Doug Kass of Seabreeze Partners was on CNBC (Tue, Feb 3 2009, 7am EST), praising the current president’s economic team. He said the previous team was bumbling, but this new one was clued in and brilliant. The CNBC reporter challenged him, pointing out that secretary Geitner was part of the previous team. [Aside: As was Bernanke.]
One of the troubling issues that arise during a recession, especially when we have arbitrary central bank monetary policy makers casting about looking for solutions to new problems is that there is a strong tendency to see inflation bandied about as a possible tool of monetary policy. RationalTheorist has looked at possible indicators of coming price inflation.
There are a couple of key reasons that inflation is considered as a policy tool. First, whether government officials believe in the value of inflation as a monetary policy, there is an implicit temptation to use inflationary policy to deal with the problems of financing massive government spending programs, such as the recent TARP, Obama stimulus package, and the FED’s various credit facilities. Inflation rewards those who hold debt, since an inflating money supply in the face of fixed debt payments means that debt loads shrink. A key problem that the FED has today is how it is going to issue enough debt in the form of Treasury bills in order to fund the stimulus programs. In addition, because asset values are inflated, any effort by the government to buy so-called “toxic assets” at prices that are too high will be ameliorated as the values of those assets would artificially inflate.
Two more expensive failures this week from our government. I am of course speaking of the Obama stimulus package which the Senate passed on Tuesday and the Treasury Department’s proposed plan for its continued effort to shore up our financial system, also unveiled on Tuesday. If someone had asked me to predict the worst possible scenario for these two efforts I would have suggested that a huge stimulus package (which fundamentally does nothing to help) and “more of the same” from Treasury (which doesn’t address the fundamental problems in the banking sector) would have been my picks. That is exactly what we received.
The stimulus bill is predicated upon the flawed view that the economy is in some sort of deflationary spiral, i.e. that the problem is fundamentally one of consumer panic, and for which the antidote is a government burst of spending. By putting money back into the pockets of Americans it is thought we can restore their confidence as they see that burst of spending stop economic decline. This of course ignores the question of how such spending is financed, through the sale of Treasury notes, in effect pulling that money from the pockets of consumers before putting it back, and mortgaging future taxpayers to do it.
From The Rational Capitalist:
Proponents of the “stimulus” plan claim explicitly or implicitly that the government can take other people’s money, spend it, and thereby cause a “stimulating” effect on the economy.
First, I’m not sure what they mean by “stimulating”. Do they mean that prices will rise? But if prices rise, then we all get poorer by definition so it can’t mean that. Will prices go down so that we can all afford more? Not really since spending lots of money on consumer goods rarely results in lower prices.
Please contact your Senators and let him or her know what you think of the “Stimulus” package which is scheduled to come to the Senate floor this Wednesday, February 4th, 2009.
The $819 billion-dollar bill passed the House of Representatives last week with a vote of 244 to 188. Read what the Wall Street Journal has to say on a few of the specifics. Or a recent article on how Japan’s “stimulus” failed. Other interesting articles can be found here, here, here, and here.
Here is my letter:
A few days ago, Harvard Law School professor Elizabeth Warren, who heads a Congressional oversight committee, told the Senate Banking Committee.”Treasury paid substantially more for the assets it purchased under the [TARP] than their … market value”. Her evaluation was based on a detailed report that concludes that the Treasury overpaid by about 66%, paying $254 billion for assets worth $176 billion. (from: CNN)
In the popular media this translates thus: the banks cheated the tax-payers out of money. I heard Ms. Warren on NPR, where she was asked if Paulson knew about this. Her reply was that she did not know which would be better: that he knew and did it anyway, or that he did not have a clue. (My paraphrase, E&OE). More material for the populist Wall Street vs. Main Street theme. Sadly, the more that theme permeates popular culture, the worse for the economy.
One of the more troubling aspects of the structure of the TARP bailouts is the potential to have government officials and their political agendas influence the day-to-day operations of the corporations who received funds. Already we hear threats from politicians demanding that TARP funds be spent in certain ways. Now we see signs of actual influence in company operations. From yesterday’s Financial Times web article “Treasury pushes Citi to cancel jet order,”
The US financial sector’s new political masters began exerting their influence on Tuesday as Citigroup was forced to scrap the purchase of a $50m executive jet that was seen as a misuse of money at a time when the bank is reliant on public support.
Only a day earlier, Citi had insisted it would complete the acquisition of the aircraft. But it backed down after officials acting for Tim Geithner, the new Treasury secretary, expressed strong opposition to the move…
Mr Geithner and his colleagues know that any full-scale overhaul of the financial sector will almost certainly require more funds from Congress. So their immediate priority is to restore confidence in the recapitalisation process, which polls suggest is deeply unpopular. An essential element of this is convincing the public that the money is being used in ways that benefit the wider economy.
Proposing almost $1 trillion in new spending, President-elect Obama said: “…at this particular moment, only government can provide the short-term boost necessary to lift us from a recession this deep and severe. Only government can break the vicious cycles that are crippling our economy…”
“…only government can provide the short-term boost ...”: What he means is: sensible people are changing their spending to fit their new expectations. So, government will force them to spend, against their best rational judgment.
” …boost necessary to lift us from a recession this deep and severe…“: Government has only three sources of finance: taxes, borrowing, and creating new fiat money. Taxes only divert money from one person to another; the same with debt borrowed within the U.S. The two remaining sources are: debt borrowed abroad and money-creation. To whatever extent new money provides a boost, it is short-lived. Then we get higher prices, and we’re back to square one.