To paraphrase a recent Obama quote, the reason we’re giving money to banks is because they can use leverage to get the economy moving again. Yes he said this.

Contrary to what Obama says, there are only two ways to get out of an excessive debt situation (debt that can never be paid off which is where the US is now). Deflation or inflation. My thinking is most governments don’t survive a massive inflation (aka hyper style inflation). Deflation will be long and painful with lots of armed hungry people out there. Both options are less than ideal for any government and neither will be pretty.

With some $500 trillion in derivatives floating around the world, who holds these things. Where are they. Toxic assets on this scale should be called Weapons of Mass Financial Destruction (who said that).

All I know is that things aren’t good, I don’t think the government has a realistic clue on how to deal with this mess. Helicopter Ben is on the loose, I hope it works out for my kids, but I certainly don’t understand how this can end well. So I think the government has chosen the shovel and hope method, as in shoveling money out of helicopters and hope things get better.

Then let the market apply valuations next week! Not so hard my friends. I suggest the market value all offending derivative packages by quoting CDS coverage! All invalid nonsense such as possible later price improvements will be met by the most impartial, objective, unbiassed, non-crony assessors.

Now if the people assigned responsibility to clear up this mess for us are similarly impartial, objective, unbiassed and not playing the crony card, we will know where we stand, the price of the fix and can nail this to the people holding the baby. Then the President tells derivatives holders to put the money on the table today!

OK Mr.Geithner go to it. No more taxpayers money handed to the banker’s fraternity!

If you bankers and R.O. merchants require assistance to understand this I will provide coaching and slow learner assistance.

Have you ever tried to set a log on fire with one, small match? In no time, the match burns down, and the big log has not yet caught fire. “Bailot Nation” is a lot like that. I don’t believe the central governments efforts can even feasibly be large enough to get the log burning…..again. Small match – big log problems are pretty much impossible to overcome without the help of friends who own blow torches. Those friends are having their own problems right now, and they no longer trust you with fire anyway. I think it leaves you out in the cold…..and without a fire.
AA

Are you prepared to argue that the many latin american inflations, for example, were successes? Were any of them?

How about our own recent massive asset price inflation, driven by an accommodative Fed and a kleptocratic regulatory regime? How likely would we be facing the current crisis without that inflation? You may be familiar with a somewhat famous quote from Thomas Jefferson about inflation leading to deflation leading to widespread dispossession.

What gives you confidence that the next wave of inflation, which you advocate, won’t lead to an even bigger hangover?

How many times do we have to go through this highly dysfunctional and destructive cycle?

I agree that it would be more effort to actively unwind the unmanageable debt load we collectively have, but I think it’s worth it as it would allow us to break the vicious cycle. If we accompany a resolution regime with strict limits on the ability of the Fed and banking system to create money-from-nothing, which inevitably cause bubbles that inevitably burst, we can end up with a sound economy based on solid, sustainable productivity.

If, instead, we again resort to inflation, we’ll just continue a dysfunctional pattern. Enough is enough!

All of your points about targeted efforts are well taken, but unfortunately targeted efforts are:

1) Slow – painfully slow
2) Very hard to politically implement due to countervailing forces (e.g. the institutions which own the student debt)
3) Often impossible (you can’t clawback what someone has already spent)
4) Very hard to agree upon and execute, often requiring significant administrative capacity from a deliberately gutted and handicapped bureaucracy

Regarding the “disastrous” results of the central bank (in the last 6 months), they are strongly preferable to what would have happened if the Fed and other central banks had not intervened. Paulson – for all his cleptocratic abuses – was right that the system nearly imploded catastrophically. The crime was that in order to get the semblance of stability, we had to payoff the culprits.

The IDEAL response (which I’ve oft-stated), is coordinated global quantitative easing (printing money), dedicating the resulting funds to a massive state-led investment in infrastructure/energy/environment, and a permanent reduction in capital/asset ratios (to prevent an inflationary rebound when velocity picks up and simultaneously stabilize the system going forward).

No such luck….

Other topics:

Regarding Hitler…

Remember, the Depression brought Hitler to power. Hitler did not create the Depression. Political instability and totalitarian regimes are directly linked to the failure of free-market democracies to confront massive economic downturns.

Hitler not only repudiated Weimar debt (which had already been restructured after it proved impossible to pay), he also inflated to fund his war machine, implemented strict currency controls, harsh penalties on black market activity, reduced trade (punishing imports, and effectively exports through the overvalued Mark), repressed organized labor…

A whole host of anti-free-market measures. Indeed, the _same sorts of things_ China is currently doing (successfully).

Contrary to EVERYONE’s predictions that he would fail, he did not.

The result was dramatic and rapid reduction in the 30% unemployment rate he inherited, which won him tremendous credibility and thoroughly undercut the credibility of his free-market gold-standard-loving opponents. And, of course, he used that credibility to wipe out millions of people and nearly destroy the world. Perhaps if the competing philosophy had accepted greater need to intervene in the currency to save the global economy, they could have won that credibility instead… alas, we shall never know.

But your general argument appears to be that the currency controls and draconian policies caused the incredibly rapid German recovery… Or that they are a necessary consequence of inflation. I struggle with both of these, particularly if inflation is coordinated and/or conducted modestly by world reserve currencies.

As to other cases where inflation failed, many of those cases can be linked to foreign denominated debt (Latin America) and/or corrupt regimes (Zimbabwe). It’s impossible to really know without better econometric models whether the inflation was a cause or an outcome. Nor did most of these cases occur during an era of global devaluation-risk.

