In my last posting I discussed confirmation bias, which according to Wikipedia is "a tendency for people to confirm their preconceptions or hypotheses, independently of whether or not they are true.". I sometimes ask myself how much I've fallen for the stock market's doom and gloom scenario and if indeed I do tend to confirm my preconceptions by reading only those authors that fit my hypothesis of a double dip recession or worse. The problem with the books I read is that bear market meltdowns are about the only subjects available in the economic sections of your local booksellers these days, either at the mall or in cyberspace. However, I did find one this past week that is very upbeat in its outlook on the economy and that book is It's Not as Bad as You Think by Brian Wesbury. Wesbury has very impressive credentials in that the Wall Street Journal named him the nation's number one U.S. economic forecaster in 2001, and USA Today ranked him as one of the nation's top 10 forecasters in 2004. I've seen Mr. Wesbury numerous times on CNBC so I took a flier on his book and I'm glad that I did.
Wesbury never comes out and states that he's from the Austrian School of economics, only a supply-sider, but clearly his roots are there. He quotes Ludwig von Mises and Joseph Schumpeter numerous times and I found it ironic that in the past month I've read three authors that are from the Austrian School or highly influenced by it and all three have different outlooks on the market: Charles Goyette in The Dollar Meltdown believes we are headed for hyperinflation and depression, Robert Prechter in Conquer the Crash sees depression and deflation while Wesbury is very positive and has an outlook of growth for the next 18 months. In fact, Wesbury is so positive on the economy, he thinks the Dow Jones Industrial Average can rise above 14,000 in a few years time.
The implosion of the financial markets the last two years has been referred to as 'Depression 2.0' and 'The Great Recession' in the popular press, but Wesbury calls it "The Panic of 2008". A common theme throughout It's Not as Bad as You Think is that government intervention is to blame for the cratering of the markets. As Wesbury states in the beginning of the book: "What caused the crisis to spread and turn into a full-blown panic was mark-to-market accounting.". According the Wikipedia, "mark-to-market or fair value accounting refers to the accounting standards of assigning a value to a position held in a financial instrument based on the current fair market price for the instrument or similar instruments.". Mark-to-market accounting standards were reinstated by the government at the outset of the financial crisis. They hadn't been in use since the Great Depression of the 1930's. When the stock market started to rally in March of 2009, mark-to-market accounting standards were altered and Wesbury believes this is no coincidence.
Could mark-to-market accounting standards be the cause of the collapse in the financial system? Of course it could be a contributing factor, but I do not believe it is the sole reason for the panic. Wesbury takes a hard stance in his beliefs and writes: "To be absolutely, 100 percent clear, I do not believe that greed, capitalism, high levels of debt, subprime loans, credit default swaps, derivatives, criminal activity, or leverage were the root problems that caused the panic of 2008.". This is where he and I differ. Wall Street always seems to be gaming the system and I feel it was no different this time. Bankers took a lot of speculative risks and used predatory lending practices. Some banks were leveraged 40:1. Wesbury also writes about the panic: "...the interconnected nature of the financial system began to crack.". He is absolutely correct with that one. We needed government intervention in the Fall of 2008. We were on the cusp of global contagion and financial collapse.
I liked It's Not as Bad as You Think. I didn't agree with anything Mr. Wesbury said, but it was well written and gave me pause to think about my current short positions. Although the author backed up his arguments with clear and concise documentation, it didn't sway me to change my mind about my portfolio allocations. To me, the short-term damage has already been done to The Ithaca Experiment. The subtitle for the book is Why Capitalism Trumps Fear and the Economy Will Thrive and I do agree with him that capitalism will survive and the economy will prosper, but not for a few years.