Saturday, December 15, 2007

"Kill All the Lenders"

"The business of Wall Street is to introduce people who should not borrow to people who should not lend, collecting fees from both parties. It's a good business as long as everyone keeps a straight face. In the last few years, it got to be too good a business: It came to be the business of Main Street as well. ... All we need is some new courthouses to hold the foreclosure papers and proceedings on a couple of million American houses. The sooner the banks own them, the sooner they can be resold on realistic terms", Thomas Donlan (TD) at Barron's, 10 December.

"Let me argue why monetary policy easing--not just palliatives such as the liquidity injections announced by central banks this week but rather significant cuts in policy rates--are now necessary and warranted. ... First of all, as argued here since August, the current global financial crisis is due to insolvency on top of illiquidity. ... The job of a central bank is not to bail out the financial system and/or investors but that of bailing out the real economy. Having millions of workers lose their jobs ... does not make sense. ... And inflicting severe misery and pain and collateral damage on innocent bystanders ... is not sound economic policy. ... Third issue: would monetary easing cause a much higher inflation rate and undermine the anti-inflation policy of the central banks? After all inflation rates are now rising around the world thanks to high and rising oil, energy, food and other commodities. ... This is the most severe financial crisis that the global economy has experienced in the last few decades. But so far central banks have been deluding themselves that this is a temporary run-of-the-mill liquidity shock", Nouriel Roubini (NR) at, 15 December.

I was in grammar school in the 1950s. Weekly we got My Weekly Reader (MWR), for a nickel! MWR exposed us to the Fed as seven-year olds! MWR taught that many South American countries were corrupt as they had 20-35% inflation rates because of their unwillingness or inability to balance their budgets. MWR did not teach monetarism, but I conclude its' writers knew more economics than Helicopter Ben (HB). MWR's writers thought the Fed's primary job was to mantain the dollar's value in the foreign exchange markets and that we were lucky to have a responsible central bank like the Fed unlike those of South Americans. HB has a choice, destroy the dollar or let the market destroy the banks. It's that simple.

NR is honest to admit his is an advocacy piece. I agree, there are insolvent actors in the market. My questions to NR are: who are they? What does bailing out "the real economy" mean? Who is helped, who is hurt? Whether or not "having millions of workers lose their jobs" makes sense depends on who they are. I believe having say, 100 to 200 thousand Wall Streeters lose their jobs makes sense. Having say, 300,000 mortgage bankers lose jobs makes sense. Is destroying millions of Americans' life savings through inflation to protect the banks "sound economic policy"? What "anti-inflation policy of the central banks" is NR aware of? If Milton Friedman established anything it is: inflation is a monetary phenomenon. NR confuses central bank rhetoric and actions. They are not "deluding themselves" at all. They will print all the money the large banks need. Got gold? Get more.

Addendum: Mike Shedlock (MS) had a post on NR's post at Mish on 18 December agreeing with me. MS notes he checks his opinions against NR's to see if he may be wrong. So do I.

1 comment:

Junior said...

ahead of your time as always...