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The bill being debated by Congress does not appear to be a good bill. Frankly, I do not know whether I support it. Many posters (and many economists) say the bailout is flawed or unnecessary. Yet what bothers me is the knee-jerkism of much of the liberal blogosphere.

Kos has railed against the bill, but the strongest opposition has come from OpenLeft, where David Sirota, Chris Bowers and Matt Stoller have viciously attacked the bill and its supporters (Stoller even threatening to ban supporters of the bill from the site, claiming they were being too self-righteous).

When asked about alternatives, many bring up Sweden's nationalization, while others call for directly purchasing bad mortgages or simply waiting it out for a few weeks.

They have some support from some economists. Dean Baker, who had earlier supported it, is now part of what Stoller calls the "hell no" caucus.

At this point I cannot identify a single good reason to do the bailout.

The basic argument for the bailout is that the banks are filled with so much bad debt that the banks can't trust each other to repay loans. This creates a situation in which the system of payments breaks down. That would mean that we cannot use our ATMs or credit cards or cash checks.

That is a very frightening scenario, but this is not where things end. The Federal Reserve Board would surely step in and take over the major money center banks so that the system of payments would begin functioning again. The Fed was prepared to take over the major banks back in the 80s when bad debt to developing countries threatened to make them insolvent. It is inconceivable that it has not made similar preparations in the current crisis.

In other words, the worst case scenario is that we have an extremely scary day in which the markets freeze for a few hours. Then the Fed steps in and takes over the major banks. The system of payments continues to operate exactly as before, but the bank executives are out of their jobs and the bank shareholders have likely lost most of their money. In other words, the banks have a gun pointed to their heads and are threatening to pull the trigger unless we hand them $700 billion.

...

For the record, the restrictions on executive pay and the commitment to give the taxpayers equity in banks in exchange for buying bad assets are jokes. These provisions are sops to provide cover. They are not written in ways to be binding. (And Congress knows how to write binding rules.)

Finally, the bailout absolutely can make things worse. We are going to be in a serious recession because of the collapse of the housing bubble. We will need effective stimulus measures to boost the economy and keep the recession from getting worse.

However, the $700 billion outlay on the bailout is likely to be used as an argument against effective stimulus. We have already seen voices like the Washington Post and the Wall Street funded Peterson Foundation arguing that the government will have to make serious cutbacks because of the bailout.

While their argument is wrong, these are powerful voices in national debates. If the bailout proves to be an obstacle to effective stimulus in future months and years, then the bailout could lead to exactly the sort of prolonged economic downturn that its proponents claim it is intended to prevent.

In short, the bailout rewards some of the richest people in the country for their incompetence. It provides little obvious economic benefit and could lead to long-term harm. That looks like a pretty bad deal.

And Nouriel Roubini of NYU says...

... the Treasury plan is a disgrace: a bailout of reckless bankers, lenders and investors that provides little direct debt relief to borrowers and financially stressed households and that will come at a very high cost to the US taxpayer. And the plan does nothing to resolve the severe stress in money markets and interbank markets that are now close to a systemic meltdown. It is pathetic that Congress did not consult any of the many professional economists that have presented - many on the RGE Monitor Finance blog forum - alternative plans that were more fair and efficient and less costly ways to resolve this crisis. This is again a case of privatizing the gains and socializing the losses; a bailout and socialism for the rich, the well-connected and Wall Street. And it is a scandal that even Congressional Democrats have fallen for this Treasury scam that does little to resolve the debt burden of millions of distressed home owners.

These are not the only progressive voices, however.

Paul Krugman has cautiously embraced the bill:

The bailout plan released yesterday is a lot better than the proposal Henry Paulson first put out — sufficiently so to be worth passing. But it’s not what you’d actually call a good plan, and it won’t end the crisis. The odds are that the next president will have to deal with some major financial emergencies.

