Lawrence J. Kramer

The Next Leg of the Crisis: Unavoidable Catastrophe

I think this article ignores context. If you worry about the dollars being printed, then apply them first to replace the dollars destroyed in the financial mess. Inflation is about M3. With wealth destroyed, new money does not raise prices - it just gets saved.

And then there's the paradox of thrift, a prisoner's dilemma writ large, in which everyone defects. Your claim that easy money is badly invested was completely true when our trading partners had the money and were buying subprime mortgages. But it's not true now. Now, even with interest rates at historic lows, anyone with money to lend can and does lend it to Uncle Sam. Look at how much money is going into bond funds - careful investments, not even entrepreneurial investments, much less risky investments. The fate of cheap money is contingent on the national mood. You are offering boomtime logic in a bust time context. (Yeah, there's a risk trade on, and the dollar is depressed by it, but it's nothing like what you fear.)

We need broken windows now because, if Bastiat's baker doesn't need a glazier, he won't spend at all, and, what's worse, his savings will not be deployed productively by his bank because, well, the glazier isn't creditworthy on account of people are being really careful not to break their windows. It would be nice if people wanted stuff so that paying a glazier would divert spending. But right now, people don't want stuff, and until they do, a lot of your concerns are misplaced.

Why Do Equity Markets Disagree with the Data?

People are rebuilding their savings. They have to put the money SOMEWHERE. Look at how expensive Treasuries are despite a trillion dollar deficit.

We have inflation in financial instruments - too much money chasing too little paper. So everything "goes up," and stays up until supply catches up. But supply won't catch up; no one wants to issue paper when no one will buy the goods the issuer would use the proceeds to produce. (When else has a bull market produced so little IPO activity?)

Why Our Credit Crunch Mirrors the Weimar Hyperinflation from 1919-1923

I think the numbered paragraphs are excellent and important, but much of the preamble is paranoid nonsense. There has been no transfer of wealth. The bankers who have been "helped" have seen their personal fortunes decimated. All they have left are their jobs. That puts them ahead of a lot of people, but "transfer of wealth"? Ask Hank Greenberg or Dick Fuld or Lloyd Blankfein or Jamie Dimon how much wealth has been transferred to them. Short-sellers have cleaned up, but not on bail-out money. Everyone else has been beaten up pretty badly.

None of this makes the historical lessons of Weimar inapposite. It's just sad to see the matter wrapped in the sort of conspiratorial silliness that makes people stop reading before they get to the stuff that matters.

Stripped of unimportant talk about what motivates individual actors, the material problem is that we bought more than we could pay for and now have to default on our bills. We have to. There is no choice, as we don't have anything to sell to pay what we owe. We tried pretending that our real estate was worth more than it is, but that didn't work. Dollar-denominated obligations will be settled at less than par in real terms because there isn't enough of value to settle them in full. Inflation is merely the mechanism by which that default occurs naturally.

If there were no stimulus, no "runaway spending," the trade deficit would still be there, and the debts would still be coming due and we would not be able to pay them except by printing dollars. Without the stimulus, though, the Chinese and OPEC would simply stop taking our dollars sooner, as they would have less business to lose. They wil continue to supply us for so long as they can pretend they are getting paid. If we don't buy, the music stops now. If we do buy, it stops later. In the scheme of things, there's not much difference.

Our standard of living has long been subsidized by the poverty of others. That may or may not have to be the case, but foreign suppliers seem no more eager to elevate their workers and consumers than we are to demand that they do so. In a globalized world, the economies of the U.S. and India should be as much alike as those of New York and Iowa - different, but not very different. Is there enough productive capacity for that to be the case? If yes, can we get there? If the answer - to either question - is "no," then what? I mean, if our hyperinflated currency won't employ those call centers, what will?

Moral Hazard: The Real Culprit of the Financial Crisis

Nice try, but no cigar.

Moral hazard is an enabling condition, perhaps, but the immediate culprit is the ratings agencies who had no skin in the game: having no risk to be insured, they had no moral hazard in their decision-making process.

But the immediate cuprit is usually just the weak link in a chain that has come under tension; the tension on the chain that is the "real cause" of the crisis. In our case, the tension was the trade deficit. The deficit made it necessary for us to provide a home for the dollars we spent on imports. Where else were they going to go to make them worth having? We had to borrow them, but Pres. Clinton balanced the budget, leaving the private market to supply the paper. The rest is history. Even the burgeoning Iraq-based deficit could not keep up with the inflow of money. Only by lying about the value of collateral could we accommodate the deluge of petrodollars. So we lied. What else could we do? Conserve energy? Use natgas or nuclear energy? C'mon, this is America!

My Proposal for Improving Lending Between Banks

It's all deck chairs until we steer the S.S. Oil Junkie away from the iceberg. We have a trade deficit; in other words, they send us stuff and we send them paper. When we ran out of good paper, we put lipstick on bad paper (aka subprime mortgages), and sent them that. Now the jig is up. Even if we solve the liquidity/credit crisis, we won't be able to borrow our petrodollars back because now the world knows that we have nothing to borrow against. So they won't take dollars, and we can kiss the good life good bye.

Nuclear energy, CNG, coal, wind, solar, etc. We need to use local energy sources to run our stuff, and we need to SELL our oil to pay for our toys.

Go back to econ 101 and study comparative advantage. In this day and age, any country that can produce oil ipso facto has a comparative advantage in oil and should export oil. Until recently, our comparative advantage was in investment grade paper - something we could produce more cheaply than just about anyone else. Now, that advantage is gone. We need to export something else, and oil is it. All we need is the brains and courage in Washington. Which is why I've loaded up on SDS and TWM.