The Unknown Liberal

I understand that suspicion but don’t share it. As I did with the neocon approach to Iraq, I may disagree with the government’s strategies but understand their motivations and rationale. That is, I do *not* believe the “AIG bonus” issue is a cooked-up story to obscure the billions going out to AIG counterparties. I do *not* believe the government’s purpose in stabilization is to help private actors “loot” anymore than Cheney’s purpose in going to Iraq was to enrich Halliburton. I believe the government wants to stabilize the financial system because they believe the consequences of not doing so will be more expensive.

If anything, awareness of the bonuses helps the GOP and right-libertarian causes, because they’re the ones who usually argue things like “we should cut out welfare because someone’s getting rich over it (and we’ll pretend we’re powerless to combat that)”. I wouldn’t be surprised to learn that the people who originally pushed this story were ideologically on the economic-right. It’s unprovable. So, it will have to remain my suspicion.

As goes Detroit, so goes inland CA. I expect these conditions to move to the rest of the US.

More of the Detroit area: Flint. (Civilizations have always created ghost towns, as the jobs move elsewhere. So, maybe Mish was posting tongue-in-cheek about “efficiency” at the end of his post. But, I hardly consider this “efficient” or “new” (implied, not said). Also, why raze those buildings to flush out gangs? Won’t they just integrate elsewhere into the system? I’m not sure but wonder whether it’s better to leave certain areas intact…and if we legalize drugs, we won’t have to worry as much about gang activity.)

Someone should start a city implode-o-meter.

By the way, was Robocop — one of my favorite movies (not for its violence but for its sardonic portrayal of our greedy culture) — prescient or what?? See you in Old Detroit…

I agree the rise from $100 to $140/barrel was a speculative run from dollar-phobic money.  But, here are a few of questions for peak-oil critics who point out the dramatic fall in prices recently:

1. Peak oil means peak production.  Actual price levels will vary by the strength of whatever currency you’re using to measure it in.  Most of the world realized (at about the same time) that half the US-denominated debt in the world was unservicable, causing a dramatic increase in the value of the USD.  So, everything has been repriced.  How does oil look in comparison to homes or other assets?

2. We reached a peak in oil production in 2005 and touched it again in 2008.  The price was so high that it was eating into the profits of all firms but energy firms, who were driving the S&P earnings.  If the credit markets hadn’t caved in simultaneously, how much longer could economic growth have been sustained?

3. If the Saudi’s convince people that oil is going to run out without tremendous investment, don’t they risk — especially with Obama in the White House — persuading Americans not to grow complacent over the big recent decline in the price of oil but instead to invest more heavily in alternative energy?

4. If I recall a chart correctly, when whales started disappearing, whale oil went thru a dramatic boom/bust double-top.  Are you unconcerned that oil won’t rise again out of proportion to everything else?

I’m not looking for actual answers to these.  I can accept that you’ll answer these questions differently.  But, one point about your relative optimism: When the welfare of the world depends on cheap energy, your lack of alarm alarms me more than the problem itself.  In other words, I’d rather people (a) consider PO, AGW, second-hand smoke, bisphenol-A, asbestos, agent orange, etc. to be threats until convincingly proved otherwise than (b) consider them okay until convincingly (for you) to be proved threats.  I believe we can tackle the threats as long as we consider them a problem.  When many people don’t consider them a problem (e.g., housing appraisal fraud), then that’s when the problem — a problem so visible that it’s basically an “open secret” — can “sneak up” on us and turn our world upside down.

As for government spending:

• In times of full employment or capacity utilization, government spending (e.g., on wars) crowds out private activity.
• In the late 2000’s, we’re nowhere near full employment in the US.  And we’re headed in the other direction.  So, I’m not much worried about government spending crowding out other activity.

As for the debt:

• In the absence of the Fed buying Treasuries, the supply of Treasuries would divert private capital. (If it did not at first, then Treasury prices would fall until yields increased enough to attract that private capital.  By the way, equity yields would have to compete with those yields, which implies equity prices would fall, too.)
• But, if the Fed buys Treasuries, then the rate of return massive issuance won’t crowd out private investment in private projects. Because the yield on Treasuries will remain too low — lower than inflation.

