Smallville, er, Hillsdale Adventures: Tales of Murphy When He Had Hair
Aristos (not his Christian name) starts out trying to pay tribute to Alexander Shtromas, a really cool political science professor we both had in Hillsdale College, but his jealousy of me overtakes the post. It’s OK Aristos, let it go. (BTW, if you are in a closet and the feds are searching your house, don’t click the link. I think music kicks in and you have to hit pause on the embedded player to stop it.)
Army Gets Ready for Civil Unrest–in the US of A
Naturally they aren’t billing it the way I have done above, but really, there isn’t much left to the imagination in this article at the Army Times from September 8. The article starts out pleasantly enough:
The 3rd Infantry Division’s 1st Brigade Combat Team has spent 35 of the last 60 months in Iraq patrolling in full battle rattle, helping restore essential services and escorting supply convoys.
Now they’re training for the same mission — with a twist — at home.
Beginning Oct. 1 for 12 months, the 1st BCT will be under the day-to-day control of U.S. Army North, the Army service component of Northern Command, as an on-call federal response force for natural or manmade emergencies and disasters, including terrorist attacks.
Aww, how sweet of them! Rather than bringing freedom and security to Iraqis and Afghans, they’re going to build dams and remove fallen trees. Be all you can be, fellas!
But then the article takes an odd turn, when they elaborate on the new training the Army of One (Quarter Million) is receiving:
In the meantime, they’ll learn new skills, use some of the ones they acquired in the war zone and more than likely will not be shot at while doing any of it.
They may be called upon to help with civil unrest and crowd control or to deal with potentially horrific scenarios such as massive poisoning and chaos in response to a chemical, biological, radiological, nuclear or high-yield explosive, or CBRNE, attack.
Training for homeland scenarios has already begun at Fort Stewart and includes specialty tasks such as knowing how to use the “jaws of life” to extract a person from a mangled vehicle; extra medical training for a CBRNE incident; and working with U.S. Forestry Service experts on how to go in with chainsaws and cut and clear trees to clear a road or area.
The 1st BCT’s soldiers also will learn how to use “the first ever nonlethal package that the Army has fielded,” 1st BCT commander Col. Roger Cloutier said, referring to crowd and traffic control equipment and nonlethal weapons designed to subdue unruly or dangerous individuals without killing them.
“It’s a new modular package of nonlethal capabilities that they’re fielding. They’ve been using pieces of it in Iraq, but this is the first time that these modules were consolidated and this package fielded, and because of this mission we’re undertaking we were the first to get it.”
The package includes equipment to stand up a hasty road block; spike strips for slowing, stopping or controlling traffic; shields and batons; and, beanbag bullets.
Now the funny/sad thing is, I’m sure a lot of regular Joes would read the above and scoff at my paranoia. But c’mon folks, obviously if the United States were to turn into a dictatorship, it wouldn’t happen overnight. But the Bush Administration has been one heckuva good start.
Funny Joel Stein Article on Bailout
Joel Stein is the kind of smarmy writer who is annoying when you happen to like whatever he’s mocking, but who is hilarious when you agree with him. On the bailout he and I are of one mind:
Even though I understand so little about economics that much of my long-term investments are tied up in Costco products, I feel pretty sure that letting Congress give Treasury Secretary Henry Paulson $700 billion to buy super-crappy mortgages is not the right call.
Sure, like any American, when I see a photo on the Internet of an adorable little investment bank and find out it’s at risk of being put to sleep, I want to throw in $2,000 to $3,000 of my own money to adopt it.
(HT2LRC.)
Phew! Don’t Worry Folks, the Politicians Stayed Up Past Midnight to Rob Us Blind
The swagger of these people is astounding. The public is against this 9-to-1 by some measures, such that they pass it literally in the middle of the night on a weekend, and then they have the audacity to pretend that we were worried they couldn’t agree on how to split up $700 billion amongst themselves? Ha ha, I wasn’t worried at all that the deal wouldn’t pass.
Just read these comments:
House Speaker Nancy Pelosi announced the $700 billion accord just after midnight but said it still has to be put on paper.“We’ve still got more to do to finalize it, but I think we’re there,” said Treasury Secretary Henry Paulson, who also participated in the negotiations in the Capitol.
“We worked out everything,” said Sen. Judd Gregg, R-N.H., the chief Senate Republican in the talks.
