Monday, November 3, 2008

"it is not surprising that they are looking favorably on statist nostrums"

An excellent post on The Bear's Lair about coming economic policy disasters. One is an old friend:

"A second idea on which there has been general consensus between Presidential candidates, although a modest rebellion in Congress, has been the TARP. The original idea of devoting $700 billion of taxpayers’ money to buying the economy’s least valuable assets, surplus securitized mortgage bonds, has now apparently been abandoned. At least one can hope so – by diverting scarce capital from more productive uses it would have depressed economic growth markedly.

However, instead of breathing a sigh of relief and letting taxpayers off the hook, Treasury Secretary Hank Paulson has taken to using the TARP as an all-purpose slush fund, bailing out the banks, and apparently in future providing subsidies to the automobile industry, local governments and anyone else with political connections who needs it. The result is that Treasury borrowing in the year to September 2009 is now estimated to be $2 trillion, around double last year’s level. Needless to say that too will damage the economy. TARP was a terrible and poorly implemented idea; no doubt that is why it is so popular with the political class."

Ah, yes. TARP.

Here I agree:

"However the bad economic idea for which support in the political class is most whole-hearted is that of excessively low interest rates, far below the rate of inflation. The financial crisis has been caused not by high interest rates, but by excessive leverage.
"

I agree with excessive leverage. Here I don't:

"Deregulation was only a minor cause of the housing bubble and subsequent debacle; the true cause was excessive money supply creation by the Fed, which is not a private sector free-market entity but an agency of government. It is these lessons, that over-easy money will bring long-term disaster and that government has been primarily responsible for this as for so many previous crises, which must be taught to the American people."

I agree with the comment about deregulation, but not the excessive money supply. I can see that as a necessary condition, but not sufficient. Too many people are accepting this theory without any kind of causal explanation involving human agency. Oh, right, the money supply and interest rates are like a spigot, and, like a spigot, are mechanical.

2 comments:

Anonymous said...

Found your blog and I love it.
My view on interest rate question is this: What gets losts in the euphoria over low interest rates is that interest rates also serve as a counterweight to excessive speculation. Reasonable returns on bonds (government or private) give conservative investors (like pension funds or retirees) a place to get a small but almost certain return. When the Fed kept interest rates too low for too long, the market came up with "ersatz" bonds to fulfill this need for bonds that pay interest at or above inflation. Only problem was, as the whole market was distorted (assets used to back the bonds were WAY overpriced - because the FED funds rate was set WAY too low) the whole scheme was uneconomic.

Donald Pretari said...

Fresno Dan, I see your point. The same thing happened in Japan.

http://don-thelibertariandemocrat.blogspot.com/2008/10/irony-is-that-japanese-regulators-were.html

See my answer there. That is still no excuse for the way the investments were collateralized or explained. In other words, I see the need for higher yielding investments, just not the way the investments were constructed.