Tape Blows Cover On True Treasury Intentions

EconomicPolicyJournal.com ^

[Pearls Before Swine]

The economic disruption of flooding massive federal money into the system will prolong the problem and make it worse. It is an inefficient allocation of resources. It is throwing good money after bad. It’s intended primary effect is to insulate bad managers from the consequences of their bad management and make sure that they all get paid. The rest of us will be doing the paying, especially with the inflation tax as the money we hold becomes ever more worthless. Its primary real effect is inflation. We are looking at Weimar.

I mostly agree, but its hard to see what should be done. If the government does nothing, including staying out of the way of deposits and money market fund runs, you are looking at a deflationary panic that would make the 30's look like a picnic. All commerce wuold grind to a halt for a long time. People like myself who have saved would be effectively destitute.

One of the lessons from the 30s was that deliberate contraction of the money supply by essentially forcing deleverage and liquidation made things worse. It also prepared the way for later FDR policies that vastly increased the government's role in the economy forever.

So, it seems that something has to be done to minimize a dramatic credit contraction. Some of the things that have been proposed--like McCain's mortgage giveaway and bank bailout -- are just stupid and inflationary (Obama will do the same thing, only phrase it differently). Some are less bad--because the shareholders and even debtholders of the offending companies have been wiped out. Lehman's shareholders got nothing, and their bondholders got something like 8 or 9 cents on the dollar. Even AIG may not be as bad a deal for the taxpayer as it appears, because the loans are collateralized and bear high rates, and the government owns 80% of the company.

While on the one hand, I'd like to let it go because we'd be better off when the dust settles, on the other, I'd hope to control collateral damage.

Given the current cultural socialist leanings, the government will probably overdo it, so the short term damage control will lead to a huge long-term inflationary bias. I don't think its Weimar yet--not until the even more colossal promises in Social Security and Medicare start to come due, and the government has to dishonor the promises either by reneging on benefits it can't pay, or by inflating to pay them in nominal terms. Inflation is my longer term concern, but you won't get it during a worldwide deflationary credit collapse. You're right, though, in that the increased monetary base will provide tremendous inflationary fuel once the economy starts to recover, borrowing increases, and the money multiplier goes up.

[arthurus]

No way.We have had inflation for 7 years. Pouring money into that hole is inflation on steroids because that money is "created" out of thin air (and out of our bank accounts). All that money depreciates your money and mine. If there is a hundred dollars in the hands of citizens and businesses and the government "creates" another hundred dollars then the effect is that the government now has cut the value of the money held by the citizenry by one half. It is like watered stock. This great gout of inflation now being pumped out is a recipe for Weimar. The government can control for inflation or deflation no matter what happens to the credit that is being wailed about. Credit is NOT in lockup. Someone with good credit history and appropriate income can get a loan. Houses here are being bought. They are not being bought by illegal aliens and welfare families, however. We had deflation all through the 90s and there was no panic. The government needs to keep its hands OFF.If it did there would be a short sharp Panic and a couple of quarters of hard times, maybe a year. Intervention this massive must stretch out the process mightily and the downturn will last for years and will end up being just as deep as the Panic would have been and will last far longer. The Great Depression lasted until Eisenhower pulled the chains off the economy with deregulation.

The politicians have to "do" something so they will get re-elected as saviours even as the economy continues to crumble. The Great Depression started out as a panic and recovery followed by a recession that brought us to FDR's massive intervention which sank the economy for the long term. McCain is for this bailout because he shares the politicians' sense of necessity to be seen as in charge of the situation- as doing something. McCain is quite ignorant about Economics. He is a dynamic person, a leader, a politician. Such people never have time to study that most boring of subjects.

And Hussein is a Marxist and the worse the economy gets the better it is for the transition to Socialism. As president he will consciously drive the economy down with heavy handed government "rescues" until it gets so bad that he can get his Democrat quasi-socialist Congress to make the Transition because it has become "obvious" that Capitalism Doesn't Work.

The Market may not solve the problem smoothly and without pain because much pain has already been inflicted by government regulations and threats that set this situation up in the first place. The government is the least source of wisdom on the subject. It can only make things worse with any positive actions. The economy cannot be run by a collection of experts who have their hands on the levers and dials. They do not receive economic signals because they operate the market, not in the market. Their remedies are always too late and too much and stifle any recovery that. It cannot be any other way.

Reagan ended the Carter Depression by getting out of the way of the market. We had then that short sharp recession and it was all over and booming until this year. Reagan is one of two American presidents who understood economics- he had his degree in it. The other was Coolidge. Kennedy listened to the right men over the noise of his Keynesians and we had the Kennedy boom because he was looking for a gimmick. It was a great gimmick. I wish politicians could study those three and learn from them but they cannot. That is the nature of the breed.