In response to Roubini, says Krugman:

Nouriel Roubini has a characteristically scathing takedown of the Paulson plan, and here’s the thing: language aside, his economic analysis is similar to mine. The fundamental problem in the financial system is too little capital; bizarrely, the Treasury chose not to address that problem directly, by (say) purchasing preferred shares in financial institutions. Instead, the plan is premised on the belief that toxic mortgage-related waste is underpriced, and that the Treasury can recapitalize banks on the cheap by fixing the markets’ error.

The Dodd-Frank changes make the plan less awful, mainly by creating an equity stake. Essentially, this makes it possible for the plan to do the right thing through the back door: use toxic-waste purchases to acquire equity, and hence inject capital after all. Also, the oversight means that Treasury can be prevented from making the plan a pure gift to financial evildoers. But it’s still not a good plan.

On the other hand, there’s no prospect of enacting an actually good plan any time soon. Bush is still sitting in the White House; and anyway, selling voters on large-scale stock purchases would be tough, especially given the cynical attacks sure to come from the right. And the financial crisis is all too real.

So is it better to have no plan than a deeply flawed plan? If it was the original Paulson plan, no plan is better. Dodd-Frank-Paulson may just cross the line — let’s see what details we have if and when agreement is reached.

If the plan looks not-awful enough, I’ll be pro. But I won’t be cheering — I’ll be holding my nose.

Today, in response to several questions, Krugman posted the following:

I’m being asked two big questions about this thing: (1) Was it really necessary? (2) Shouldn’t Dems have tossed the whole Paulson approach out the window and done something completely different?

On (1), the answer is yes. It’s true that some parts of the real economy are doing OK even in the face of financial disruption; big companies can still sell bonds (and have lots of cash on hand), qualifying home buyers can still get Fannie-Freddie mortgages, and so on. But commercial paper, which is important to a lot of businesses, is in trouble, and I’m hearing anecdotes about reduced credit lines causing smaller businesses to pull back. Plus there’s a serious chance of a run on the hedge funds, which could make things a lot worse. With the economy already looking like it’s headed into a serious recession by any definition, the risks of doing nothing look too high.

It’s true that we might be able to stagger through with more case-by-case rescues — I think of this as the "two, three, many AIGs" strategy; in fact, we might not be at this point if Paulson hadn’t decided to make an example of Lehman. But right now it’s not even clear who to rescue, and the credit markets are freezing up as you read this (1-month t-bill at 0.04 %, TED spread at 3.5)

On (2), the call is tougher. But putting myself in Barney Frank or Nancy Pelosi’s shoes, I’d look at it this way: the Democrats could start over, with a bailout plan that is, say, centered on purchases of preferred stock and takeovers of failing firms — basically, a plan clearly focused on recapitalizing the financial sector, with nationalization where necessary. That’s what the plan should have looked like.

Maybe such a plan would have passed Congress; and maybe, just maybe Bush would have signed on; Paulson is certainly desperate for a deal.

But such a plan would have had next to no Republican votes — and the Republicans would have demagogued against it full tilt. And the Democratic leadership cannot, cannot, be seen to have sole ownership of this stuff.

So that, I think, is why it had to be done this way. I don’t like it, and I don’t like the plan, but I see the constraints under which Dodd, Frank, Pelosi, and Reid were operating.

Brad Delong had argued for a Swedish-style nationalization (something Krugman also says would have been better), yet he ultimately falls into the "hold your nose and vote yes" caucus.

Hold Your Nose and Vote for Paulson-Dodd-Frank

The Swedish model is better, but doing nothing is like a poke in the eye from a Lawn Dart(TM).

He also agrees with Larry Summers that the plan will ultimately cost far less than $700 billion and should not hobble an Obama administration's priorities.

How Much Will This Cost? How Does This Constrain the Policy of an Obama-Biden Administration?

