. We're just suggesting a gradual nudging of attitudes away from expecting the central bank to come by every night on a sleigh drawn by reindeer and drop down the chimney with gifts for all.

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