Wednesday Links: Double Dip, Fed Failure, Chicago School

Randall W. Forsyth of Barron’s is calling a double-dip recession, pointing to the declining money supply calculated by John Williams’ Shadow Government Statistics (the Fed no longer tracks the M3 measure, Forsyth reports, which sounds story-worthy in and of itself).

Now, Williams writes, SGS’ estimate of M3 is signaling the opposite; it is shrinking in real terms, that is, after adjusting for inflation. That’s happened only four times before last November, and each time it signaled either the onset of a major recession or a sharp deterioration in a contraction already underway.

“Not all economic downturns are triggered by liquidity crises, but all liquidity crises trigger or intensify economic downturns,” he asserts.

The notion of a tightness in the money supply seems to fly in the face of all the “money printing” by the Fed since the intensification of the credit crisis in the fall of 2008. But what the Fed supplies is the monetary equivalent of crude oil to the economy, which actually runs on the refined product analogous to gasoline — money and credit supplied by the banks. And it is those banking “refineries” whose output has been lagging, resulting in a now-shrinking broad money supply.

Based on currently available data, SGS estimates real M3 in December is down 3.2% from a year earlier.

What this means in simpler terms is that the banks aren’t lending as much. That’s going to hurt the economy, but that’s unavoidable if we want to deleverage. The alternative—keeping on borrowing—doesn’t sound any better.

David Leonhardt makes a good point by making a simple point this morning in The New York Times: How can the Fed call for more power to prevent another crisis when it utterly failed to see the starkly obvious conditions that created the current one in the years leading up to the crash?

The fact that Mr. Bernanke and other regulators still have not explained why they failed to recognize the last bubble is the weakest link in the Fed’s push for more power. It raises the question: Why should Congress, or anyone else, have faith that future Fed officials will recognize the next bubble?

That one’s easy: They shouldn’t.

Barry Ritholtz posts an amusing rant on the Chicago school of economics, on the heels of a John Cassidy New Yorker piece on how it’s in disarray, but incredibly, not in full retreat—even after the crisis punctured its core tenets. Here’s Ritholtz:

Why is the Chicago School of Economics such an intellectually bankrupt line of thinking? It represents two major cognitive errors: First, it attempts to be an all-encompassing ideology, one that tries to explain much of economics via its fundamental constructs.

As history has shown us all too many times, most such ideologies eventually collapse under their own weight. Rather than recognize their own shortcomings and failures, these ideologies rationalize away stubborn facts…

Second, it was based on a rather silly and thoroughly disproven notion: That Humans are rational. Everything that follows is therefore premised upon a terribly faulty foundation. How on earth could that edifice come tumbling down?

If you are presently an undergraduate, and you are being taught by someone who believes in the Chicago School, run don’t walk to the registrar and switch to a different econ professor. It is the intellectual equivalent of a tenured Astronomy professor still teaching the Earth is flat following Ptolemy.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.