TARP update and a few afterthoughts on the crisis of ‘08

There has been a flurry of activity lately surrounding TARP. You remember “TARP” don’t you? The legislation that was passed with great debate and outrage in early October 2008. It was derided as a massive “bank bailout” sure to cost the taxpayers hundreds of billions. Even more important, many politicians, pundits and commentators shouted that in addition to the cost, it wouldn’t work. Not only would TARP fail, but the proper course of action was to do nothing. Mostly Republican and free-market purest voices were heard to repeat, to varying degrees, that such intervention was futile- simply letting events unfold as they may is the only truly prudent course of action. No “bailout” was needed, they said; the system would right itself, they said; we aren’t really facing a complete financial meltdown they argued.

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Brett

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Karl

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Julio

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Chinese Effrontery

Monday’s WSJ brought a front page article that made me LOL at the hypocrisy. The sub-headline was all it took. The article in question is “China’s Blunt Talk for Obama” and the humorous sub-headline “Regulator Says U.S. Policy Puts Global Recovery At Risk as President Arrives in Beijing”. What specifically is so funny? Let me quote:

Who’s Afraid for the Dollar? Part III- Can the Dollar Weaken Anyway?

The first two parts of this series dealt with the reasons the dollar is not about to collapse, but could the dollar weaken anyway? The short answer is a resounding ‘yes’. The dollar’s value will fluctuate and it may even decline fairly significantly in value as a result of all the recent monetary policy. However, hyperinflation is not in the cards, nor is an outright dollar crisis.

Who’s afraid for the dollar? Part II- the Chinese and Reserve Currency Status

So what happens if the Chinese stop buying our debt? Let’s start with a some perspective: China currently owns about 11% of all the outstanding U.S. Treasury notes and agency debt (Fannie, Freddie, etc). While this is a large, significant and growing proportion, it is hardly enough to consider the Chinese our economic masters. Consider that the UK, Cayman Islands, Luxembourg, Belgium and Canada collectively own twice as much as the Chinese. Indeed, Japan alone is still our largest creditor holding a little more than the Chinese.

Keynesian economics wrap up

A few days ago Brett and Julio sparred over Keynesian economics in our Second Great The Long Run Great Debate II. (Not to give a lot away but we’re thinking of having the third as a pay-per-view event in Lagos.) Now lest you think my job in this debate was walking into the ring in a bikini with the title card, you stand corrected. Actually, I thought that was my job but Brett and Julio pointed out that in The First Great The Long Run Great Debate 1.0, Brett did a postmortem q&a. Right. So that duty now befalls me.

The Great Long Run Blog Debate #2: Keynesian Economics

Keynes has been a popular topic lately. By Keynes I mean both John Maynard and his economic theory of government intervention into the free market. To quote wiki:

The Amazon Tax

In these cash-strapped times legislators everywhere are trying to find creative ways to raise revenue. California, for example, is issuing IOUs to help temporarily ease its cash crunch. Lawmakers in both Rhode Island and North Carolina are trying another tactic: they are trying to tax the internet.

Before we pass judgement, however, a little background is in order. Way back in the mid 1990’s, when the nascent internet was just developing “ecommerce” in earnest, Congress decided it was best not to tax the internet so as not to nip in the bud the growth engine that ecommerce was deemed to be. State legislatures were and still are very worried about lost sales tax revenue. If a company has no physical presence in your state, the state can not collect sales taxes from it. So when Amazon ships a book from Washington to Colorado, Colorado can not collect sales tax because Amazon has no presence in CO. Washington does not tax Amazon’s sales (unless in WA) because the shipment to CO is inter-state commerce, protected from tax by the Constitution.

Idiot Revisited: Fisher

A while back, last September 9th to be exact and right before the world really fell apart, I took some flack for calling the Dallas Fed President Richard Fisher the economic idiot of the week. If you don’t recall why, let me help you. As the world was rapidly deflating in a giant credit crunch, Mr. Fisher’s position was described in the Fed’s meeting minutes as

“While the financial system remained fragile and economic growth was sluggish and could weaken further, he saw a greater risk to the economy from upward pressures on inflation.” [Emphasis mine]

A few months later he changed his tune and accepted that the right thing to do during a credit crunch is not tighten credit, but rather expand credit and liquidity. Thankfully, Bernanke already knew this.

I raise this issue again because Mr. Fisher was in the news again today. Bloomberg reported on some of his remarks this week. I’ll quote from Bloomberg’s article (again, emphasis mine):

How to fix the economy

Snopes had a recent expose of this hair brained idea:

For a total cost of 40 Billion you could solve our financial problems. There’s about 40 million people over 50 in the work force. Pay them $1 million apiece severance with the following stipulations.

1) They leave their jobs. Forty million job openings
- Unemployment fixed.

2) They buy NEW American cars. Forty million cars ordered
- Auto Industry fixed.

3) They either buy a house or pay off their mortgage
- Housing Crisis fixed.