My last blog entry looked at how how the market was heading for its biggest decline in 300 years. All this has raised questions about whether any of the stimulus packages have worked.
Last week, I did a podcast interview with economist Steve Kates who said the stimulus packages were a complete crock that had made things even worse.
But John Hussman of Hussman Funds argues that the US government's stimulus measures failed because they were badly targeted and that because of this, the US is headed for the second leg of a recession. He warns that US unemployment might soon be up to 12%.
Hussman says the US government needs to focus on socially useful stimulus packages, instead of bailing out the banks. "The issue is how this real value is used. Is it used to advance socially useful outcomes which private individuals, through some failure of coordination, could not achieve? Or is it used to defend bondholders, industries, and institutions with which the policymakers are most closely aligned? … Meanwhile, I continue to believe that both Bernanke and Geithner's hands should be tied quickly. If we have learned anything over the past 18 months, it is clear that these bureaucrats can misallocate an enormous quantity of public resources with mind-numbing speed. The diversion of public resources to the bondholders of failing financials – to precisely the worst stewards of capital in society – is not stimulative, but ruthless. A second economic downturn should encourage the repudiation of the policies that Bernanke and Geithner pursued during the first."
Instead of bailing out the fat cats and investors at banks, the US government should bring in packages that make the economy more productive. "Various forms of public infrastructure, particularly those that increase the efficiency of large numbers of individuals (roadways, telecommunications) have been shown to have a good payoff over time in terms of output, relative to the cost of those investments." Investments in alternative energy and other infrastructure would also be effective.
But in the meantime, he warns investors are in for some nasty shocks and that they should duck for cover. "The overwhelming risk at present is that we are in what I've called the "recognition phase" where economic reality and earnings guidance deviates substantially from the expectations that have been priced into stocks."
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