Posted by
Andrews on Sunday, September 27, 2009 1:32:50 AM
I was reading
an article about Volker's disagreement with the Obama / Treausry plan to increase the number of "systemically important" institutions, when I was struck by
how off-target all these proposed solutions are.
Now, I have given
my answer before, and I know
the odds of it coming to pass. As I think the answer is to
return to gold, to
free banking, surrender all
government interest in financial institutions, or
any businesses, restore the
absolute right to contract and embrace an
unregulated financial market,
free of experts and
of managed currency, I
don't see it happening under today's
Democrats or Republicans. So, I am left trying to come up with half-answers. Steps that, while not
resolving the underlying problems, at least remove many of the biggest negative outcomes.
And it seems the first, and easiest solution, is to stop the bleeding. If you were in an accident, the first thing a paramedic would do would be to stop the bleeding and other processes making things worse. Similarly, if you have, say, high cranial pressure, they first relieve the pressure then worry about the cause. Yet, we seem to be trying to solve the problems stemming from the mortgage lending collapse while the underlying process continues.
So, first, what we need to do is shut down Fannie, Freddie, the FHA and other institutions encouraging the creation of bad loans. At least by so doing we would avert a future crash. It will also keep the problem from getting worse. It might not remove the bad paper from the system, nor will it make the money supported by the massive credit expansion any more stable, but it will prevent things from getting worse.
Second, in the same vein, though it goes against conventional economic wisdom, we need to gently increase interest rates. I know during a contraction you are supposed to create cheap money, but right now we
NEED a contraction. Our problem is that we created too much credit, both during the housing boom, and earlier when Bush inflated us out of the post-9/11 slump and Clinton inflated us out of the dot-com bust. We still have too much money and allowing more to be created will only exacerbate the problem. We need to draw down the amount of cash out there.
As a corollary, we need to stop deficit spending, to the degree that is possible. If the government must spend, then it needs to borrow from financial institutions, not monetize debt through the Federal Reserve, creating more credit. Yes, that will slow economic growth, but that is less harmful than pouring more inflationary fuel on the fire.
Finally, we need to
stop being scared of bankruptcies, large or small. There
have been times in the past when bankruptcies were hundreds of times more numerous, yet our economy was stronger. And big firms have failed in the past without taking the US with them. We need to get the government out of the business of bailing out companies or keeping them afloat. (And it most certainly should not involve itself in imposing decisions in bankruptcy cases, leave those to the judges and existing laws.) We need to pull the government out of those businesses it has already bailed out, and convince it to let the market heal itself. We have poorly allocated resources thanks to inflation, and the only way to correct that is to liquidate those investments, that means, bankruptcies, sales and mergers.
If the politicians must do something, let them extend unemployment, or institute special unemployment for those in firms which close, or something along those lines. It is either pointless or mildly harmful (see "
When Help Hurts"), but it is a lot less damaging than letting the government perpetuate bad investments and take over firms.
I could probably come up with
a few more half-steps, but these seem enough to bring
some degree of sanity. They will certainly not solve our problems, far from it, but they can at least do what Reagan did in the early 80's, help us suffer through a
moderately painful contraction, allowing us to enjoy about a decade and a half of prosperity. Of course, as long as we have managed currency and government sponsored inflation we will come back to this point again and again, but until we learn that lesson and restore the gold standard and independent, free banking, the best we can do is make sure these periodic contractions bring us some benefit.
POSTSCRIPT
I have written countless posts on this subject, as the links above show. However, for those looking for a simple explanation, I recommend "
Monetary Issues Made Simple Part I" and "
Monetary Issues Made Simple Part II" as good starting points. If you want a more comprehensive view of my wrioting on this topic, then I would suggest reading "
Inflation and Uncertainty", "
Explaining Past Crashes", "
Not Entirely to Blame", "
The Inflation Engine", "
A Thought on the Clinton Surpluses", "
The Importance of Error", "
Cash For Clunkers Revisited", "
The Cost of Big Government", "
Economic Resistance to Recovery", "
A Strange Wish" and "
Interesting Article" and following the links to find most of my posts on the topic.