Having said all of this, currency controls should be unnecessary with proper coordination in international monetary policy. (Where does the money flee, except into non-currency assets which is exactly the goal in a debt-heavy economy.) Without international coordination, the US should still be able to employ unilateral QE due to its (remaining) status as a reserve currency, and because its debt is denominated in dollars. The US does not need an overvalued currency (like Nazi Germany sought), except to purchase specific items from abroad (e.g. oil, which is why a massive investment in energy is needed). Also, lower-valued currency facilitates exports, helping both us and dollarized export economies.

Finally, if you want a less frightening example of inflation helping the poor, consider wage-led inflation in Europe in the 1950s through 70s… The debate still rages about whether or not it “worked”…

The commonly accepted wisdom that inflation is always regressive does not hold in all times and places, although on average and across countries/times it tends to be true.

Let’s begin with this: Inflation disproportionately helps those who owe fixed rate debt and who own non-cash assets. Deflation does the opposite (and generally causes mass bankruptcy too). For most middle class americans, their house is their most important asset, and they still owe a mortgage on it. Compared to historical norms, the Debt-To-GDP ratio is HUGE, and much of this debt is owed by consumers. Keep these datapoints in mind.

Regarding the (relative) beneficiaries of inflation, it depends on who gets the money that is being printed (and printing can involve the issuance of below-market-rate loans), the ratios of debt/cash-based-assets/non-cash-based assets in different economic strata, and the expectedness of inflation (which can allow hedging). It may also depend on wage laws (does minimum wage keep up, or not) and other factors.

For consumers with fixed rate debt who own houses, inflation is generally good (so long as rising interest rates don’t destroy house prices too much).

For indebted (poor) consumers who have variable rate debt, we tend to think inflation is bad, but even worse is skyrocketing credit-card rates _during_ deflation. That’s what’s happening now, and it’s crushing consumers, and is being implemented by banks who are taking advantage of consumer inability to shift debt. (Previously, if banks raised credit card rates, a consumer could shift debt to a new card or take out a HELOC; now they are trapped, and the bank wants to build loan loss reserves through rate hikes/fees even though _they_ can borrow money at a subsidized 0.25% from the Fed courtesy of taxpayers.)

If one believes that the PRIMARY PROBLEM now is not restoring “liquidity”, but doing something about the crushing debt that is destroying spending power (debt that was not spent on investment, and that was likely incurred to maintain consumption by offsetting declines in median real incomes over the last 30 years), then inflation seems a lot better than deflation. I continue to refer to Roubini’s lovely summary:

http://www.rgemonitor.com/roubini-monitor/254419/20_reasons_why_the_us__consumer_is_capitulating_thus_triggering_the_worst_us_recession_in_decades

One major question which is being overshadowed by the inflation vs. deflation debate is HOW the printed money gets spent – on cheap loans to banks to reflate the consumer-driven spending spree, or on real investments in infrastructure/energy/research, etc.

I do not see the big companies in the private sector leading the charge to invest in the areas of the economy that most people want to invest in. Case in point:

http://www.nytimes.com/2009/04/08/business/energy-environment/08greenoil.html?_r=1&pagewanted=all

And the Obama Administrations 150 billion dollar investment over 10 years (15 billion a year) is certainly a vast improvement, but still pales next to to _annual_ oil company investments in drilling/discovery/field operations.

Not when we will need _massive_ investments to maintain sustainable growth in 10-15 years. Obama’s energy/infrastructure plan just isn’t ambitious enough. If we had dedicated 900 billion (aka, TARP + AIG) to energy & infrastructure over 5 years, imagine what _that_ would have done.

There are many examples of failed inflations you choose to ignore.

You seem to imply that inflation is, if not the only way to reduce debt burdens, the best way to do so. I have not seen any support for this. Unreasonable debt burdens (including student loans) can be cancelled without taking indiscriminately from others.

Similarly, the widespread unjust enrichment can be addressed with clawbacks, rather than indiscriminately taking from those even you would likely agree earned their cash honestly.

As for the economic distortions you cite, they can more easily be explained by central bank manipulations than market failures.

Perhaps your biggest omission is in ignoring the disastrous results we are witnessing from “successful” central bank efforts to inflate asset prices. Your solution to same is much more of it. Please.

The important thing is to distinguish between legitimate banking and the type of banking that got us into this mess. The liquidity has to support real banking and somehow punish those responsible for all the capital destruction. Somebody has to take a big hit. What we are doing is lifting all boats, and thereby paying for the capital destruction through inflation. I can’t buy into your argument that inflation will somehow help the periphery more than those with better access to power and wealth. For example if housing prices go up because of inflation, homeowners due indeed spend less of their real income on housing (assuming a fixed rate mortgage), however this is probably offset by the rise in other costs of good and services – like business that pay a higher rate of rent and simply pass on that cost to their customers. Inflation is essentially a regressive tax.

Start with cleaning up the regulation that allowed this mess to happen.

The underwriting institution wrote the mortage knowing full well that the buyer had ZERO equity in the house. The underwriting institution also ASSUMED that the house would not loose value.

Now the buyer obviously is not someone anyone would want to do future business with, but it’s the banker’s (or underwritter’s) own stupidity for making poor business decisions and doing it on a grand scale – multiply that transaction by hundreds of subdivisions.