Paulson Flips Again On Whether He Needs the Remaining $350 Billion In TARP
Now I didn’t specify in the title of this post whether it means Paulson wants the money or not; do you remember? I know it’s a tough question since I think Paulson has literally flipped twice in the past two weeks. But as of right now, Paulson claims he doesn’t need to tap into the other half of the TARP. Now what would be funny is if he comes back and says, “Yeah, of course I want to spend another $350 billion. But I meant I wouldn’t be spending it on troubled asset relief.”
Mankiw Wants a Nobel Too So Starts Writing Like Krugman
Look at his latest blog post calling for the Fed to explicitly abandon price stability (HT2EPJ). In his words:
[E]ven if the Fed cannot reduce nominal interest rates, it can reduce real interest rates by committing to a modest amount of inflation.
Some would view this as a radical change in monetary policy. In some ways, it would be. Given how weak the economy is, however, a bit of radicalism may be called for. I am more comfortable having the Fed commit itself to modest inflation than having the federal government commit itself to a trillion dollars of new spending. The more we can rely on monetary rather than fiscal policy to return the economy to full employment and sustainable growth, the better off future generations of taxpayers will be.
The abandonment of “price stability” would be the modern equivalent of Roosevelt’s abandonment of the gold standard. Of all the things that Roosevelt did to get the economy out of the Depression, jettisoning the gold standard was the most successful. Today, monetary policy is fettered not by gold but by fear of inflation. Perhaps it is time is get over that fear, at least for a while. As Jim Tobin said in an earlier era, there are worse things than inflation, and we have them.
I think all there is to say, is a line from a childish MTV show: “No Beavis, that would suck.”
Old School Video Explains the Joys of Inflation
This 10-minute video (HT2LRC) could be a documentary on That Which Is Seen.
Fed Slashes and Promises to Make It Stick: Let’s See if Krugman Is Right
The Fed cut the target today down to “0 to 0.25%” and “made an explicit commitment to keeping official interest rates near rock bottom for an extended period.” This is exactly what Paul Krugman has recommended. So let’s see if it works.
My point here is that for every period where the standard “cut rates and spend a lot of borrowed money” approaches failed miserably, the Keynesians always say, “It was too little, too late.”
For example, Paul Krugman amazingly describes the Bush Administration response to all this as an example of a government too constrained by free-market ideology to actively rescue the markets. (I’m not going to bother digging up cites; I hope I didn’t shock you by claiming that he said that.)
My prediction is that the economy will still be in the john come summer. And Krugman will still be saying, “We need to take the gloves off and really stimulate this economy! Man I can’t believe how screwed up the free market can get sometimes.”
Oh, one last thing: Those who keep saying that the humungous base injections are nothing to worry about, because the wise Bernanke will suck those reserves out once the economy picks up the slack–what do you say now? Is Bernanke going to invent a way to suck out $450 billion in base money without raising the target above 0.25%?
Hayek Tells Bill Buckley That Even Keynes Was Afraid of the Keynesians
Last month Bob Roddis caused a stir when he made available the audio recording of Hayek’s 1975 “Meet the Press” appearance.
Well Roddis has done it again. He has provided me with this recording (mp3) of Hayek on Bill Buckley’s Firing Line. Buckley asks Hayek about the popularity of Keynesianism, if (as Hayek claimed) it was so “manifestly ill-adviiiiised” (picture Buckley’s scary eye rolling).
Let me map what Hayek says, because it gets a little tricky in the middle but the ending is amazing. Hayek explains that in Great Britain during World War I, the pound was cut loose from gold, leading to large increases in prices and wages. Then after the war, the British government wanted to return to pre-war parity. Prices generally came down, but nominal wage rates remained high. Thus, workers saw a huge increase in their real wages because of the efforts at deflation (needed to go back on the gold standard at the old parity).
So, in order to prevent widespread unemployment (i.e. allow British workers to be competitive with the rest of the world), they either had to lower nominal wages or raise prices again. Hayek explains that the first option was politically unpopular, and also was–according to a complicated argument from Keynes’ General Theory–not even effective. (I.e. Keynes argued in his book that even if all nominal wages fell, that might end up reducing overall prices and hence not lead to a fall in real wages.)
But now the awesome part. Hayek says that Keynes’ theory was, at best, appropriate for the specific deflationary environment of the 1930s. After the war had passed, the great danger was inflation. And–according to Hayek–Keynes himself agreed with this, and even promised to rein in his foolish disciples if they ever got the crazy notion to advocate pump-priming in an inflationary environment. But alas, Keynes died six months after pledging this to Hayek.
As I said, Hayek sounds like he’s rambling for a bit, but try to stay focused because the end of the clip is really incredible.
What Was Madoff’s Exit Strategy?
Econophile asks some good questions:
Ponzi schemes are fascinating. Why would anyone do one unless they have a plane to Rio waiting on the runway? They know that they have to get off the train at some point and then it’s all over.
Why did Bernie Madoff do it?
$50 billion is real money. Aside from the question of what he did with the money, why did he think he’d get away with it and why did it last so long?
Econophile doesn’t really answer these questions, but he does manage to blame the Fed and government. My kind of guy.
Dan Mitchell Blows Up Keynesianism
Yeah yeah, this video (HT2 Pete Boettke) from Dan Mitchell is a bit elementary, but it’s not his fault that our society is enthralled by a ridiculous idea. Incidentally, the defender of Keynesianism would argue that Hoover and FDR didn’t do it right; they shouldn’t have raised taxes, just spending. And with Japan, the response is that it was too little, too late.
More Problems in Paulson’s Explanation of the Lehman Collapse
Robert Wenzel at EPJ explains the latest twist in the Lehman story: Even though Paulson & Co. first said they didn’t have legal authority to help Lehman, and then said they never once considered putting taxpayer money at risk for the company, it turns out the Fed lent a Lehman subsidiary $87 billion after Lehman had failed. Click on the link above for more details. You know, I’m really starting to wonder whether Paulson’s pants are on fire.
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