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12/07/2008

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Jim

Daniel, I suspect that the real problem is not the free market versus regulation. More likely it is human nature run amok. If we had decent, self- regulated folks with a conscience running the government and our oligopolies, there might be fewer indictments and bailouts.

neilehat

Jim, I've read the charges, most sound rather spurious to me. However, the Tribune has got a bug up its butt about the Gov. as well as the Gov. for the Tribune. From what I've been able to gather, the Fed's indictment is based on "investigative reporting" released to it by the Tribune. This may have something to do with the State backing out of negotiations with the Tribune Co. to purchase Wrigley field ( with the Tribune Co. going into bankruptcy and all). Perhaps a ploy by the Tribune to increase circulation? Ahh... Illinois politics.

BO Bill

The proposed infrastructure spending would not be as effective today as it was in the 1930s, even if it was effective then. Back in the day, you basically just went out and built a road.

With today’s environmental gamesmanship, ‘safety’ regulations, labor arrangements, the EEOC, helpful government employees, political favors, etc, etc., I doubt that one third of the money would go into asphalt and concrete to benefit the economy.

If the President-elect were true to his claim to be a champion of the environment and energy independence, I’d like to propose a better plan. One that would reduce our dependence on foreign oil, reduce greenhouse emissions, and set the stage for future electric cars.

We should use this situation as an excuse to waive wasteful and burdensome government regulations. Then we should build nuclear power plants by the dozen, and electrify the nation’s railroads.

Quinn

What makes this downturn - I suspect it will be called a depression before we are all said and done - dangerous is that it has several interlocking components. Each of these would normally cause economic contraction. Together, they feed on themselves. The result is that we are seeing a number of things that are "not supposed to happen" and which our decisionmakers have not seen in their lifetimes.

If you would ask economists what effect any of the following would have on the economy:

(a) $140 crude oil
(b) a major downturn in household equity and buying power
c) the implosion and Chapter 11 of a major Wall Street bank
(d) sustained job losses of over 200,000 per month
(e) credit panic brought on by, say for argument, massive accounting scandels at a number of U.S. and global commercial banks that would force bailouts, nationalizations, and mergers
(f) A non-functional real estate market

The response would be that (a) through (f) would at least cause a slowdown if not an outright contraction. It's possible to conceive of something that would involve one or at most two of those, because they generally haven't happened in the past. The tech bubble took out household equity and caused large job losses, but it didn't damage most real estate (certainly nowhere near this scale) or really injure Wall Street banks.

What we have now is a burst credit bubble that was inflating the negative savings rate's buying power and the economy as a whole. Our economic growth during this bubble was mediocre at best. The excesses of the credit bubble were outragous and supportable only by their own momentum. It became literally impossible for people of upper middle class income to own real estate in certain parts of the country without stupid exotic mortgage products.

The credit bubble - and its idiot loans - only existed due to securitization. If you have to carry some of this garbage, you write less of it and you start writing to higher standards so you don't get a visit on FDIC Friday. The belief that developed that "no one will lose" on defaults on underlying mortgages that were idiotic is contrary to economics and market principles. Someone paid way more than that asset was worth.

Well, now we know what happens when house prices stop going up at a rate grossly exceeding income growth. We also know what happens when we "test" the idea of "too big to fail." Lettling Lehman go was disasterous. Letting Lehman get to the point it did where its peers flat-out refused to buy it out of self-perservation was equally disasterous.

What we have now is a number of things tied up in the credit/housing downturn that are feeding and cascading off of each other. None of them are healthy for the economy. The accelerating trend of job losses - driven by collapsing revenue and a lack of affordable credit - makes housing worse. No mortgage rate is affordable if you have essentially no savings and no job. Job losses also, as pointed out by Posner, feed into contraction in retail spending and further contraction in corporate revenue. The net job losses in the retail sector are going to be ghastly this holiday season.

At present, a lot of these horses have left the barn. What are probably the best targest for trying to halt the death spiral are

(1) Doing something to halt the job losses. That includes not letting the automakers go into an uncontrolled Chapter 11; this will directly destroy Michigan, Ohio and Indiana and cause collateral damage throughout the United States. On the actual jobs, stimulus needs to target employment, up to and including make-work. I don't like this term, as we really do need infrastructure work done as it stands.