Someone on Slope of Hope used the recent Hudson River airplane landing for an analogy. Well, think of Bernanke’s moves as an intentional water landing. Without attempting to fire up inflation, the deflationary effects of all the debt writeoffs would put us right into the 1930’s — a very hard landing.

Thanks to fraud and incompetence in the private sector running up huge debts, our public-and-private debt/GDP ratio has become as unsustainable now as in the 1929. I believe our private and public institutions have only 2 choices:

• default explicitly (e.g., plenty of personal and company bankruptcies, like in the 1930’s)
• default implicitly via inflation (e.g., Nixon taking us off the gold standard, leading to the 1970’s)

Those are our choices. Which time period would you rather live in? I prefer the 1970’s. That’s why I agree with this inflationary move by the Fed.

If you want to get to the meat of my proposal, then jump to the section that says “We Prefer a Somewhat More Literal “Helicopter Drop”: Tax Credits/Checks”.

…

Dear federal government,

Many of us understand the motive to reinject money into the system to replace the money disappearing via massive writeoffs of debt. But, we disagree with the methods of achieving this, because it is being spent in a way that directly rewards people who helped create the present situation — often in a spectacularly focused manner — and only indirectly helps the rest of us. And, in many cases, it hurts the rest of us.

Many of Us “Get” Deflation

Many of us believe the financial authorities’ motives are good. Without intervention, all markets would clear at much lower price levels. Every American would look at his/her 401k’s, money markets, and other investments, and panic at the ever-decreasing nominal values. They would become more risk averse. They would spend less. Businesses would invest less in new goods, services, inventions, medical research, etc. because they expect Americans would have neither the means nor the inclination to purchase those goods and services. And what would be the result of this spiral? Although “consumerism” is endlessly criticized for a number of reasons, would we as a people be “richer” because we slow down our production and consumption of goods and services? Many of say “no, we do not want the US to continue a deflationary spiral.” And although there is work to be done to encourage savings, millions of unemployed people would not be “saving”.

Many of us also believe that fighting deflation *is* possible. Here, the government is not attempting to control prices on specific goods (via price controls, which never work) but to control the general price level. Dollars are nothing more than “IOU’s” which the government can either “print” or “unprint”. The government has the capability to create more “IOU’s”, either thru existing agencies, legislation, or new legislation. Yes, the velocity of money is decreasing. But, by increasing the supply of these IOU’s, certainly the price of everything else tends to increase. Eventually, with enough IOU creation, banks will want to lend — at high rates — because their fear of inflation will motivate them to conserve the real value of their holdings by lending them out and making those IOU’s “work for them”. I.e., these inflationary expectations will force banks to “put money to work”.

We’re Angry at the Current Means Used to Combat Deflation

However, as stated earlier on, many of us are livid — LIVID — at the beneficiaries of these distributions. Consider these distributions and side effects:

1. The USG is rewarding incompetently-run insurers and banks, who *chose* to deal in financial instruments they had every reason to know were impaired or would become impaired beforehand. These entities pay their staff handsomely and pay dividends. By giving money to these entities — instead of wisely-run banks like Hudson City Savings — the USG is hurting everyone else.
2. The USG is rewarding incompetently-run auto manufacturers — and their private backers — who when confronted with big decisions made the wrong ones. By giving money to these manufacturers, the USG is hurting competing companies who made better decisions and would survive/thrive with less competition. (If there are indeed any supply chain issues, then direct money there. And only if private investment wouldn’t step in first.)
3. The USG is rewarding house purchasers (a.k.a., home owners) who often stretched to buy the most money they could afford with zero room for miscalculation. Years ago, the folks in trouble essentially bid up the price of a home beyond my ability to pay for it, which means I’m still living in a small apartment with little sense of “roots” while waiting for the housing market to come back to earth. By giving money to these people (either indirectly via “cheap money” for refinancing or perhaps soon even directly), the USG will compound my injury and threaten to keep me out of the housing market another 10 years.
4. Above all, the USG is maintaining “the current order” of a massive disparity between the rich and poor. How so? It is common knowledge that the “top 1%” holds 50% of the financial assets in this country. By guaranteeing many of the IOU’s in the system, the USG is maintaining the price of those assets. That means that 50 CENTS OF EVERY DOLLAR SPENT HELPS THE TOP 1% maintain their relative wealth disparity over everyone else! And do they deserve it? First, collectively, they freely invested in companies with a lot of debt, in companies that were part of the “biblically corrupt” housing/financial industrial complex that robbed the country the past 8-30 years, and in companies that freely fired Americans and moved jobs offshore. How dare we bail them out. Second, if they had been more reluctant to invest in the now-troubled companies, then the cost of capital for those companies would’ve been higher earlier on. So, we wouldn’t be in this mess. … Look, I can feel sorry for them but feel there is no justification for the bottom 98% to directly compensate the wealthy for their loss.

