32 Comments

1. Jay:

The various macro economic theories are pseudo science. The Fed operates with highly aggregated data which has a lot of noise in it. Many of us who understand economics and know the macro theories and the arrogant clown who have risen to the top of the academic economic gang believe that the Fed will be unable to sanitize the enormous liquidity that they have injected in the system when the economy picks up.
The betting is on hyperinflation and social chaos. If I could convince my wife I would move to Chile or Australia.

Jan 7, 2009 - 7:13 am 2. Ron Hardin:

Cut cap gains taxes to zero, and business taxes as well. Businesses aren’t the ones that pay such taxes anyway.

An government intention to stay out of the way is easily signalled.

Jan 7, 2009 - 7:22 am 3. slade:

The lesson of 2008 is that alot of BSD’s got it wrong. The official line was that risk could be adequately regulated by “market forces” – without legislation to mitigate extremes. Suggestions to the contrary were “misguided” (Summers), but are now described as “we were mistaken” (Greenspan):

It’s hard to tell what’s more striking about Raghuram Rajan’s 2005 presentation at the Kansas City Fed’s Jackson Hole symposium — the way many of the dangers he laid out came to pass, or the way he was attacked, and then discounted. (Read the full story.).

Mr. Rajan came to the conference, dedicated to soon-to-retire Fed Chairman Alan Greenspan, with strong bona fides as a pro market advocate. He and University Chicago colleague Luigi Zingales wrote a 2003 book, “Saving Capitalism from the Capitalists,” that argued at length that free-market capitalism is the best way to organize an economy, and that free financial markets – through their ability to direct funds to where the economy needs them most – are crucial to the system’s success. But when he suggested at Jackson Hole that markets could get it badly wrong sometimes, and that central banks should consider responding to that, he was lambasted as nostalgic for the old days of highly regulated banking.

Fed Governor Donald Kohn – who for years has played the role of providing intellectual ballast to the central bank’s decisions and now serves as its Vice Chairman – said that for central bankers to enact policy’s aimed at stemming risk-taking would “be at odds with the tradition of policy excellence of the person whose era we are examining at this conference.” Former Treasury Secretary Lawrence Summers said the premise of Mr. Rajan’s paper was “misguided.”

“This is a common feature of people when they come across dissent – they want to put you in a box and label you and dismiss you,” says Mr. Zingales. “He is definitely not anti-market. That’s the most mistaken characterization of Raghu.”

The episode suggests one reason that the crisis went unchecked: A dangerous all-or-nothing orthodoxy had come to dominate the policy debate, where one was either for free markets or against them.

Flying blind.

Jan 7, 2009 - 8:15 am 4. 49erDweet:

They missed the boat. The economy is controlled by “consumer confidence”. With its last few gasps the MSM will bugle how well the teensy messiah is doing “governing” his kingdom and fools will begin “spending” again. Short term gain. Long term no lessons learned. Cycle repeated every few years with higher and lower dips. Nobody learns anything. Financial institutions continue to earn big money and pay out obscene bonuses to their key players.

A move to Chile or Australia does look better, but those countries, too, will be affected by the gigantic “elephant” in the room.

Jan 7, 2009 - 8:22 am 5. RWE:

It’s time we realized something.

The Community Reinvestment Act, the whole sale redefining of lending standards, the political pressure on banks that amounted to blackmail, the refusal to impose even modest oversight of Fannie Mae and Freddie Mac – collectively these amounted to a huge, 15-year plus, government-directed, bribe-supported, “economic stimulus package.”

And the answer to bail us out of that mess is more of the same? And without really even fixing the first mess?

The definition of insanity is doing the same thing over an over and expecting a different result each time.

Jan 7, 2009 - 8:49 am 6. Peter Boston:

Why are the people who failed to see the disaster coming any better at forecasting its going?

The addition of accomplished intellectuals like Al Franken, Caroline Kennedy and Biden’s progengy to the august body of the US Senate will surely make this a government of our Betters that will cure all ills of our society and elevate our civilization to unimagined heights.

Jan 7, 2009 - 9:15 am 7. CornFuzed:

An extreme liberal executive, legislative, and judicial mix at this time is a real formula for disaster. Indeed, at this time we certainly have that in the United States as well as the rest of the world controlled by thugs. Very few if any leaders, or movements of consequence, that I see in the world today are interested in the freedom and liberty of the individual. At 70 there are fewer days ahead in my life than there are behind – but a moderately sufficient financial position at zero % interest certainly does not guarantee security.