(2) Pre-empting the impending disaster with Option ARM resets. If Option ARM defaults go the way they can be expected, they will cause further depression on house prices, more foreclosures and more worthless credit securities and the cascade goes on.

neilehat

Quinn, "News Flash": House Republicans and other "Free Marketers" torpedo first steps to a National Recovery Act. Automakers begin to roll out Project "Every Man, Woman, & Child for themselves". Begin to expect the unemployment rate to spiral upwards of an extra 10-20 percent. Expect retail sales to collapse, expect foreclosures to climb for all types of property.
Expect more Banks and Financial Institutions to move into receivership or outright collapse.

On the International Front, Riots begin to sweep across Europe as legions of unemployed take to the Streets.

And the Band plays on ...

These are not good signs.

Edward G. Nilges, Hong Kong

Judge Posner, thanks for an interesting essay.

We tried monetary policy: but the monetary bailout did not work and it grossed us all out: the very idea of giving money to banks reminded me of Mr. Creosote in the Monty Python movie The Meaning of Life; I'd best not recount the details of the scene.

There are multiple types of monetary policy and the most traditional form, call it Stalinist, may not work. Big iron projects will employ ironworkers. What about teachers?

The next most traditional form, call it bright iron, might work better and be easier to start. Perhaps we should give everyone broadband first: as George Gilder has pointed out recently on the BBC, this might change the rules so dramatically as to pull us out of Depression without a war.

What if all job seekers had perfect information and could work remotely, not just the favored few?

But the next type of stimulus might be best. A fraction of the original 700B bailout, if simply given as a dole not only to the registered unemployed but to any layabout, any flaneur, who applies, would have been and could still be the cheapest and most dramatic stimulus, as long as there was a time limit on this temporary reign of Cockaigne, this holiday Big Rock Candy Mountain.

Keynes himself suggested that the unemployed be set to digging up gold bars, so perhaps some temporary corvee could be assigned the beneficiaries.

To be unlike the crudest form of Peronism, my fanciful program would have to be time-limited, like FDR's bank holiday.

Truth and reconciliation would indicate that most of the populace has been not enriched but instead dispossessed by the last thirty years. According to the CIA's own figures, for every computer millionaire who cannot program a computer, there are at least four hard-working programmers who don't have medical insurance.

And, with all due respect, Judge, talking heads and de facto intellectuals (including anti-intellectual intellectuals) need to admit that during the fat years, they saw no need whatsoever for government intervention. Now it may be too late.

Edward G. Nilges, Hong Kong

I think there may have been an oversight made at the time of the bank bailout.

Suze Orman is "just" a pop financial guru. Nonetheless she wisely has pointed out to her adepts that when they lose their home in a disaster, or send the keys back to the mortgage holder, they have NOT escaped obligation under the law.

Many people seem to believe they have, even the banks, which are laying their back-office people off when those folks could be on the phone making money by collecting money owed, or mowing the lawns of the houses the banks now own.

Sure, create jobs for the deadbeats. But make them pay what they owe. This can restart the engine.

Edward G. Nilges, Hong Kong

We don't need a "jubilee". Quite the reverse.

I think it's less important that Americans don't save than that they don't actually work. The negative savings rate was caused by the savage absence of medical insurance in some measure, and by the savage absence of mass transit in more.

The problem is that "diligence" became a lawyer's term for pretty paperwork while the truly diligent are shown the door in layoffs, or tagged as whistleblowing trouble-makers when their actual diligence uncovers fraud.

The banks, in a mass overwhelm, labeled their securities toxic but the truth is that people will pay debts as long as they are not deprived of basic decency in the form of a place to stay and a job.

Make full employment your target and adopt an idea from Islamic banking: forbid the banks from selling debt. The system will restart.

[I hope I have figured out breaking tags. Thank you, Gary and Judge Posner, for allowing me to post here.]

Sr Max Higgins

Bank of America and Mr. Higgins missing $millions, It can happen to you, my fellow Americans


More info: http://mrhigginsbank.blogspot.com/

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