We Prefer a Somewhat More Literal “Helicopter Drop”: Tax Credits/Checks

What’s the alternative? The USG should print additional IOU’s — in the order of magnitude of that being given to all the undeserving people and companies now — and hand them out to everyone. Consider the following:

1. Is that a lot of money? Of course! But, it’s no more than what’s being “guaranteed”, “lent”, and “invested” now. That’s already in the trillions.
2. It helps everyone without regard to their culpability in creating the mess.
3. It helps everyone without regard to their current wealth.
4. It repairs the consumers’ balance sheets.
5. If consumers pay down debt, that implicitly helps recapitalize the banks. If consumers spend, that helps businesses and, in turn, helps banks again. So, by helping consumers first, everyone benefits. Think of it this way: Money given to consumers has a higher velocity than money given to anyone else, because they have to spend it to survive. (Thus, this is quite unlike giving the money to banks, who have no incentive to lend and who will just sit on their cash — at least until the specter of inflation threatens the real value of their reserves and thus forces them to lend.)
6. It gets commerce and invention moving again. (The purpose of a business is to provide a good or service in an attempt to induce a potential consumer to part with his/her money. When businesses know consumers have money to spend, entrepreneurs form businesses and hire staff.)
7. It helps the auto makers. Give me $50k and I’ll spend some of it to finally trade in my 20 year-old Honda for a new one (probably built in the US anyway).
8. It helps current borrowers who can no longer afford their home payments. $50k will help many of them with payments. And, for those that want to sell anyway, I’ll spend half of my $50k on a downpayment for a home.
9. It is — by comparison — TRIVIAL TO ADMINISTER. No alphabet soup of government programs to dole out the money. No Congressional hearings to argue over transparency. No multi-year hand-wringing in the media and around water coolers. Less social unrest.
10. By obviating the need for so much of the government administration just mentioned, it avoids turning America into a command economy — which is what we’re quickly becoming. Surely, after all that’s been written of the USSR’s demise, it’s sad and ironic that among the proposed solutions Americans discuss is the government appointment of a “auto czar” to direct the production of consumers goods.

Talk to Our Creditors: They Need Us to Print As Much as We Do

Problems with this plan? The main one: negotiating with our international creditors.

Yes, foreign creditors will be angry with the currency depreciation generated by “printing money”. (I believe the credit creation should be done without creating offsetting liabilities. Americans collectively have too much debt. We wouldn’t be “repairing our balance sheets” if we offset these new credits with debt.) But, they, too, are overleveraged, very dependent on a weak dollar, and thus now need the US to print more of the USD — the global reserve currency. I believe they would welcome a deal over a wave of public and private bankruptcies within their own country. Indeed, many of them face the prospect of a domestic depression and/or national bankruptcy.

They *must* be as willing to compromise as we are.

…

Questions:
- Has anyone at the Fed (or elsewhere) researched such a scheme?
- What are the best ways to implement this?
- Who are our international state and private creditors and what would we have to give them to persuade them “buy in”? (USD? Grain? Carbon credits?) By cutting the average American in on the deal, we’ll also be a little less angry over the programs which so far have been in part giving money to foreigners.