The sadness is that most of our children, much less our grandchildren have no idea what trillion dollar annual deficits into the foreseeable future means but I fear they are soon to find out. The outright theft at the point of a gun by our government of the productivity of the individual at the trillions of dollar level may be more than can be managed, and may indeed bring about the chaos that Jay foresees.

Although they are now extremely involved in controlling most every aspect of our lives, the fact remains that the state produces virtually nothing and only exists at its current level by theft. The only thing our government can or should produce is security, and it is this security that is being sold as
Henry Louis Mencken (1880-1956) stated: “The whole aim of practical politics is to keep the populace alarmed — and hence clamorous to be led to safety — by menacing it with an endless series of hobgoblins, all of them imaginary.”

We certainly are not being provided the security needed for freedom and liberty. “‘what will tomorrow bring?’ the answer is ‘it depends’.” A wise man once said: ” I d0n’t know what happens when we die, but I believe that good is never forgotten and hope we will see each other again as Jesus taught.” Keep the faith.

Jan 7, 2009 - 9:20 am 8. Charles:

imho the whole botched biz will work out if the feds can redirect capital investments to power & water in that order–but the workout won’t be in a year. More like five years. Much of the federal money will be poured down the toilet however. There won’t be any return on capital. So there’s no great reason to think there will be any growth. There might be stagflation. The banks won’t increase their lending until their loans to capital come back to historical levels. At the slightest sign of uptick in the world economies the price of oil will jack skyward and suck out any surplus from the system.

A commodities trader called me yesterday to get me to buy comodities like oil. wither oil? I don’t know. the buzz is that the world economy won’t pick up until at least the 3-4 q. so right now oil is range bound. will that hold? beats me.

Here’s a spotter on the afgan border up in the Hindu Kush who says the US has learned to blind side AQ and Taliban persistently. That AQ & Taliban are now being taken down in detail. He also has some choice words for the Afghans. The article is posted here and again here

I have seen at least one or two other articles like this in the last month that say the US have got their arms around Taliban and AQ in Afghanistan and are now taking them down in detail.

Jan 7, 2009 - 9:39 am 9. I see nothing improving:

[...] met in December to sort out that things are going to get worse and then better. Their method… sophisticated wild assed guessing.  Well I can do [...]

Jan 7, 2009 - 9:41 am 10. LJM:

While the Keynesian and neoclassical economists got things badly wrong the Austrians and a few others predicted this whole mess pretty well.

Start by looking at the Bailout Reader at Mises.org
Especially look at this Economic Prediction for 2008, written on 2 Jan 08.

Then for the real doom and gloom read what Karl Denninger has to say. Short version, “simplify your lifestyle ‘cuz house prices have a long way to drop until they average 2.5 times average salary.” I for one knew the housing market had turned corrupt when I sold my old house and was told the appraiser could appraise it for any amount I wanted, as long as someone was willing to buy it for that. This was reinforced a few years later, after I gave up waiting for the bubble to pop and bought again, when I talked to the mortgage banks and found the old rule of thumb, that you could multiply your income by 2.5 to find the most house you could afford, was no longer being followed, and that houses were ridiculously expensive because of it.

Jan 7, 2009 - 10:04 am 11. Anton:

I’m with Jay, a trillion and a half dollars injected into the enconomy will only lead to hyperflation. What will the aging Boomers do when their savings evaporate because we have become the Weimar Republic of the 21st century? What seemed like a reasonable nest-egg a few years ago now looks perilously small.

Of course the Govt can always tie the Social Security payments to the skyrocketing cost of living thereby gauranteeing that the “constant state of alarm” that Mencken speaks of is a persistent feature. This will lead to a jump in oil prices as the barrel is priced in dollars, the value of which will drop rapidly.

Hey, at least the value of the trillions that we owe will go down. Heck I might even live long enough to see a billion dollar bill.

