Four days ago, Alan Greenspan posted an article wondering what went wrong: “We will never have a perfect model of risk†“Risk management systems – and the models at their core – were supposed to guard against outsized losses. How did we go so wrong?†Hey Alan! Check your spam folder for 2006. You will find it is full of ads saying: “Buy the house of your dreams for no money down! No credit? Bad credit? No Income? No Problem!†…
Category: economics
Stagflation
The US economy faces recession: To stimulate the economy, the fed is lowering interest to near zero and the government handing out six hundred dollars to everyone. But what the US faces is not recession, but stagflation, and handing out free money is not the cure for stagflation. Stagflation was first observed in the first great fiat money inflation of modern times, the French assignat. The more assignats they printed, the worse the shortage of assignats became. They would double …
Moral hazard:
Financiers know that if they misbehave, the Federal Reserve will print money and give it to them in return for worthless collateral. Public knows that when the central bank prints money, its value diminishes, and thus the public become reluctant to sell, and unable to buy. Hence stagflation.
Yes, the Fed can just keep on printing money.
The business times quotes an anonymous “senior London Banker†Someone will go under in this crisis, that’s for sure. The question is whether they stay under or get rescued. Let’s see whether this latest round of stabilisation helps, but if it doesn’t, it’s difficult to see what Plan B is. The Fed can’t just keep on printing money. Yes, the Fed can just keep on printing money. The banks have real assets and nominal liabilities. If the Fed debases money …
Fed blows three hundred billion in one day.
Yesterday, the fed, in an effort to restore liquidity, “loaned†the banks three hundred billion dollars with mortgage backed securities as “securityâ€. Because these securities are not worth @#$% it in fact purchased these securities. And because the mortgages backing these securities are not worth @#$% it in fact purchased the mortgages. And because the mortgages are for more than the value of the properties, it in fact purchased the properties – mainly residential properties. But government is notoriously incapable …
Which is irrational, the Fed or the market?
The economist is puzzled that the very rational Fed is having such difficulty bringing rationality to those terribly irrational markets: the more frightening tremors in the system are those generated by the seemingly irrational unwillingness to hold safe investments, thereby making the safe unsafe. And to cure this terrible irrationality, the Fed is injecting liquidity buying dud mortgages. Hang on. Dud mortgates are not safe investments. They are extremely speculative investments. The Fed is going into the the real estate …
Cause of International Inequality
Arnold Kling is much puzzled by the inequality of nations. I don’t know why. The answer is pretty obvious. Firstly, you require capitalism, which requires not mere formal laws recognizing private property, but a culture of respect for entrepreneurship, for property rights in productive capital and freedom to do business. With that respect, the laws are unnecessary, as in today’s China. Without that respect, the laws are useless, as in Argentina and Russia. Secondly, given capitalism, you require people able …
commodity money
The subprime crisis represents massive unpunished malfeasance by financial intermediaries managing US dollars. This discourages people from using US dollars as money. In 2008 January, the fed drove real dollar interest rates negative – only slightly negative, but negative interest rates suggest an intent to inflate away the dollar denominated liabilities of financial intermediaries until the real assets cover the dollar denominated liabilities. In the ensuing two months, all commodities that are readily storable and have large liquid markets, all …