…
Hours later, when he and others told reporters of the plan in a post-midnight news conference, Reid referred to the sometimes testy nature of the negotiations.“We’ve had a lot of pleasant words,” he said, “and some that haven’t always been pleasant.”
“We’re very pleased with the progress made tonight,” said White House spokesman Tony Fratto. “We appreciate the bipartisan effort to deal with this urgent issue.”
I am getting so cynical about this stuff, now I’m wondering if the whole House Republican thing was a sham too, to give the voters the illusion that their interests were actually considered. This way everybody wins (except taxpayers): The Democrats have cover, since they weren’t the only ones who signed on to this robbery. But the Republicans are OK too, since they can say they were a powerless minority and yet won concessions for the taxpayer.
Oh, and the other benefit to them is, they just extracted $700 billion more from us. Let’s not forget that aspect of the “agreement.”
This farce should be sobering to those who still think we have a democracy in this country–not that there’s anything right with that (to paraphrase Seinfeld).
Bruce Bartlett: Another Fair-Weather Friend of the Free Market, & Commentary on Capital Consumption
Well shoot, just when I thought we had this all locked up from a disinterested academic viewpoint, Bruce Bartlett comes along and endorses the Paulson Plan. He starts out by explaining the fractional reserve system. It doesn’t appear that Bartlett has even considered whether fractional reserve banking is a good idea; he just takes it as a given, to explain why banks are more fragile than other industries and so need a bailout.
But then he gives us these hysterical warnings:
There are, of course, policies in place today that didn’t exist in 1929 that make another Great Depression unlikely. (The most important is federal deposit insurance for the vast bulk of deposits.) But there is still a great danger that, if the financial sector becomes overloaded with assets falling in value, it could lead to a long period of economic stagnation, such as that suffered by Japan in the 1990s.
One reason for this is that Federal Reserve policy becomes impotent when the financial system simply can’t distribute changes in the money supply throughout the economy.
We’re seeing evidence of this already, as interest rates on Treasury securities fall to very low levels. When this happens, we have what economists call a “liquidity trap” – and it means that the Fed is incapable of stopping a deflation once it gets started.
Bottom line: We’re closer to the precipice than Congress or most of the public understands. Our entire economic system really is at stake – and those treating the bailout plan as just another government spending program are seriously wrong.
Failure of this plan risks another Great Depression. Really.
You can see the fear in Treasury Secretary Henry Paulson’s eyes and in those of Federal Reserve Chairman Ben Bernanke. But they dare not say how critical the situation is – lest it shake confidence and make matters worse.
C’mon Bruce, the reason the Great Depression lasted a decade, and the reason Japan’s economy was in the toilet for so many years, was that the American and Japanese governments prevented adjustments in the structure of production.
I really don’t understand how these people think the world works. In U.S. history up through 1945, all but one of the economic downturns was over within two years. (I am pretty sure that’s right, though I might be forgetting an episode.) Yet the Great Depression arguably lasted over 10 years. At the same time, we all know without doubt that FDR’s New Deal was the most ambitious attempt ever by a US government to wage war against a bad economy.
So I want to conclude that the Great Depression lasted so long because of the New Deal. This fits perfectly with economic theory; if the government and unions prop up wage rates during a deflation, you get massive unemployment. Simple stuff.
Yet those who want to argue that there are just random chaotic forces that suddenly push fragile free markets into sluggishness, and that a strong central government response is needed to correct things: Are you saying that if FDR/Fed had done nothing, then the Great Depression would have lasted, say, 20 years–thus proving that FDR saved the country? And so that means you think these ticking time bombs latent in advanced capitalist economies, were just popping out in two-year bursts throughout US history, and then all of a sudden in 1929 there was a 20-year burst of bad vibes? And now, 79 years later, we just got hit with another random burst of super bad financial vibes?
I am not trying to be flippant. The people warning of a credit collapse have a point: It really would be awful for a while if the banking system (with check clearinghouses etc.) actually shut down.
But no matter how bad it was, if the politicians would for once just stand back and watch entrepreneurs make small improvements here and there on the edges, after 12 months things would be back on solid footing. The recession would be over, workers would be in the appropriate jobs, and growth could resume.
But instead of that, the government is going to do everything in its power to cajole Americans to continue consuming more than they produce. Financially, this of course translates into more debt held by Americans (whether privately or from government IOUs). Physically, it will manifest itself in a shrinking of the capital structure. Not enough real resources each year will go into reproducing the machines and other equipment being worn out over the course of the year.