I completely have the economic anxiety bug: http://www.nationalpost.com/most_popular/story.html?id=1116171

Some part of me says “learn to farm and buy guns, ammo, and a security system” to ride this out from a location of relative calm — even though I’m a friggin desk jockey / city slicker. The other part says “that’s nuts / not practical”.

I bet NOLA’s poor went thru a similar mental calculation about getting out of the city (without transportation, an idea of where to go, or enough money to survive) versus “riding it out and hoping for the best”.
Reminds me of this quote:

“With the enemy’s approach to Moscow, the Moscovites’ view of their
situation did not grow more serious but on the contrary became even
more frivolous, as always happens with people who see a great danger
approaching.

At the approach of danger there are always two voices that
speak with equal power in the human soul: one very reasonably tells a
man to consider the nature of the danger and the means of escaping it;
the other, still more reasonably, says that it is too depressing and
painful to think of the danger, since it is not in man’s power to
foresee everything and avert the general course of events, and it is
therefore better to disregard what is painful till it comes, and to
think about what is pleasant.”

Leo Tolstoy, “War and Peace”

http://benbittrolff.blogspot.com/2009/01/economic-masochism-or-bulltardation.html

http://www.ritholtz.com/blog/2008/05/quote-of-the-day-on-a-great-danger-approaching/

Sorry to say. But, this endless Ben-bashing is tiresome. Here’s a typical sample of it, followed by my reactions:

>> Bernanke thinks because he is a scholar of great depression he knows best

He probably knows better than people who spent less time studying the great depression. No?

>> … that is not being a learned man in my books… a learned man is humble and wise

Do you see Ben strutting around like Mick Jagger? What is unhumble about spending a career studying a topic and then believing your studies qualify you to set policy?

>> … which obviously Bernanke would not understand given that he intends to play god

Jeez! Wall Street created fictional wealth for 10 years. Its sudden evaporation is going to cause a depression. Whatever Bernanke does, even if unsuccessful or only moderately, to mitigate the depression will in no way display nearly the kind of arrogance and power witnessed on Wall Street.
Q: You want to know what’s even less humble and even less wise than studying the Great Depression and using your education to help you set policy for the present conditions?

A: Not studying the Great Depression in depth and then casting aspersions on people who did.

Posted by someone on The Big Picture:

rww Says:
December 3rd, 2008 at 9:27 pm

Whoever names it, frames it: The “Patriot” Act; the “Moral” Majority; the War on “Terror”.

Call it a “credit crisis” and trillions of dollars get transferred to creditors. Call it a “housing crisis” and money gets thrown at housing.

It was never a housing crisis or a credit crisis; it is an income crisis.

No one needs more credit; everyone needs less debt.

A Bush-supporter/Obama-basher had this to say on another board:

>> Words are cheap…
>> action speak louder than words

Actions DO speak louder than words. So, the second statement is true. But, thoughts precede words, which precede and facilitate action. When you have dumb ideas, you say dumb things and then you DO dumb things. So, while I’m sure the first statement (”talk is cheap”) is well accepted by the wrestlemania crowd, it’s incorrect.

The last 8 years strongly suggest that words are dear. Dubya, his administration, and his supporters are poster children for:
(a) poor strategery,
(b) irrational discourse, and
(c) poor execution.
To many of us, these are related and, given (b), (c) was no surprise. That’s why I was able to predict (i) “no WMD” and (ii) “easy victory in Iraq followed by unplanned-for insurgency” way back in February 2003. (What were your predictions back then???)

So, “words are cheap”?? No sir!

…

The election took place just 3 weeks ago. When I see anyone trying that hard to find fault with the president-elect, I think of the following:

• Where was the critical assessment of Dubya during the past 8 years?
• In Dubya’s case, one can compare results against one’s own personal expectations about how Dubya’s plans panned out. You can’t even begin to do that with Obama.
• Criticizing Obama for “speaking but not yet acting” says more about the unreasonableness of the critic than about Obama. Obviously.