Posted by
Andrews on Friday, January 23, 2009 9:55:44 AM
I was watching financial news (more on this in my next post) on Fox when I was struck by something. A commentator suggested something akin to the FSLIC solution from the 80's for failed financial companies. I don't want to write on that (at the moment anyway), but about something he said in the course of proposing this solution. His comment was "we are throwing money down a hole, and that hole is getting bigger".
That comment reminded me of one of the biggest idiocies of this entire "crisis". The whole problem was brought about, directly, by the subprime crisis, and, indirectly, by the housing bubble which artificially inflated housing prices. Of course the two are related, both being caused in part by the artificially lowered interest rates of the Clinton and Bush eras, with the subprime crisis being fueled by the added problem of the Community Reinvestment Act.
So, if those caused the problem, wouldn't you think the solution would be to stop the Community Reinvestment Act and also to allow interest rates to rise a bit? However, worried by "deflationary pressures", the fed is keeping interest rates low, while the feds are doing even more harm by having Fannie and Freddie subsidize loans at an even lower rate. Nor has the Community Reinvestment Act been reined in. In short, the hole is getting bigger precisely because we are continuing to do the very things that caused the problem in the first place.
Let me give an example form a nation a little farther down the same road, Weimar era Germany. They had inflated the money supply over and over to pay for massive social spending as well as to pay reparations and conduct a covert rearmament program. (It is a myth the reparations alone caused this, but as I don't feel like debating history right now, I will not get into that.) The inflation had caused unprecedented price rises, and the expectation of more inflation caused prices to race ahead of the money supply. So, what did they do? Stop inflating, tough it out, and wait for the economy to recover? No, they inflated more. And, surprise!, the problem got worse.
Despite all the
Keynesian beliefs in the benefits of inflation and government spending, they did not recover. Instead the economy got worse and worse, and so they ended up with billion mark postage stamps (I have a few in my father's stamp collection). You see, once inflation causes these problems, no amount of inflation and spending will resolve it. The answer is simple, stop inflating, take your lumps, and come back on a solid footing. It worked
for Reagan in the early 80's, it will work for us.
What will not work is more inflation, or, even worse, an inflation funded bailout.
POSTSCRIPT
For those who think FDR spent and regulated us out of the Depression, please read "
Government Cheese?" and "
War Stimulates the Economy? Let's Nuke San Francisco!", as well as part of "
A Final Comment on the Futility of a Bailout". For a full discussion of the crisis and the bailout, examine the list of posts found in the postscript to "
History Repeating Itself". And, as always, I recommend my two posts "
Monetary Issues Made Simple Part I" and "
Monetary Issues Made Simple Part II" as they offer better explanations than I can give here of why I oppose the Keynesian consumerist fallacies as well as any theory which extols the virtues of inflation or deficit spending. (To clarify, deficit spending may be necessary in a dire crisis, say a war or catastrophe where we lack the time to sell bonds, but it should always be seen as a bad thing, never as beneficial. And should be the act of last resort, not a daily practice.)