Because resource flows can be rearranged, for a while this capital consumption need not restrict total consumption. The same amount of cereal boxes and F-150s can crank out of US factories every month, for a while. But “higher up” in the production structure, the necessary replacement investment is not occurring. So at some point, even if they are willing to say, “To heck with the future!” it will be technologically impossible to maintain the current level of output of consumer goods.
On top of the politicians’ efforts to prevent Americans from rationally responding, and curtailing their consumption during these hard times, there is now another problem: The politicians are directly interfering with the financial markets. Thus the market prices that guide entrepreneurs are going to be a lot fuzzier; their information content will be lower, if you will.
We’re heading for another Great Depression, all right, but it’s not because of “the liquidity trap.” No, it will be due to the “Obamanomics Trap” or the “Palinomics Trap.”
The Nonsense "Free Market" House Republican Alternative
The House Republicans valiantly stood up and delayed the Paulson Plan, but their suggested alternatives make no sense. First, they want to lower the capital gains tax. That is good in general, but as some have pointed out, it doesn’t really help firms unload their MBS–they obviously will be selling them at a loss, and so taking away the capital gains tax shouldn’t make them more likely to sell.
On the other hand, an outside buyer would buy the assets for a higher price, if he wouldn’t be taxed on the capital gain if the assets recovered in a few years.
But putting the capital gains tax cut aside, the main proposal was for the federal government to set up an insurance program, rather than buying the bad assets outright. This made no sense to me. If the plan is voluntary, then why isn’t the government just replicating the credit default swap market? And if the plan is mandatory, then how is the government going to determine premiums? And how much coverage does each firm have to buy?
The whole thing is completely ridiculous. You could get an outcome where you’re trying to set up a fire insurance company that includes only houses that are already on fire. Or, you could get an outcome where everyone pays a fixed premium, and then scrambles to get their hands on assets most likely to default, because the government insurance indemnifies for above-market prices. So for a while, the market price of an MBS more likely to default could be higher than a safer MBS.
I admit I haven’t actually worked out a game theoretic model to prove that this could happen, but I think it could. Imagine there are two identical buildings, except one is located next to a fireworks factory. They normally would sell for $100,000 each. But now the government mandates that every building owner pays $5,000 annually for fire insurance, regardless of the value of your building, and if your building burns down you get a check for $500,000. I think in the new equilibrium, the price of the building next to the fireworks factory would be much higher than the other building.
In the same article linked above, they quote economist Robert Waldmann who wrote:
[T]he problem is the price, in this case the premium. If it is vastly less than the probability of default, the House Republicans have found a way to throw money at bankers and financial arsonists instead of just bankers. If it is actuarily fair, it will force liquidity constrained firms to unload the securities — they could wait and hope for no default, but they can’t pay actuarily fair premiums. When you are insolvent, risk, variance, double or nothing is your only hope of survival. Thus aside from the contribution to financial arson (which I guess will be huge) the plan would also force distressed banks etc to unload mortgage backed securities at fire-sale prices. Now I don’t think the current problem is mainly due to systemic margin calls due to mark to market and capital requirements, but making that problem vastly worse would hasten the collapse of the US financial system even without financial arson.
Why is it that our politicians keep proposing plans that an actual economist can explode with 5 minutes of critical thinking? Does that bother you?
Is Bernanke Going to Inflate or Not?
That has been the question in my mind for the last year. As I will explain in more detail in a future post, Bernanke has been “sterilizing” his liquidity injections to Wall Street as best he could, thus far. Briefly, what Bernanke injects as reserves by lending to a bank, he takes out of the system by selling off some of the Fed’s holdings of Treasury debt. So when you see stories in the WSJ talking about injections of $75 billion etc., that’s at best like a revolving line of credit; you wouldn’t add up all those headlines to get a cumulative increase in the money supply. Now because Bernanke has been sterilizing all along, the monetary base grew quite modestly indeed.
So it seemed that Bernanke was following the political necessity of doing something to bail out Wall Street since September 2007, but that he was putting his macroeconomics skills to use in trying to minimize the damage to the dollar. The question then became, “What happens when the Fed has drained its balance sheet, and has nothing left with which to sterilize its injections to troubled banks? Will Bernanke cut them off, or will he allow the monetary base to grow like gangbusters?”
My vote had been Door #2. And this latest figure (HT2LRC) reinforces my view (click to enlarge):
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