Larry Summers's answers are "not much" and "not at all." I agree:

Lawrence Summers - Taxpayers can still benefit from a bail-out: The American experience with financial support programmes is somewhat encouraging. The Chrysler bail-out, President Bill Clinton’s emergency loans to Mexico, and the Depression-era support programmes for housing and financial sectors all ultimately made profits for taxpayers. While the savings and loan bail-out through the Resolution Trust Corporation was costly, this reflected enormous losses in excess of the capacity of federal deposit insurance programmes. The head of the FDIC has offered assurances that nothing similar will be necessary this time. It is impossible to predict the ultimate cost to the Treasury of the bail-out programme and of the other guarantee commitments that financial authorities have – this will depend primarily on the economy as well as the quality of execution and oversight. But it is very unlikely to approach $700bn and will be spread over a number of years....

   [T]he usual concern about government budget deficits is that the need for government bonds to be held by investors will crowd out other, more productive, investments.... To the extent that the government purchases assets such as mortgage-backed securities with increased issuance of government debt, there is no such effect.

   Third, since Keynes we have recognised that it is appropriate to allow government deficits to rise as the economy turns down if there is also a commitment to reduce deficits in good times.... [T]he US made a serious error in allowing deficits to rise over the last eight years. But it would be compounding this error to override what economists call "automatic stabilisers" by seeking to reduce deficits in the near term. Indeed, in the current circumstances the case for fiscal stimulus – policy actions that increase short-term deficits – is stronger than at any time in my professional lifetime. Unemployment is now almost certain to increase... to the highest levels observed in a generation. Monetary policy has very little scope.... [E]xperience around the world with economic downturns caused by financial distress suggests that while they are of uncertain depth, they are almost always of long duration.... The more people who are unemployed the more desirable it is that government takes steps to put them back to work by investing in infrastructure, energy or simply through tax cuts that allow families to avoid cutting back on their spending....

We still must address issues of entitlements and fiscal sustainability.... [T]he worst possible actions... would be steps that have relatively modest budget impacts in the short run but that cut taxes or increase spending by growing amounts over time.... The best measures would be those that represent short-run investments that will pay back to the government over time or those that are packaged with longer-term actions to improve the budget. Examples would include investments in healthcare restructuring or steps to enable states and localities to accelerate, or at least not slow down, their investments...

What's my point? Economics is an art, not a science. Ask three economists a question and you'll get three different answers.

I honestly don't know whether we should enact the bailout -- both Roubini and Baker make good points, but I don't think this will end up costing anywhere near $700 billion. Although I do worry that, even if this shouldn't hobble an Obama administration, opponents of spending may well (as Baker points out) argue against spending anyway.

Ultimately, however, my main argument is against the knives and pitchforks. Several good progressives DO think a bailout is necessary and that this is better than doing nothing. Others disagree, but its foolish to cherry-pick, declare that only those who embrace your views qualify, and then rail against those who support the bill as backstabbers and enablers. There are plenty of people acting in good faith -- they may be wrong, but the idea that everyone voting for this is selling out to corporate donors is knee-jerk reductionism.

Again, I'm an agnostic on the bill. But I'm willing to wait and see how this pans out.

Originally posted to liberalpragmatist on Mon Sep 29, 2008 at 09:36 AM PDT.

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Comment Preferences

  •  Fine, Krugman and Delong can pay for it. n/t (1+ / 0-)
    Recommended by:
    EastCoastShock
    •  What part of Krugman's analysis is wrong? (9+ / 0-)

      Do you quarrel with anything he says about the difficulty of getting a Democratic-written bailout bill past the roadblock Republicans and George W. Bush's veto pen?

      Do you doubt the possibility of a genuine financial crisis as more giant institutions collapse every week?

      •  What I doubt (0+ / 0-)

        is that this bailout does anything to solve the crisis that those demanding it claimed just two weeks ago did not exist.