Jan 7, 2009 - 10:21 am 12. Staring In Disbelief:

Any of you pessimists that want to move to another country, do us a favor and GO AHEAD. You sound like those crybaby actors wailing about moving to Canada if Bush got re-elected. While the portents are bad they are not yet catastrophic. I mean REALLY catastrophic. 1932 FDR – Wiemar Germany catastrophic. Get a grip. If the Socialist monolith approaching landfall on Jan 20 is so hell bent on the End of Capitalism, why is Obama making so many bipartisan CYA noises instead of calling for the lynching of evil rich “malefactors of wealth”? I’ll tell you why: He (and most of his Democratic Party colleagues) don’t believe their own bullshit anymore than we do. They know that crap is stale and doomed and ultimately going to boomerang on them HUGE if they keep all their loony left promises. It’s great for election time (or was this time) but as for really enacting it? They know deep down they are PARASITES and that while they want their bloodsucking, dead weight body to grow as large as possible, it can’t grow too large or it will KILL THE HOST and then THEY DIE TOO. So they are desperately trying to figure out a way to LOOK like they meant what they said without really, completely DOING what they said. Oh I am sure there will be new, appalling and permanent expansions of government of formerly free market activities, and spending and taxes are going up big time, but the Republic is not yet lost because in the end their actions have to be perceived to have WORKED or it’s lights out in 2010 & 2012. And they won’t work because they can’t work and never have worked.

So go ahead and move to Chile, Australia, Panglossia or wherever the hell you think its better. I’m hanging in, fighting the good fight, with faith that we’ll figure it out.

Jan 7, 2009 - 10:26 am 13. RWE:

Peter Boston: Quite. And I have come to the conclusion that, just as it is morally wrong to let suckers keep their money it is morally wrong to frustrate the “will” of the ignorant majority and their criminally elected electees.

The faster they are allowed to pursue their vision successfully – over our clearly stated but ineffective protests – the faster that The People will realize where the problem is. No deals, no moderation, no meeting them half way. Full speed ahead, damn the torpedoes, rig for collision, keep your power dry and make sure you get to the lifeboats first. And armed.

Jan 7, 2009 - 10:27 am 14. Leo Linbeck III:

The notion of a “stimulus” is kinda weird. If a guy has been out drinking all night, and has fallen asleep to rest and regain sentient function, you should not stimulate him. Let him rest. His body will recover.

And, for God’s sake, please don’t “stimulate” him with a bottle of tequila.

We have been through a raging expansion, a large chunk of which was driven by government “stimulus” (e.g. CRA), and everyone is just damn tired and balance sheets are over-extended. The economy needs to “rest,” which in economic terms means that balance sheets need to be rebuilt. That means layoffs (aka reallocation of human capital), reducing inventories, and savings.

The only way to restore economic growth is through productivity growth. And the best way to increase productivity is through private investment. Encouraging consumption by increasing taxes and/or deficits does not increase productivity growth. It is just distributing Jose Cuervo.

The problem is that you can’t name productivity growth after Robert Byrd, and there’s no groundbreaking or ribbon cutting media ceremony associated with it. Productivity grows through millions of individual investment decisions and organizational changes. No one person or group can control it.

The President does not run the economy. The Fed does not run the economy. Corporate chieftains don’t run the economy. No one runs the economy. The economy runs because of the collective effects of millions of individual decisions. Sure, you can apply fiscal stimulus. But the net effect of such efforts will simply be to slow productivity growth by discouraging or misdirecting private investment. And that will make things worse.

It appears, however, that an ignorant press is prodding ignorant politicians to undertake ignorant policies that will have ignominious effects. And to do so in a big, big hurry. Don’t just take a shot, but drink to whole damn bottle. Now. And eat the worm.

Slower, please.

L3

Jan 7, 2009 - 10:48 am 15. Warsong:

For those who might think that this is all Paranoia, who still have faith that Obama and the Socialist Gang can pull through it, do a search on Dubai, the land of our former Corporations (like Haliburton)…it appears ‘their’ “Elephant in the Room” is in the last stages of Death.

Jan 7, 2009 - 10:52 am 16. Peter Boston:

I have been reading a bit lately about the Roman Republic and trying to get a handle on how and when the Republic turned from a vigorous society with a common vision of the Public Good to the Get Mine society that trampled over generations of republican virtues in a free-for-all rush to the public treasury.

That’s when I noticed that the period from Cincinnatus – statesman, soldier, republican – to the patrician led and very public assault on Scipio Africanus – the man who won the war that could not be won – was 236 years. The time from George Washington to George W. Bush is about 232 years.

The Republic didn’t end then but perhaps the vile left over from the unremitting assault on a man who accomplished much in his administration left the Republic too weak to recover from the body blows that followed. The Republic thrived on the vilification of its enemies and died on the vilification of its countrymen.

A trillion seconds is 31,688 years 269 days.

