Mr. B

The Deflation Debate: Why This Time Is Different

He may be right for the wrong reasons. The massive explosion of money created by the Fed will likely stop a deflationary spiral in the long-term.

Inflation subsides in any recession and the question here is how long and deep will this recession be.

China does have about 300 million people with discretionary income. Granted it is a fraction of the total population of 1.1 billion people, but it is still a large number. Everyone should hope they keep spending.

What he does point out is that the US Government is pursuing the economic policies of a banana republic. We have just witnessed the discipline of the market when too much debt relative to income/cash flow occurs.

Ultimately, the hazards of excessive government spending, inflationary monetary policy and the trade deficit will be harshly judged by the global market place. (We will see if the new Obama adminsitration is as naive as I think when it comes to even larger government programs and larger deficits.)

The rally in the dollar is temporary and the trend of US dollar weakness will resume as the current crisis fades. The US Government is debasing the dollar by defict spending to support current consumption (and a new government healthcare program will just compound this massive problem). A huge percentage of the $3.1 TRILLION federal budget is consumption spending.

The only way for the US to recover is to stop asking the government to do everything and insist that government spending (both real and as a percentage of GDP).

The US used to be the world's largest creditor nation. All of that has changed beginning with Johnson's Great Society spending. All that has done is transfer more power and influence to the federal government and it has done nary a thing for the poor it was supposed to help.

Even an economy with an inefficient, corrupt central government like China's can prosper as a creditor nation.

The Shallowest Generation

The financial house of cards began with FDR and his set of social programs, including Social Security. (SS is a Ponzi scheme and anyone in the private sector that tried it gets put in jail.) Johnson had is great society. The boomers that came of age in the 1960s are the generation of peace, love and free sex - luxury given to them by the self-sacrifice of the greatest generation.

Mr. Quinn is correct that we are up to our eyeballs in do-do. We can debate about the reasons why. Then he turns to Obama as an example of leadership? I'm sorry, but that is moronic.

Obama, who will likely be the next President, is at best an unknown quantity. His solution is to expand government with an additional $1 trillion in new programs. Tell me how this is good for America and how the progressive agenda will lead to the pursuit of life, liberty and happiness?

All Obama will do is finish the bankrupting of America. (BTW, I am no fan of McCain.) Obama is about creating dependency on government so that he and the progressives/liberals can entrench temselves in power. Why is that so hard to see?

Maybe I will discuss my ideas on how to deal with the current mess at another time. Mr. Quinn completely lost me when he held up Obama as some kind of virtuous leader. God help us all if he wins and has a bulletproof Democratic Congress.

The U.S. Economy After the Bailout

In principle, I am not in favor of government intervention in markets. I do not like the socialization of risk and losses by the government. However, the federal government has been a key part of the problem in this case.

The bill does not address the root causes of the problem. Government has fundamentally contributed to this mess with the Community Reinvestment Act and the GSEs (Fannie and Freddie). The CRA needs to be repealed or modified so that traditional lending standards can be applied to all extensions of credit, including low and moderate income borrowers. The GSEs need to be downsized and their function needs to be placed entirely in the private sector without a government guarantee.

Turning the US Treasury into a distressed debt hedge fund is a bad idea. The US Treasury does not have the skills to manage these assets. Outside managers should be retained to manage the assets. PIMCO said it would do it for free, simply covering their costs. 100% of the profits must be returned to the US Treasury.

The price discovery process for the purchase of assets must be thoroughly vetted and be made available to taxpayers. And, yes, if done correctly, there could be a meaningful profit for the UST. (My confidence level here is not high.)

Transparency with the flow of funds, including purchases, sales, expenses and gains and losses, must be made available to taxpayers. In other words, follow the money. Sunlight is the only way of keeping behavior on responsible terms.

Regarding housing prices, the demand curve shifted to the right because people used new mortgage products to buy more house then they could afford and because loans were made to unqualified, low income borrowers under CRA mandates and GSE assistance. Now demand, supply and home prices are returning to a normalized level and this will take time. This bill will not stabilize home prices nor stop foreclosures.

Mark-to-market accounting needs to be changed to valuation based upon expected cash flows. This is being addressed in some fashion. Mark-to-market accounting has contributed to volatility in the prices of illiquid assets, misrepresented the prices of securities and adversely impacted the capital ratios of banks thereby contributing to the contraction of credit.

While I object, this bill is loaded with pork. The idiots in Congress cannot grasp moral hazard issues. No one would lend the Big Three auto makers money, but Congress gave them $25 billion. Can you say corporate "subprime" loans? Have we learned anything? I don't think so. (As an aside, the ACORN provision in a draft of the defeated bill was a complete affront to any thinking person.)

The TEMPORARY increase in FDIC coverage should help stop the "run-on-the-bank" driven failure (although the threshold of $250,000 is too low to address institutional money which moves faster than retail deposits), save the FDIC from needless bank failures and allow for a more orderly price discovery process on impaired assets.

The plan does not ensure that banks will resume lending. This cannot be legislated nor should it be. But this is a major assumption and risk in the proposed plan. My view is that credit has permanently contracted in part because of tighter lending standards and in part because consolidation among banks reduces capacity (e.g. Citi lends $50 million and Wachovia lends $50 million, but after the merger the new Citi will only lend $65 million). The cost of credit will be higher for the foreseeable future. This will impact valuations and demand across the entire spectrum.

The bill will not save us from a recession and there are many other excesses that will need to be worked off. No economy has ever expanded during a period of contracting credit.