Potpourri
* Tyler Cowen links to a piece that explains a strategy to game the Geithner plan.
* Oh man, more talk about the Fed’s “weapons” at Mankiw’s blog…Check it out:
Some people are concerned that in the the fight against recession, the weapons of monetary policy are nearly out of ammunition. That is certainly the case for the standard monetary weapon–cuts in short-term interest rates. After all, short-term interest rates are already about zero, and the Fed cannot cut interest rates below zero.
Or can it? In a discussion at a Harvard seminar recently, a clever grad student proposed a solution to the zero-lower-bound problem.
…I can now state the proposed solution: Reduce the return to holding money below zero. Imagine that the Fed were to announce that, one year from today, it would pick a digit from 0 to 9 out of a hat. All currency with a serial number ending in that digit would no longer be legal tender. Suddenly, the expected return to holding currency would become negative 10 percent.
That move would free the Fed to cut interest rates below zero. People would be delighted to lend money at negative 2 percent. Losing 2 percent is better than losing 10.
Folks, at this point can we admit that the mainstream models are BAD? If you’re trying to figure out how to help the economy, and you end up concluding, “We might try randomly turning off 10% of the dollar bills,” then I think you need to check your assumptions.
To repeat a point I’ve been making lately: Does it make any sense that after everyone realizes we were all consuming way too much, and we all need to buckle down and save like crazy, that the solution involves…negative interest rates?!
Two Narcissistic Notes
* Here [mp3] is my hour interview with David Hanson (who sounds like Ronald Reagan when you first hear him). I followed Tom Woods, so you know I blew the audience away.
* Here is the itinerary for my May 16th talk at the North Dakota Policy Council. What the heck, I have to follow Tom Woods at this thing too?! I guess that’s going to be my career now, cleaning up after Tom.
Utopian Regulators
The people touting the market can plausibly say, “We never gave it a shot.” But those blaming the housing bubble on deregulation don’t really have a strong position. There really wasn’t deregulation, but instead changed regulation (or reregulation) after the changes in financial regulation that allegedly spawned the boom.
The mysterious von Pepe and I were emailing about credit default swaps, and how a bank could meet its capital reserve requirements by buying a CDS and (for purposes of regulation) effectively take the volatile asset off its books. The bank would still hold the volatile asset, but it supposedly now had taken care of the downside because of the CDS which acted as an insurance policy against default.
So as I said to von Pepe, “People keep saying that the CDS market allowed firms to evade regulation. No, the regulation allowed firms to use CDSs to evade capital requirements.”
Shocker: Government Plan to Fix Economy With Inflation Not Working
This CNBC article explains:
The Fed’s bid to lower long-term interest rates on home mortgages and corporate debt is already running into trouble.
In the aftermath of last Wednesday’s announcement that it would buy back $300 billion of 2-10 year Treasury securities, yields on benchmark 10-year notes were cut 51 basis points, from 3.02 percent to 2.51 percent in a matter of minutes.
But rates have since crawled up on Thursday and Friday, and show no sign of falling today, leaving the market just 36 basis points lower than before.
And I liked this part:
The Fed is trapped. The current buy back program is too small to have more than a symbolic effect. Expanding it, though, would trigger fears about inflationary financing and risks bringing on the rise in bond yields and collapse in confidence and the currency the Fed is desperate to avoid.
I have been saying this more and more in the last couple of weeks: Everyone says, “Bernanke will have to suck those reserves out of the system once the recovery begins.” But what happens when unemployment is in double digits and CPI is rising at more than one point per month? People are acting as if that’s impossible. We’re back at the pre-1970s Phillips Curve consensus.
Nice Review of Woods
This CBS review of Tom’s new book Meltdown is really good. I don’t just mean, that I agree with guy, but I’m also saying objectively, he is very well-read for someone who gets a CBS spot. I think the Internet is really opening up the floodgates in terms of nuanced analysis.