Jan 7, 2009 - 11:13 am 17. slade:

And eat the worm.

Interesting exchange between Lawrence Kudlow and Barney Frank yesterday. Kudlow queried Frank about the stimulus part of the deal by saying “some economists” question the wisdom. Frank wanted to know who “they” were and Kudlow mentioned Mankiw’s name and someone else. But it is troubling because all surveys I have seen suggest a 50-50 split among economists, which means that the diverse debate that Obama has embraced as integral to his “strategic” decision-making is more monotonic than rhetoric would suggest.

Reality makes an entrance.

Just a drive-by comment from fly-over country, I agree with Staring in Disbelief above that some of the posters here could use a stiff belt to steel their stamina. Or maybe shoveling snow until your arms fall off is a good perspective builder. The history of credit-driven downturns suggests this will be a bad recession, but nobody knows the effect of the proposed “interventions.” Just as a reminder for those of you looking into the abyss, the fact that 40% tax cuts were made part of the package suggests that somebody recognizes there aren’t enough “shovel-ready” projects to absorb the allocated stimulus (see Tyler Cowen over at Marginal Revolution).

The trick “tell” will be the extent to which GWB continues to receive blame. The more we hear his name, the worse it will be.

Jan 7, 2009 - 11:49 am 18. Mark:

RWE writes: “And the answer to bail us out of that mess is more of the same?”

The confidence of the middle class is not going to rise very soon. Legislation has become, and will increasingly become, another form of taxation. Bernie Madoff has been arrested for running a ponzi scheme. But he has nothing on our congresspeople, who run a much, much bigger scheme . . .and enjoy about the same popularity ratings as Mr. Madoff.

Imagine someone who has been saving regularly via payroll deductions into retirement and education accounts. Imagine that person has seen $100K or $200K disappear from his accounts, and he’s not sure how much because it’s too painful to look. And imagine he’s about to send his third child to college. And he knows that the financial aid budgets of the colleges, due to falling endowment return, are going to yield less merit and need-based aid than he hoped they would provide. And imagine he tunes into C-SPAM and sees Barney Frank blathering away about fairness. How does that person feel about our democracy?

That person, of course, is me. He’s not very happy.

Jan 7, 2009 - 12:08 pm 19. Mongoose:

for the capacity= or the capacity

Jan 7, 2009 - 12:39 pm 20. Contrarian:

Anyone who believes that major inflation, maybe even hyper inflation, is in store for us in the future should be purchasing gold. I have gold in my portfolio and it has performed very well over the past few years. I expect it will do even better as the full impact of Bush-Obama works it’s way through the economy. The true value of gold never really changes, but it’s relationship to currencies does. Dollar down, gold up!

Jan 7, 2009 - 12:42 pm 21. RWE:

Mark:

Yep, me too. As I said in another post some weeks back, last year I theoretically made over $81K in income from mutual funds last year. Now all that “gain” is gone, more than 3 times over – but I paid taxes on that money then, so the Warren Buffet argument that “You never really had it so you never lost it” is not true. I lost the considerable taxes I paid on that nonexistent gain. And I fully expect that when the economy recovers some time down the road they will tax me on that same money all over again. This is not the first time this has happened, just the worst.

Bought a copy of the WSJ last week. One of the front page articles was how the small investor has lost faith. Gee, do ya think?

And now we have a crew in DC who says that they want to spread the wealth and that you are not patriotic if you don’t like to pay taxes.

So I plan to visit the financial advisor that told me to buy all those funds starting over 20 years ago and tell him the jig’s up. I’m through being a patsy. So it’s gonna start coming out of the mutual funds and go into savings accounts, gold, municipal bonds, annuities, whatever. I think we will start that process pretty soon, say, 21 Jan 2009.

And Obama has just announced that he will tackle the costs of entitlement programs like Medicare and Social Security by “reforming” them. Now that is gonna be fun to watch. If he had announced that 4 years ago he would be lucky to be dogcatcher of Cook County now.

