The financial markets are suffering from what I would call a case of Baracktile Dysfunction.  The other morning on the Radio From Hell morning talk show, Kerry Jackson was ranting about how stupid people were for blaming the massive decline in the stock market on the election of Barack Obama for president.  He said Bush was to blame for the declines in the financial markets.  All I can say is that we don’t need people like Kerry Jackson spoon-feeding economic ignorance to Barack Obama supporters – most Obama supporters that I have met demonstrate ample amounts of economic ignorance.

Apparently, Jackson doesn’t understand that stock prices will tend to price in the impact of known future events.  Baracktile Dysfunction is a disheartening mental condition where investors fear to inject capital into the economy because of the fear that the return they will receive for their risk will be taxed.

You can partly blame Bush for the current collapse in the financial markets, in that it is his fault the asset values ever got so high in the first place because of his tax cuts.  Once the candidacy of Barack Obama became more and more statistically viable, the asset values of the financial markets fell in sync.

Of course Baracktile Dysfunction tends to only affect the investor class to begin with, its negative effects will reverberate through the larger economy.  For example, an acquaintance of mine who knows some of the higher-ups at Wells Fargo said that Wells Fargo isn’t looking to make loans right now.  They are hoarding capital to make acquistions.  When banks stop lending money, that hurts everybody.

However, the most problematic symptom of Baracktile Dysfunction is deflation.  The following excerpt from a speech by Ben Bernanke demonstrates why deflation is such a problem:

Deflation great enough to bring the nominal interest rate close to zero poses special problems for the economy and for policy. First, when the nominal interest rate has been reduced to zero, the real interest rate paid by borrowers equals the expected rate of deflation, however large that may be.³ To take what might seem like an extreme example (though in fact it occurred in the United States in the early 1930s), suppose that deflation is proceeding at a clip of 10 percent per year. Then someone who borrows for a year at a nominal interest rate of zero actually faces a 10 percent real cost of funds, as the loan must be repaid in dollars whose purchasing power is 10 percent greater than that of the dollars borrowed originally. In a period of sufficiently severe deflation, the real cost of borrowing becomes prohibitive. Capital investment, purchases of new homes, and other types of spending decline accordingly, worsening the economic downturn.

Although deflation and the zero bound on nominal interest rates create a significant problem for those seeking to borrow, they impose an even greater burden on households and firms that had accumulated substantial debt before the onset of the deflation. This burden arises because, even if debtors are able to refinance their existing obligations at low nominal interest rates, with prices falling they must still repay the principal in dollars of increasing (perhaps rapidly increasing) real value.

In a country like America where policies and culture have encouraged us to take on substantial amounts of debt, a period of strong deflation would be an unwelcome development in the current economic crisis.  I have started noticing signs popping up from IKEA to the local carwash proclaiming that they have lowered their prices.  There has been much talk of a bailout of the big three automotive companies, but no one has mentioned how these companies still can’t sell cars even when they slash prices.  I swear I saw a commercial where I could get $9,000 in customer cash if I purchased a Dodge Durango. To bail out a company that can’t get up their limp, flaccid prices or to bail out wage earners who can’t get up their limp, flaccid wages without minium wage increases, improvident union contracts, and wealth distribution from the successful to the unsuccessful doesn’t sound like a great plan to me.  I hope that everyone enjoyed the post-election obamasm because the ideas of our Fisher King elect seem to be the equivalent of prescribing viagra to a eunuch.