David Einhorn made a great speech at Whitney Tilson’s Value Investing Congress last week. We’ve embedded the whole thing here and below. We’ll be running some excerpts this morning.
Here’s a good one.
Any time someone suggests to the Obama administration that it’s time to start thinking about pulling back on the stimulus, this is (approximately) the response:
Whatever we do, we’re not going to make the mistake the government made in 1937, when they rolled back the stimulus too early.
Anyone who hears that without having a good grasp of the 1930s might conclude that the catastrophic decisions made in 1937 caused the Great Depression. In fact, they came near the end of the Great Depression, five years after the stock market bottomed and four years into a violent recovery. And they merely caused a mild return to recession that was probably inevitable anyway.
Don’t believe us? Here’s a snapshot of GDP in the 1930s, courtesy of Paul Kasriel at Northern Trust.
So Obama is going to do anything to avoid making the mistake made in 1937. If we extrapolate the same time frame to today, this means that the government will not begin to roll off any stimulus until 2013 at the earliest, even if the economy grows 10% a year in the meantime.
For understandable reasons, David Einhorn thinks this is nuts. He also suggests that a recession like the 1937 recession is basically inevitable when you remove stimulus as massive as the one we’re currently employing.
In dealing with the continued weak economy, our leaders are so determined not to
repeat the perceived mistakes of the 1930s that they are risking policies with possibly far
worse consequences designed by the same people at the Fed who ran policy with the short-
term view that asset bubbles don’t matter because the fallout can be managed after they pop.
That view created a disaster that required unprecedented intervention for which our leaders
congratulated themselves for doing whatever it took to solve. With a sense of mission
accomplished, the G-20 proclaimed “it worked.”
We are now being told that the most important thing is to not remove the fiscal and
monetary support too soon. Christine Romer, a top advisor to the President, argues that we
made a great mistake by withdrawing stimulus in 1937.
Just to review, in 1934 GDP grew 17.0%, in 1935 it grew another 11.1%, and in 1936
it grew another 14.3%. Over the period unemployment fell by 30%. That is three years of
progress. Apparently, even this would not have been enough to achieve what Larry Summers
has called “exit velocity.”
Imagine, in our modern market, where we now get economic data on practically a
daily basis, living through three years of favourable economic reports and deciding that it
would be “premature” to withdraw the stimulus.
An alternative lesson from the double dip the economy took in 1938 is that the GDP
created by massive fiscal stimulus is artificial. So whenever it is eventually removed, there
will be significant economic fall out. Our choice may be either to maintain large annual
deficits until our creditors refuse to finance them or tolerate another leg down in our economy
by accepting some measure of fiscal discipline.