Jan 7, 2009 - 12:43 pm 22. Mongoose:

Well, some here have it right:

1) Do away completely with corporate income tax. Do it now.
2) Suspend capital gains tax for three to four years; Announce that we cut it substantially when this moratorium expires. Follow through on this.
3) Curb spending to adjust for the short term fall in tax revenues, but increase defense spending by 10% a year weighted heavily towards procurement and manpower budgets.
4) Restore confidence in the dollar and Wall St. This can be done by a) forcing the return of the “bailout” monies, over about a year and a half, from the accounts of those companies that took it, b) Going after the culprits on Wall St. and the Hill (and have someone really look at paper trials left by Soros, Lewis and Co.), 3) Terminating CRA, and privatizing Freddie and Fannie. (admitting that the bailout was a stupid idea in the first place might help as well.)
5) Figure out how to get ahead of that inflation.
6) Get control of the labor unions. Ban unionization for government workers; help non-government workers’ unions to move to a profit sharing/stock options structure and have them move away from the sort of adversarial banditry that they have been up too heretofore.
7) Do something about energy. Loudly and clearly say that AGW is baloney and that this is going off the table; drill, drill, baby, drill, and build more refineries. Let the markets take care of new energy sources.
9) In genereal, get out of the way of the economy. Announce this intent loudly, clearly and weekly.
10) Do not go to universal health care; Dismantle medicaid and medicare.
11) Make security and foreign affairs the focus of the “Obama years” (and here I shudder). Start with Iran (bt loudly supporting Israel), move on to russia and end up with China.

That would about do it.

The irony is that if the democrats actually started to lead the way in dismantling the whole mess they have created over the last 70 years, they would stay ensconced in power for a couple of generations, and have to spend much less money and be much less corrupt to do so. They would have to shift their core constituency so that it was made of the “middle classes” (as it once was).

Of course, all of this will never happen. For all of their political savvy, they are really idiots when it comes to long term thinking — really just a crew of political savants surrounded by opportunists and clowns. It does not help either that they thoroughly hate Western Civilization with every molecule of their being.

But think of what would happen if, say, the Democrats actually tried to cut the government payrolls by 5% a year for 15 years. Think what would happen if they were as aggressive internationally as they are domestically.

Nixon had to go to China: Perhaps the Democrats have to go to Detroit (and Sacramento, Brussels, Moscow and Tehran).

As L3 said above, this all is a much less glamorous approach, but it is likely that it is the only one that will work.

Fat chance. I know, but it need not be as it seem to be shaping up to be.

As to Rome, I doubt that a few years of BDS can do that much damage. Then, as now, this was a symptom of many larger currents and forces, not the cause of the decline.

When the honest yeoman farmer/soldier was excluded for an honorable position by a consolidation of power in an new (and perhaps illegitimate) elite, and thus forced in to poverty and city life, this was when the republic was doomed.

We certainly have parallels here though, I grant you that. We can certainly look forward to plenty of that “bread and circuses” business.

At least they got a few centuries of Empire out of it. It is doubtful that we can even manage that.

I think that our situation is different. With us it is the dark spirit of collectivism that has destroyed us. Obama is neither Caesar or Augustus — if he resembles any Roman ruler it is Romulus Augustulus.

Perhaps if Rome had allowed the priest and rulers of conquered land to become their officials, teachers, priests and key advisers then there would be a greater parallel.

Ultimately, we are dealing with the collapse of institutions following the “Second Thirty Years War” that allowed collectivism and its high priests to flourish.

We need not decline, but we need to have the will avoid it and this require that we undertake the necessary soul searching and then act positively upon it.

Collectively, we may not have the guts or the capacity for this.

It is a matter of the soul, mind and heart. and then expressing them through culture and civilization. Do we still have this in us?

BTW, Spengler over at the ATimes has a couple of good articles in this regard:

http://www.atimes.com/atimes/Front_Page/KA06Aa01.html

and

http://www.atimes.com/atimes/Global_Economy/JL25Dj02.html

Jan 7, 2009 - 12:48 pm 23. Ron Hardin:

inflation

That depends on what the Fed does when money starts moving again. At the moment, the new money just winds up back at the Fed as a deposit by the banks, as the financial system deleverages.

Money that doesn’t move in search of having the economy do something for it is money that doesn’t count. If you put dollars in your mattress, the Fed will notice the money supply is a little low and print a replacement. If you then spend your mattress money, the Fed sells a little debt to soak it back up.

All the new money at the moment is going right back into a government mattress, and so isn’t itself a cause of inflation.

Jan 7, 2009 - 12:49 pm 24. Eggplant:

Wretchard said:

“Over the really long term, rising population growth and technological advancement probably guarantee a return to economic growth.”

Rising population constrained to a world with finite resources is a Bad Thing. Petroleum is about $48/barrel. Unfortunately this low price is due to demand destruction from the depressed world economy. Peak Oil is real and will eventually kill what’s left of our economy if we don’t transition away from fossil fuels.