      •  My thoughts (1+ / 0-)
        Recommended by:
        corvo

        If the Democratic leadership is so convinced of the viability of the bailout, then they should have pursued Krugman's "best option" plan.  Congress holds the cards in this situation.  Certainly Paulson would have accepted the plan out of desperation, if nothing else.

        The fact that they have not indicates to me that they do not believe it has a good chance of working.  This does not surprise me; these securities are not worth the paper they are printed on.  If the securities had any worth at all, they would have been bought by the private sector already.  This stuff is so toxic that the firms that hold them cannot find a way to dump them off their books.

        Instead, they are trying to tie the House GOP to Paulson's shitty plan as well, so it cannot be seen as exclusively a Bush and Congressional Democrat plan.  The anchor will drown them both.  It is a slick political move.  It is not good economic policy.

        Any bailout of this size will devastate our currency.  By extension, inflation will increase along with trade deficits and, of course, the budget deficit.  Then we can talk about having a real economic crisis on our hands.

        McCain * Poverty First

        by EastCoastShock on Mon Sep 29, 2008 at 10:15:43 AM PDT

        [ Parent ]

    •  Everyone will pay if the credit markets fail (8+ / 0-)

      Forget expansion for small business, large business too.
      Forget stopping the bank failures.  More day by day.
      Forget retirement for the Boomers--work until you are 70.
      Forget universal health care because tax revenues would nosedive with the rise in unemployment.

      Just a few of the things to look forward to.

      John McCain--he's not who you think he is.

      by Mimikatz on Mon Sep 29, 2008 at 09:55:50 AM PDT

      [ Parent ]

  •  Krugman likes to get on TV (1+ / 0-)
    Recommended by:
    corvo

    He has to stay on the left but he will not anger his corporate masters.

  •  I'm in the "hold your nose" camp (11+ / 0-)

    But I know where the blame should be squarely directed -- on the people who caused this in the first place.

    The Obama/Biden Inaugural -- the exact moment when the world goes from gray to colorful.

    by alkatt on Mon Sep 29, 2008 at 09:40:22 AM PDT

  •  I hate your headline, but thanks ... (9+ / 0-)

    ...for including excerpts and links to several people (who disagree with each other) that progressives should be looking to for advice on this matter.

    I am an anti-imperialist. I am opposed to having the eagle put its talons on any other land. -- Mark Twain

    by Meteor Blades on Mon Sep 29, 2008 at 09:44:23 AM PDT

  •  so does Warren Buffet. (3+ / 0-)

    that's what sold me on it.  When there's a question about Wall Street, trust the guy who's

    1. In it for the money.
    1. Cares at least a little bit about regular people.

    He also has purchased $5Billion worth of Goldman Sachs stock.


    Gentlemen, you can't fight in here! This is the War Room! - President Merkin Muffley

    by AlyoshaKaramazov on Mon Sep 29, 2008 at 09:45:52 AM PDT

    •  I gotta say (2+ / 0-)
      Recommended by:
      Catte Nappe, llamaRCA

      since I don't understand macroeconomics, and I don't have the time in my life or the space in my brain or the inclination in my personality to study it, I'm simply going to sit down behind Warren Buffett and let him be my guide.

      If Warren Buffett thinks shoring up the existing framework is the first step in the way forward, then that's what I'm going with too.

  •  The problem with Stoller's plan (3+ / 0-)
    Recommended by:
    Bronxist, Drew J Jones, flahawkfan

    is that bailing them out "one by one" could very well cost more than $700 billion.  Bailing out AIG alone was, what? $85 billion?  

    evstatus.com - Status of the Electoral College

    by FleetAdmiralJ on Mon Sep 29, 2008 at 09:46:38 AM PDT

    •  Stoller (3+ / 0-)
      Recommended by:
      ClaudeB, FleetAdmiralJ, lalo456987

      Math is for communists, as you know, so we don't do it in 'Murka.  That seems to be the consensus at OpenLeft right now.

