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Thu Sep 25 22:35:27 2008 Open Letter Open Letter to my Representative and Senators
Open letter to my US Representative (Jim McDermott) and US Senators (Maria Cantwell and Patty Murray) Dear Senator Murray, Senator Cantwell, Representative McDermott: Please do not approve the administration's proposed $700 billion bailout plan! I know you care deeply about the health of the nation's economy, and the impact on local businesses. And I am sure we would all gladly pay now to prevent a damaging recession or depression later. However, the Administration's proposal does not guarantee the future health of the economy. At best, it may prop up some failing investment banks a little bit longer. At worst, it will reward those institutions that took inappropriate risks with their investor's money. And it will tie up funds that could be used to fight a recession or depression more effectively. Most importantly, there is no clear reason why this large sum of money should be spent or allocated now. The proposal is right to focus on subprime mortgage instruments as a key factor in the current crisis among investment banks. Those instruments will probably continue to lose value over the next year, as more mortgage holders default, and investors decline to purchase them. However, that decline is not likely to be stopped by the Administration's plan. Instead, the result will be a lot of taxpayer money spent on instruments that will continue their collapse. Also, the impact beyond overly-leveraged investment banks is not clear. Many parts of the national and world economy are more healthy, including commercial banks. It is possible that the Administration's plan will not be able to stop a wider economic downturn, and the $700 billion will simply evaporate. It is possible that no wider economic downturn will happen, and the Administration's plan only lines the pockets of poorly-managed investment banks. It is unlikely that a wider economic downturn could be stopped by purchasing a fraction of available mortgage instruments. There are measures that could be taken to improve the health of the economy! Restore the separation of investment and commercial banks. The Federal Government should not be insuring high-risk investment companies. This means restoring parts of the Glass-Steagall Act of 1933, which was repealed by the Gramm-Leach-Bliley Act of 1999. The current crisis was greatly exacerbated by the risks that investment banks took with commercial deposits. Get the deficit under control. Large budget deficits have put the dollar at risk, and made foreign creditors unwilling to loan us money. If foreign creditors lose confidence in the US Dollar, and we have not restrained our spending, the result would be either economic collapse or hyperinflation. That is much worse than a recession. But whatever you decide to do, please do not vote for the Administration's plan! It is only likely to reward those who took inappropriate risks, and will not prevent a recession if one is truly coming. Comments	Related: > economics < Unrelated: books energy environment geopolitics lists mathematics predictions science

Wed Sep 24 22:37:39 2008 Cure for our Ills The administration proposes a really big blank check.
Keep plugging the holes! Image courtesy of Pieter1 (wiki) Wow, a lot has happened in the past 2 months! I used this photo before, but it is still relevant: the administration continues to find ways to throw money at the problem. In Fannie and Freddie I argued against bailing out Freddie Mac and Fannie Mae. Since then, the administration has nationalized the companies, and put billions of dollars of Federal funds behind those mortgages. Then, Lehman Brothers collapsed in a spectacular and (for investors and employees) painful bankruptcy. Now President Bush is proposing a $700 billion bailout of the financial industry, by having the Federal government buy even more of the distressed mortgages. Embarrassingly, I didn't see the speech. I was working. However, I have read a few summaries and other articles about the speech. And I have of course seen the plan in the press for the past several days. The net result? Bush's speech appears to be a concession that the plan will not be approved by Congress. He seemed more interested in preserving his legacy by presenting the plan as a way to assign blame. Perhaps that is an unfair assessment. But I think he is well aware that the plan has little chance of passing. At least, I hope it has little chance of passing! My goodness, why would we sign up to spend that much money? Paulson and Bernanke are right: the piecemeal approach isn't working. But I think a better solution is to leave things alone, rather than put more Federal funds at risk. Remember, there is a real chance that even if the $700 billion plan was approved, it wouldn't work. Then we'd have a serious recession anyway, no reserves to spend our way out of it, and we'd have scared away all of the creditors we'll desperately need to borrow more money. Then we are faced with Federal bankruptcy, or hyperinflation as the Fed has to print money to get out of the disaster. Inflation is definitely the more likely scenario. And in any case, we always have the option to start buying troubled mortgages later. Perhaps the markets will panic, and the financial system will "seize up". But that might happen regardless of the $700 billion Federal infusion, or might not. And there are chances that the overall economic collapse won't be that bad. I think Paulson and Bernanke are surrounded by frightened Wall Street executives, and they are picking up that panic. But there are large parts of the economy that are still rolling, many banks still lending to businesses that are not underwater in bad mortgages. So I think we should let the honest businesses have a chance to take advantage of the lower prices and collapse of overly-aggressive competitors. The risk-takers should sweat a bit longer. Comments	Related: > economics < Unrelated: books energy environment geopolitics lists mathematics predictions science

Sun Jul 27 22:41:01 2008 The S-Word Stagflation is back...
Welcome back, Carter: it's the 1970s again! Image courtesy of Tom (wiki) In The Great Stagflation of 2008 I talked about the coming of stagflation. Well, now I know it's here! How do I know? I know because the Federal Reserve is now denying we are experiencing stagflation, which is a pretty sure sign that we are. What is stagflation? It is when an economy is hit with slow growth (or contraction) and rising prices. The combination presents a problem for policy makers. What do you do? If you lower interest rates to spur growth, then you stoke inflation that just causes prices to go up more. And sometimes the higher prices cut into growth again. So cutting rates just causes inflation without growth. But if you raise rates to stop inflation (price increases), then you hurt growth because it's harder for companies to find the cash they need to expand. So now the Federal Reserve is wringing its hands about what to do. Fortunately, the answer is simple: raise interest rates. Why do I say that? Because the Fed's main job is to protect us from inflation. If inflation gets out of control, it destroys peoples' savings, and that can have catastrophic consequences. Besides, the Federal Reserve isn't really supposed to be the safeguard of the US Economy: that's the Federal Government's job. The Federal Reserve should just be safeguarding the currency. What do I think will happen? Given the recent track record, I have a pessimistic outlook. I think the Federal Reserve will continue to drift for a while, and attempt to be all things to all people as it deals with the current recession. One example is its disastrous decision to insure investment banks, which is going to cost us all a lot of money in a few years. (Incidentally, that is a fairly biased article, but worth reading for the viewpoint). We will need to hope that the Executive or Legislative branches will eventually decide to sort things out without damaging the currency. Comments	Related: > economics < predictions Unrelated: books energy environment geopolitics lists mathematics science

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