Appropriate technological advancement is a Good Thing. However, keep in mind that nuclear proliferation is an example of inappropriate technological advancement. There are a whole bunch of technological booby traps waiting out there, e.g. weaponized viruses, the artificial intelligence “singularity”, fissionless fusion weapons, total loss of privacy (every conversation is computer monitored), etc. A big problem that we have in the United States is not enough money is being spent on higher education and advanced technological research and development. My profession is aerospace engineering. Most people don’t realize this but aerospace engineering went moribund around 1972 after the double whammy of the Apollo Program being terminated along with cancellation of the Boeing SST. Concepts are still coming out, e.g. UAVs, hypersonic propulsion, rovers on Mars, etc. However almost all of those concepts were initially developed on paper before 1972, e.g. hypersonic propulsion was invented by Antonio Ferri in the early 1960s. We’re drawing down ideas from a reservoir that is not being replenished with new concepts (eating our seed corn).

49erDweet said:

“The economy is controlled by “consumer confidence”. With its last few gasps the MSM will bugle how well the teensy messiah is doing “governing” his kingdom and fools will begin “spending” again.”

Actually the economy has been driven by bubbles. This is a consequence of our becoming a “service economy”, i.e. we’re not producing anything new and only recirculating old money. It used to be that a person could get rich by coming up with a better farming method, finding a new mineral deposit, opening a factory based upon a new technology or simply coming up with a technology that created new forms of wealth. That ship seems to have sailed. Now a person gets rich by coming up with some new Ponzi Scheme, e.g. the Dot Com, the sub-prime mortgage fiasco, Green/politically-correct technology, etc. The name of the game is to sucker elderly people into investing their 401K retirement money and then scuttle off before the suckers realize they’ve been had.

49erDweet also said:

“A move to Chile or Australia does look better, but those countries, too, will be affected by the gigantic “elephant” in the room.”

I don’t know about Chile but I lived in Australia for 7 years before returning to California. IMHO, Australia is one of the best places in the world to live but a lousy place to work. I left Australia because it was impossible to find steady employment. If you are planning on retirement and have your money in hand then moving to Australia or New Zealand would be a ***Good Idea***. However, I would advise keeping your money in Swiss Francs and only convert to the local currency as you need it, particularly if you opt for New Zealand. Australia’s fortunes will improve because the country is still very rich in natural resources such as high grade iron ore, bauxite and anthracite coal. Also Australia and New Zealand probably will not get nuked when the Islamic fascist thing reaches its logical conclusion (minimal issues with nuclear fallout, mega-deaths, etc.). However Australia’s economic situation will change in 20 years as the country gets mined out but that’s a non-issue if you’re already retired and your money safely squirreled away.

Peter Boston said:

“That’s when I noticed that the period from Cincinnatus – statesman, soldier, republican – to the patrician led and very public assault on Scipio Africanus – the man who won the war that could not be won – was 236 years. The time from George Washington to George W. Bush is about 232 years.”

I’ve done the same analysis. It’s clear that we’ve “timed out”. Obama isn’t smart enough and doesn’t have the distinguished military career to be a Lucius Cornelius Sulla. My guess is the American Sulla will appear after Obama hammers everything into the ground (our Sulla will be a handsome young man with several university degrees and a distinguished military record, e.g. a brilliant USMC officer, combat decorated for heroism).

Jan 7, 2009 - 12:54 pm 25. Late Bloomer:

After WW II, the US had a baby boom. In the eighties, the baby boomers entered their peak earning years. Since the baby boomers were well educated, well fed, and well parented, they were quite productive.

Now the baby boomers are leaving their peak earning years. They are followed by less well educated and less well parented children (the rise of divorce and out of wedlock children).

To add to the problem, the babyboomers were used to living well and did not save much. Unless we can increase productivity and savings in this country, we are going to have to learn to live with less.

