Another Good Op-Ed from Bruce Bartlett

I forgot to link to Bruce yesterday, who has a good post on how to treat our current Lawn Dart(TM) injuries, but Andrew Samwick remembered:

Another Good Op-Ed from Bruce Bartlett | Capital Gains and Games: In The New York Post today, Bruce Bartlett makes the case for why trouble in the financial sector merits federal intervention, relying on the particular nature of financial institutions:

The basic problem is that the financial sector faces systemic risk in a way that no other industry does: By its nature, it is a house of cards that can collapse at a moment's notice.

[...]

What prevents this house of cards from falling is confidence: People don't feel compelled to hold all their money in cash under their mattress and the system functions smoothly.

But, should confidence be shaken, the risks are very great indeed.

This is a good article to e-mail your less financially savvy friends to help explain the mess to them.

Comments

[Kato Bernanke]

This is a defense of the proposition that what is Washington's belongs to Washington. If you take a single dollar bill out of your pocket, if you have one, you will see Washington is printed on it.

Now send that dollar bill to Washington.

The dollar is also a faith-based tool. Our foreign creditors are losing faith.

Interest rates are going up.

[Frank Dean]

Why can't economists be a little less like the journalists Prof. DeLong regularly excoriates?

Bartlett's article is a distortion of Bagehot. To balance Bartlett, be sure to remind your friends in your email that Bagehot argues that "Very large loans at very high rates are the best remedy for the worst malady of the money market . . . ."

Bagehot is writing about a liquidity crisis. When the panic subsides, the assets the central bank has advanced loans against go up in value, and all is well.

Bernanke & co. aren't making big loans at high rates--they're buying worthless loans for large amounts of cash. Why? Because this isn't a liquidity crisis, it's a solvency crisis. Lots of real estate loans will not be paid back.

The monetary authority should not be trying to fix a solvency crisis. Fiscal policy needs to be used in concert with monetary policy to inflate. This is what will prevent 1990s-Japan-style economic stagnation. Bernanke and Paulson are inflating by giving money to their friends. The public, shockingly enough, doesn't think this is fair or sensible, given that incompetence and corruption is being rewarded.

Institutions that make stupid loans should go bankrupt in an orderly fashion, with the Fed imposing a settlement on the bondholders. If more economic stimulus is needed, give more cash to everyone, not just Paulson's buddies on Wall St.

Do establishment economists really believe that pretending it's a liquidity crisis rather than a solvency crisis is effective policy? Did it work for the Bank of Japan?

Solving the problem you wish you had rather than the problem you actually have usually doesn't work. At least Prof Delong is willing to advance a serious solution (nationalization) to the actual problem.

[Bruce Bartlett]

I think we have more of a liquidity problem than Frank Dean realizses. Just look at the rates on Treasuries. When they get this low we have a liquidity trap that makes it very hard for the Fed to provide liquidity to the financial system.