Monday, October 06, 2008

Policy failures

This entire episode should be looked at as a demonstration of how overconfidence in knowledge leads to inherently bad decisions.

The "bailout" package was hailed by our political leaders as "action" in the face of a crises. Unfortunately, the market knows better and has said something like the following: "you should have studied how the bailout plan would effect aggregate demand and thus correct the underlying problems in this economy". A $700 Billion asset swap does not do that.

So the U.S. political leaders have been exposed as ordinary people on a sinking ship, panicking instead of thinking about the underlying problem and the best course of action to take in order to maximize surviveability. It also helps if one is prepared for this sort of outcome or has experience with same. It is truly unfortunate that Ben Bernanke, a celebrated student of the depression, does not see that the issue is a rapid decline of aggregate demand.

Deficit spending must happen statim. Tax breaks, infrastructure projects, etc. The markets are going to remain locked up until the only player left can get the wheels moving again. Remember, dear readers, the ability of the U.S. Government to expand the budget deficit (with fiat currency) is NOT CONSTRAINED by tax revenue. We should simply declare a moratorium on income taxes for an indefinite period. The Fed should do their part as well. Equity markets have lost trillions in (as yet unrealized) value. House prices have fallen by over 20% in some areas.

Stop treating symptoms as they arise and strike at the cause.

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