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To: tcostell
I'm making an anti-creditbubble argument. If the Fed did its job we wouldn't have $47T in credit (on the books) for a $14T economy. We require $6 in credit for a $1 growth in GDP. The Fed has brought us well past the point of credit sustainability which leaves us no choice but to do the writeoffs and take the lumps. The Fed will have to do more of BSC type transactions: buying bad securities and sticking them in new LLCs that it creates so they can be sold later (or never). That is monetization and of course it is inflationary, but it is much better to get that over with than to try to expand the credit bubble even more.

What financial wizards don't realize is that boom/bust is easily fixed if it stays in the nonfinancial world. My friends can start new business that are not housing related provided there is no credit contraction. But we are doomed to a credit contraction because of the previous loose credit policies. All Bernanke is doing now by lowering rates now is creating the next credit contraction later (if he is successful now) or creating needless inflation now (if he is not).

Asset bubbles come from credit bubbles, until you understand that, you aren't going to solve anything.

23 posted on 04/07/2008 6:04:22 AM PDT by palmer
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To: palmer
Well to be perfectly honest, I'm not sure you know what it is you're arguing against and what you're not.

You say rates should be set by market forces but you complain about the effect of the “carry trade” which is a market force. I describe a simple solution for a purely market phenomenon and you respond by saying that a better solution is to find some way (a way you don't specify) to solve an economic policy problem by keeping it in a “nonfinancial world”. You ignore the fact that I'm not talking about that part of the problem at all.

I think it's pretty clear that you know who it is you think is the villain in this circumstance, and I think it's hard for you to get past the idea that I'm culpable in some way because of my choice of careers. But the truth is, I don't think you've actually read my piece at all, or if you did, then I guess you didn't understand it. I'm talking about solving one kind of problem, and you're talking about addressing a completely different one. Your insistence that they are really the same and that your claim that I don't understand the connection are unfounded.

You're clearly a smart guy (please excuse the gender assumption) but you're talking only about the causes of the last problem, while I'm talking about preventing the next one.

What's worse is that you don't seem to understand enough about financial markets as they are now to know that without a change like the one I'm proposing, your solution can't be had without catastrophic effects to overall economy. When a crisis like this occurs, the Fed see’s itself as having it's hands tied. They see themselves as doing what must be done to avoid economic catastrophe. The thinking is that you can't do anything about inflation by putting some high percentage of Americans out of work.

But if a solution like mine was implemented, we take the crisis out of the equation which would free up the fed to take a longer term view and do more of what you would like them to do. And eventually (not quickly as you seem to well know... but eventually) address the very issues you complain about.

Either way though, I think it's pretty clear that we're not speaking the same language.

24 posted on 04/07/2008 6:56:09 AM PDT by tcostell (MOLON LABE)
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