      Why people are taking the macroeconomic analysis from people like Stoller is Sirota is beyond me.

      And it's not even that I necessarily disagree with them, even though I find myself leaning Krugman's way.  It's that people are treating these clowns as being somehow equivalent to the likes of Krugman and DeLong.

      "Words ought to be a little wild for they are the assault of thought on the unthinking." - John Maynard Keynes

      by Drew J Jones on Mon Sep 29, 2008 at 09:54:41 AM PDT

      [ Parent ]

  •  Thank you. n/t (1+ / 0-)
    Recommended by:
    Shhs
  •  Good job, (3+ / 0-)

    I just quoted some of the same people on my blog including Krugman and Delong.  

    Doing nothing is not an option. There will always be politics. I think that the Dems have done what they needed to in moderating the initial disastrous bill proposed by Paulson.  

    IMO, Krugman is right.

  •  Jared Bernstein supports a yes vote too (3+ / 0-)
    Recommended by:
    ClaudeB, spherulitic, NY brit expat

    On Politico's Arena.  He says "yea but not yay!"  Same idea as Krugman--it isn't all good, but the situation in the commercial credit markets is dire and there really wasn't time to do something else from scratch.

    But there will be in January after the Inauguration.  Passing the bailout will make it much easier to raise taxes on the top two brackets--and how about a new 50% bracket for people making over $1 million in AGI?  End carried interest for the hedge fund industry, drop the 15% dividend tax rate for people who make over $500,000.  Lots of chances to get that money back and fund infrastructure projects and other measures to put people back to work.  But if the Dems let the bailout go and the market drop 1000 points, they would not have the cred to do any of those measures.

    John McCain--he's not who you think he is.

    by Mimikatz on Mon Sep 29, 2008 at 09:52:56 AM PDT

    •  Wealthy tax increases (0+ / 0-)

      That's an interesting point.  Passing this bailout now will likely make it easier politically for Obama to pass his tax plan come next year, if only because the American people may feel that the wealthy should be punished for the massive Wall Street bailout.

      There are enough respected economists on the left who are in the "better than nothing" crowd that I think I'm also reluctantly for it.  Although I won't be upset if it doesn't pass.

  •  no one knows "how much it will end up costing" (3+ / 0-)
    Recommended by:
    corvo, llamaRCA, NY brit expat

    the Treasury Department gets to decide what prices are acceptable to buy these crap assets. They also get to figure out how much equity is reasonable to ask for in return.

    So Paulson can buy up these assets at hugely inflated prices, and not ask for any equity at all, or only a pittance. Congress cannot gainsay him; the bill only requires the Treasury Secretary to publish "guidelines" for setting prices. So much for "oversight"!

    Krugman, et. al. grudgingly support the bailout on the premise that equity warrants will be obtained to mitigate the risk to the taxpayer. But that provision can be circumvented. Which is the problem.

    I have also not seen any explanation why this will solve the underlying problems with the economy. Jerome a Paris, among others, has argued that the problem is not just with the mortgages, but with home values, and that infrastructure investment makes more sense. Will someone explain to me why, if we give $700 billion (or $250 billion, or whatever) to the same people who caused this mess, we won't be in the same situation six months from now?

    This is trickle-down economics, throwing good money after bad.

    Any bill that Bush willingly accepts is a bill that he wants. If he has the slightest problem with it, he won't sign it. And he's happy with this bill, which should give us all pause.

    •  More bad mortgage debt is not being created. (1+ / 0-)
      Recommended by:
      limpidglass

      Bad mortgages aren't being written and bundled and sold anymore.  The crises now are a downstream issue from that.  That is my understanding anyway.

      "It's funny that a comment like that was kinda made to ... I don't know, you know ... reporters." Barbie Spice

      by llamaRCA on Mon Sep 29, 2008 at 10:00:38 AM PDT

      [ Parent ]

      •  the reason the banks won't loan to each other (2+ / 0-)
        Recommended by:
        corvo, llamaRCA

        is because of these "mortgage backed securities", which are estimated to be worth in the hundreds of trillions, though no one knows their true worth.