Jan 7, 2009 - 1:34 pm 26. Jay:

Ron Hardin, My post was to tell the folks that the economists I know who are good and not part of the Fed gang do not believe that the Fed will be able to sanitize (sop up) all that cash that will fuel an inflation.
Plus since are savings rate is near zero our debt in Treasury bonds is being carried by China and to lesser extent Japan and the rich Arabs. If the Chinese government decides to spend are IOU’s and take a loss now rather than later given the inflation we will not be able to sell those bonds unless the interest rate shoots up.
The neo Keynsian macro argument for government spending depends on the country having positive savings.
The fundamental problem with all the macro models is that they assume a linear economic system and use a very simple model of dynamics. An economy is a highly nonlinear system with millions of states in the state space.
The problem is with modern economics and modern egotistical economists and not with socialism. As we move left the problems will get much worse.
That is why I am concerned with hyperinflation and its chaotic consequences.
We were a law abiding hard working society in 1932. Now we have young population that wants the easy life and has never seen hard times except for the criminal subclass. Those of us who are old generally can not depend on our children or our family to help the way the Japanese society reacted to their bank crisis.
Where I live there are Mexican (not US citizens) gangs who roam around robbing and killing whenever they can find a soft target.
Thinking people are afraid of Obama and his policies, especially older people.

Jan 7, 2009 - 1:57 pm 27. joe buzz:

Freaky Frank should lose his job for blocking efforts to reform Freddie and Fannie, instead he gets fluffed by 60 Minutes as the “smartest man in congress”. You cant make this crap up. I cant even watch the evening news anymore without cussing. I’ll be in the basement hand loading ammo for stress relief.

Jan 7, 2009 - 2:02 pm 28. Unsk:

There is a good post from Francis Cainfrocca, ” Revisiting the Supply Side Thesis” on 1-06-09 at Redstate that explains why the Obama stimulus package won’t work.

His main points are:

• We have entered a period of extreme risk aversion, due to the Fannie/Freddie Collapse, particularly in the financial sector, and similar to that experienced in the Great Depression.

• The Obama stimulus package and his likely policies do little to make the market less risk averse and in the case of many his policies like his proposed higher payroll tax, make it much worse.

• The stimulus package may improve GDP numbers, but it won’t affect unemployment, because in effect the economy through the stimulus package may be buying less goods for more money.

The hallmark of a socialist bureaucracy is to increase the risk for investment.

Jan 7, 2009 - 2:22 pm 29. Ron Hardin:

If the Chinese government decides to spend [our] IOU’s and take a loss now rather than later given the inflation we will not be able to sell those bonds unless the interest rate shoots up.

I don’t understand foreign exchange (currencies ought to change value in response to transportation costs involved in buying from the cheapest source, in my opinion, and they seem not to), or why the Chinese like to hold surplus dollars rather then spend them; but if the Chinese want to sell the IOUs, what do they get for them? Dollars.

The only thing on God’s green earth that you can do with dollars is invest them in the US economy, or buy something from the US economy. Both of which solve our problem.

IOUs sold to Americans, at any interest rate, are not a national burden. The debt is to ourselves, and cancelled exactly by assets, namely the IOUs themselves.

The hazards are populist campaign issues they might threaten; and actual misallocation of resources by government spending in the first place.

Jan 7, 2009 - 3:37 pm 30. Niko:

What happens when the Fed can no longer roll over treasury bonds and the tax base is too small to fund spending? What happens to the military?

Jan 7, 2009 - 5:26 pm 31. Lowell:

It seems that there are two popular explanations for what happened. One side says “Too much regulation–the markets should rule!”, and the other side says “Too little regulation–capitalists are all corrupt!”

I say it was a combination. There was too much regulation in some areas–where it was not necessary (see the Community Reinvestment Act, CAFE fuel economy standards, and dozens of other areas).

Meanwhile, there was too little regulation in other areas–where it was made necessary by the government taking on risk. Bank regulations are necessary as the mechanism by which the government keeps watch over its risk. If the government is going to guarantee bank deposits, then the government needs to do the due diligence that we would expect from a free market player making a large investment in a bank. The same thing is the true for Freddie Mac and Fannie Mae (the GSEs). So long as those institutions appeared to be solvent, Democrats swore that there was no government guarantee–therefore no need to regulate them. Of course, once the they became insolvent, then everyone stepped up and said they were too big to fail. So, we got the worst of both worlds. We had the government “investing” in the GSEs without doing its due diligence while “capitalists” took advantage of the fact that the risks were covered.

So we have “too much” regulations that don’t have to do with covering government risk and we have “too little” regulations that do.

Jan 7, 2009 - 11:43 pm 32. CornFuzed:

Its clear why your handle is ‘Staring In Disbelief’, Seems as if you are mesmerized by the facts staring back at you and have little or no understanding of them .

Jan 8, 2009 - 6:01 am

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