Monday, June 15, 2015

Peter Schiff says Larry Lindsey got a few things right

It is well known that I don’t think much of the ability of government officials to correctly forecast much of anything. Alan Greenspan and Ben Bernanke have made famously clueless predictions with respect to stock and housing bubbles, and rank and file Fed economists have consistently overestimated the strength of the economy ever since their forecasts became public in 2008. 

But there is one former Fed and White House economist who has a slightly better track record...which is really not saying much. Over his public and private career, former Fed Governor and Bush-era White House Chief Economist Larry Lindsey actually got a few things right.

Back in the late 1990's, Lindsey was one of the few Fed governors to warn about a pending stock bubble, and to suggest that forecasts for future growth in corporate earnings were wildly optimistic. He also famously predicted that the cost of the 2003 Iraq invasion would greatly exceed the $50 billion promised by then Secretary of Defense Donald Rumsfeld, a dissent that ultimately cost him his White House position.

Now Lindsey is speaking out again, and this time he is pointing to what he sees as a painfully obvious problem: That the Fed is creating new bubbles that no one seems willing to confront or even acknowledge. To paraphrase:

“The public and the political class love to have everything going up. We had 'Bubble #1' in the 1990s, “Bubble #2” in the 00s, and now we are in “Bubble #3.” It’s a lot of fun while it’s going up, but no one wants to be accused of ending the party early. But it’s the Fed’s job to take away the punch bowl before the party really gets going.”

To his credit, however, Lindsey sees how this is sowing the seeds for future pain, saying:

“The current Fed Funds rate is clearly too low, the only question is how we move it higher: Do we do it slowly, and start sooner, or do we wait until we are forced to, by the bond market or by events or statistics, in which case we would need to move more quickly. By far the lower risk approach would be to move slowly and gradually.”

In other words, he is virtually pleading for his former Fed colleagues to begin raising rates immediately. I would take Lindsey’s assertion one step further; the party really got going years ago and has been raging since September 2011, the last time the Dow corrected more than 10%. (That correction occurred at a time when the Fed had briefly ceased stimulating markets with quantitative easing.) Since then, the Dow has rallied by almost 58% without ever taking a breather. With such confidence, the party has long since passed into the realm of late night delirium.

Peter Schiff is a smart investor and author of several best selling books. He correctly predicted the economic meltdown of 2008 - 2009