Reading God’s Book
In this post, I merely want to note the point that the existence of an omnipotent being who created the structure of reality–and who moreover is reputed to have an actual personality and enjoys interacting with humans–well that’s by far the most important aspect of your belief system. How you answer that question fundamentally influences what kind of life you will lead.
So I fully grant that I may be making a horrendous mistake by saying I “believe in Jesus.” Fair enough.
However, I think that I think about this issue more than most atheists. That doesn’t make me right, obviously. But it does mean that those (atheists and believers alike) who spend all their “philosophical” time tracing out the implications of their answer to that big question, are putting the cart before the horse. For example, if it turns out that there was a God, then the implications of evolutionary biology wouldn’t be so awesome. The strictly positive statements would still be true, of course, but they could no longer really say, “There is no ‘purpose’ or ‘goal’ behind evolution.” That would be easily seen as a bold conjecture on their part, because it would mean they were sure the (known) God was not acting slyly through some undetected mechanism to influence evolution, if only from establishing the initial state of the universe juuuuuust right.
And as I say, the danger holds for the evangelicals, too. It would be disastrous to structure your life around this one guy, if it turned out he was a fraud (or insane). So I encourage Christians reading this to think more deeply about why they believe. A true believer should relish this task, not shrink from it for fear of what he might realize. (Because of this, I don’t worry that my son might become an atheist–maybe just to spite me. That’s fine, I was an atheist too for a few years. The LORD can deal with that sort of thing. He’s fairly clever, and that whole omnipotence thing doesn’t trip Him up either.)
Last point: If you do want to ponder the implications of the possible existence of (the Christian) God, then you’re in luck: He allegedly wrote a book, all about Himself. They call it the Holy Bible (a fairly presumptuous title, eh? Who is this guy, some kind of guru?) They market it as a history book, but it just as well could have been sold as an autobiography: God: My Years With the Talking Monkeys.
My Prediction Coming True Moments After I Make It
In the previous post, I said it would not be hard to imagine the government taxing the heck out of hedge funds that hadn’t taken a dime of bailout money. Well, von Pepe just sent me this NYT article that contains the following ominous paragraphs:
WASHINGTON — The Obama administration will call for increased oversight of executive pay at all banks, Wall Street firms and possibly other companies as part of a sweeping plan to overhaul financial regulation, government officials said.
The outlines of the plan are expected to be unveiled this week in preparation for President Obama’s first foreign summit meeting in early April.
Officials said the proposal would seek a broad new role for the Federal Reserve to oversee large companies, including major hedge funds, whose problems could pose risks to the entire financial system.
Von Pepe’s only comment: “It’s over.”
The U.S. Financial Sector Is Done, for a Decade
So I said in this unusually pessimistic appearance on Scott Horton’s radio show.
This AIG bonus bill has really sealed the deal for me. Suppose you were put in charge of AIG. How would you structure compensation packages to attract the right people who would actually turn the company around? Why, I think you would want low base salaries and bonuses tied to objective measures of performance, which could be quite lucrative depending on what happened with corporate profits.
Well shucks, the government just took that option away from you. Try again.
Now look, I am NOT defending the $165 million as “efficient.” Obviously the people running AIG (and who offered those contracts) didn’t know what they were doing; that’s why they have asked the government for $170 billion so far.
But what I am saying, is that now it will be much harder for not only AIG, but also all other financial institutions, to turnover their employees and retain/attract the right people needed to fix this mess.
As a matter of fact, I imagine the most competent people are jumping ship for other industries en masse now. Now they realize, that even if they succeeded in their difficult task, the government would swoop in and take their earnings.
Seriously, just think about that: Suppose you run a completely private hedge fund, which had no ties to government bailout money. Is it inconceivable that if you made $20 billion shorting U.S. Treasurys, that Uncle Sam would design some special new tax that basically gave them the right to take $19 billion of it from you? And make it realistic: You made $20 billion from “shorting America” while unemployment is 10.4%. You think the public is going to cry foul when the feds take your money?
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