        If you're an ordinary person with real collateral, you can get a loan. But if you're a big bank, you can't get credit from another big bank because no one is really sure how much those securities you have on your books are worth.

        This bailout would do nothing to help that problem. Even a trillion dollars would be a drop in the bucket, especially if the Treasury were to buy up these securities at above-market value.

        The problem, as I understand it, is twofold. First, these securities may be grossly overvalued, and the only remedy for that is to figure out how much they're really worth.

        Second, the mortgages that are underlying these securities, and the values of the homes they're written on, are not remedied by this bailout. To do that would require government assistance directly to homeowners, to help them pay off their mortgages in a reasonable fashion and increase the values of their homes.

        This bailout is the equivalent of morphine--it soothes the pain, for a little while, but does nothing to treat the underlying disease.

        My guess--and this is just a guess--is that Paulson and friends are literally going to take the money and run when the system crashes. They're not going to bother issuing more of these worthless securities, they'll just convert our cash into hard assets--cars, mansions, jewelry, what have you.

        Then when it all comes crashing down, they can live high on the hog.

        •  There are a lot of homeowners (0+ / 0-)

          who were doing fine until their subprime mortgages adjusted their payments to twice their previous amount. The only assistance they require is a mortgage under reasonable terms.

          What's the difference between Vietnam and Iraq? Bush knew how to get out of Vietnam.

          by happy camper on Mon Sep 29, 2008 at 10:40:07 AM PDT

          [ Parent ]

  •  Thanks for the diary. (4+ / 0-)
    Recommended by:
    ClaudeB, Bronxist, slksfca, NY brit expat

    Your user name suits you.

    Please put up a tipjar.

    "It's funny that a comment like that was kinda made to ... I don't know, you know ... reporters." Barbie Spice

    by llamaRCA on Mon Sep 29, 2008 at 09:54:19 AM PDT

  •  Another Thanks (4+ / 0-)
    Recommended by:
    ClaudeB, Catte Nappe, slksfca, Shhs

    And wishing for a tip jar.

    This thing is spinning all over the map, and I don't really know enough to have an opinion.

    I appreciate your pulling out snippets from several places and brining them here for us.

  •  Markets can be irrational places (0+ / 0-)

    Something has to be done, and done now, or the fear will feed upon itself. The Fed is the backstop that everyone looks to and respects for having that ability.

    The problem is that if you let this thing unwind via its own devices, the market is so interconnected now and gerry-rigged because of the shadow financial system that no one knows where you'll end up or when it will have hit bottom. The rule of unintended consequences applies to both scenarios, but has significantly more downside possibilities in a "free market" seen being moved by nothing but fear and flights to safety.

    The Republican Party: Reinventing government, the same way they reinvented New Orleans

    by QuestionableSanity on Mon Sep 29, 2008 at 10:01:24 AM PDT

  •  Thanks for this ... (1+ / 0-)
    Recommended by:
    ClaudeB

    you make an excellent point about economics not being a science (although I am uncertain whether it is an art, as all economics is essentially ideological). I really appreciate the compilation of different perspectives on the bail-out as this is really useful.

    I am not a specialist on Financial Economics and/or Money and Banking so I find it hard to make a coherent analysis without the help of various macroeconomists. What would be helpful is to see what the various versions of Keynesians are saying (i.e., Keynesians, neo-Keynesians and Post-Keynesians) check their analyses to see how they are viewing the situation, and then see what is causing the differences in their positions with respect to the bailout. This would be great if you were an economist and have the time.

    For those who do have the time, there are some whose analyses I would trust more than others (e.g., Paul Davidson, followers of Hyman Minsky at the Levy Institute at Bard http://www.levy.org/, Robert Solow, Paul Krugman).

