There are dozens of ideas floating around out there on how to punish [[AIG]] for the impending payment of $165 million of U.S. taxpayer money in executive bonuses. Tar and feathers have been mentioned. The New York Attorney General has issued a subpoena, something usually done only for criminal misconduct. Team Obama is jawboning like crazy. The problem is, the bonuses are going to get paid, regardless of subpoenas, jawbones or tar and feathers.

So the Administration and Congress needs to do an Al Capone on them. If you can’t nail them for bootlegging and murder, pin a tax rap on ‘em. Better yet, do it in such a way that it is unfairly retroactive and puts AIG in a box from which they can’t escape without knocking down the entire string of dominoes.

I’m wondering about the practicality of the suggestion that homeowners who are under water and unable to keep up with rising/confiscatory mortgage payments be converted temporarily to leasees, with a local bank as the lessor. The monthly lease payments would be held at some formerly affordable level while the market bottoms out. Housing and employment markets will at some point in the foreseeable future stabilize at a point where the homeowner is again solvent and, one hopes, interest rates are suitable for converting to a new, affordable fixed rate mortgage.

A New Class of Mortgage - the Neutral Mortgage

In order to finance the upcoming various and sundry bailouts, the US Treasury will be selling bonds. Lots of treasury bonds. Economics 102 tells us that an increase in the supply of bonds will cause bond prices to fall and interest rates to rise. The net effect will be inflationary. The dollar will be heading lower against other currencies. The good news is that the trade deficit should shrink, at least at the margin.

Let’s check the laundry list of issues confronting the US economy:

• A soft domestic economy, virtually flat, with inflation and unemployment both on the rise;
• Foreign trade deficits in the area of $700 billion a year;
• Federal deficits on the order of $400 billion a year and most def on their way up;
• Never mind the implied deficits in the “off-the-book” stuff, i.e., Social Security and Medicare;
• Global growth in the demand for natural resources, from oil to water;
• Crumbling global infrastructures everywhere but downtown Dubai City.

The mild form of stagflation currently in place in the United States is an example of an economy that is out of equilibrium.  (See Rock–Ben Bernanke–Hard Place)  There are scores of reasons as to how it got here, but it’s here.  Most of the reasons are political.

The myth of “tax and spend Democrats” is, in fact, a myth. The myth of “dispassionate, fiscally responsible Republicans” transcends myth, having achieved jokedom. And, most amazingly, the myth that Republicans are better for the economy is (you guessed it) pure fiction.

Wall Street greeted last week’s Fed announcement as if it was a declaration of victory, when in fact the Fed is now officially handcuffed, locked at the rates in effect when the summer paralysis set in. Played “Fed Funds Musical Chairs” for months, and the music stopped at 2%. Now, they need to raise rates, need to lower rates, can’t fish, can’t cut bait. Too hot to spit, too wet to plow. Reduced to “observer” status. We’re not afraid to raise rates, we’ll raise them if we must, really we will. Sure you will.

 Disequilibrium: Weirdness in Abundance

It's a good thing that Adolph Hitler decided to invade the Soviet Union before disposing of the Brits, or we’d all be speaking German today.

He proved the old military adage that you can’t win a two front war. Which is exactly what the Federal Reserve is preparing to fight in the recessing summer of 2008.

Well, we sure dodged a bullet there, didn’t we?  Oil dropped $17 a barrel in a week, and now everything is gonna be great!  Before you know it, gas will be back to $2.75, closed factories will be re-opening, and our homes will again be worth what they were two years ago.  Party on, Garth!

Wrong.  This party’s not over–it hasn’t even started yet.  The misperception is all about lags.