  •  I vote for voting against bad bills n/t (1+ / 0-)
    Recommended by:
    corvo
  •  This is the same reasoning that supported Iraq (2+ / 0-)
    Recommended by:
    corvo, happy camper

    Democrats knew there was no imminent threat from Iraq. They knew they were being lied to. They knew it was a bad decision. They voted for it anyway because it was a smart political calculation.

    If Democrats had stopped the war, it would have looked bad, and "we" would have "owned" Saddam Hussein. Anything that went wrong at that point, Democrats would have had to take the blame for. So Democrats played along, pretended to be "pressured" into voting against a saner policy, knowing full well that when it turned out to be the disaster they fully expected, they could alsways blame Bush. They knew Repyublicans would end up "owning" the mess.

    This is exactly the same calculation Krugman describes above.

    But such a plan would have had next to no Republican votes — and the Republicans would have demagogued against it full tilt. And the Democratic leadership cannot, cannot, be seen to have sole ownership of this stuff.

    It's about damn time Democrats had the balls to OWN a sound policy. Yes they will be criticized and blamed. They will be anyway. Heck, Republicans are already trying to claim Fannie Mae and Freddie Mac caused the problem.

    It seems to me that all the Democrats are doing here is worsing their reputation as spineless jellyfish who don't really care about taxpayers any more than Republicans do.

  •  love how they win either way (0+ / 0-)

    if economic Armegeddon doesn't occur, they will say it was because of this bailout. There will be no way to confirm this because it might not have occurred anyway.  On the flip side, if Armegeddon does occur---they can say well, we didn't promise this would fix it.  What a crock. As Michael Moore says, "they're stealing the silverware on their way out."  They are getting what they can before the plug is pulled.

    The Paulson Proposal: Dear Congress, Give me $700 billion dollars. Love, Hank

    by livjack on Mon Sep 29, 2008 at 10:31:42 AM PDT

  •  On the TED Spread (0+ / 0-)

    It is true that is is becoming difficult for businesses to borrow in some markets, particularly form banks, and for businesses with any significant risks (like those already holding a fair amount of debt).

    But, note that the Fed is not applying the traditional remedy here of increasing banks non-borrowed reserves in order to recapitalize them. Instead they are trying to attack the problem with more loans, thus more debt, no real increase in capital. The former would be accomplished by trading currency for treasury bonds, thus retiring some of the outstanding debt that taxpayers would otherwise have to repay.

    So why aren't they doing this?

    The best explanation I have seen is from James Hamilton here:

    The Fed could simply lower its target for the fed funds rate, and chase the T-bill rate down to zero, if it wanted.

    What's the downside to that? Here's the next shoe that could drop: the financial dislocations could lead to a perception by global investors that the U.S. is no longer a safe place to be putting their capital, which could add a currency crisis component to the present financial turmoil. Greg Mankiw notes this report:

       China's government moved to calm financial markets Thursday and denied a report that it had ordered mainland banks to curb lending to U.S. banks, a day after rumors of financial stability led to a run on a Hong Kong institution.

    Calm again for the time being, I guess. But if a cut in the fed funds rate leads to rapid dollar depreciation and commodity inflation, it could be pulling the trigger on something even scarier than what we've seen so far.

    I'm not convinced.

    The Fed has long demonstrated a willingness to throw the economy into recession, causing plenty of economic losses and pain to Main Street, whenever they fell this is necessary to squeeze out too high expectations of workers for wage increases.

    But, if we now allow much needed reavaluations of assets to occur, rather than bail them out by having the government over pay for them, it will be congresses fault for allowing the recession to occur?

    It is clear to me, that what this economy needs is not more debt, but for those revaluations to be allowed to occur. That includes some revaluation of the currency.

    What we need is more inflation, and the Fed's unwillingness to allow this is what is causing this recession.

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