tag:blogger.com,1999:blog-2098432983500045934.post1514730066446779744..comments2024-03-12T22:19:32.339-04:00Comments on The New Arthurian Economics: They're Getting Warmer...The Arthurianhttp://www.blogger.com/profile/16501331051089400601noreply@blogger.comBlogger2125tag:blogger.com,1999:blog-2098432983500045934.post-178762593230918642010-09-14T12:23:55.922-04:002010-09-14T12:23:55.922-04:00Thanks JB. I'm pretty fond of the idea, myself...Thanks JB. I'm pretty fond of the idea, myself!<br /><br />Three thoughts on your remarks. First: "Letting homes foreclose appears to be worth it in some twisted way. Perhaps the real purpose of TARP was to allow recipients to buy out smaller regional banks weakened by bad loans. Look no farther than the purchase of Indymac by OneWest, which allowed OneWest to write off the value of foreclosed mortgages but only if they foreclose, as part of a guarantee issued by the FDIC to OneWest upon the buyout of Indymac. So Fedgov subsidizes the acquirers losses."<br /><br />This is a great insight. If not the "purpose" of TARP, at least the "effect" of it. (The way policymakers bumble and bungle, I find it hard to believe they could come up with any kind of plan that sophisticated, that actually worked. I think what we have is more like accidental economics, and people taking advantage of the situation.)<br /><br />Next: "With mortgage prices artificially inflated, and no renegotiations allowed, more homes get foreclosed and homeowners face a depressed market."<br /><br />A good reason, I'd say, to do something "artificial" for homeowners, too. Something like printing money to pay down that ridiculous mortgage debt.<br /><br />Finally:<br /><br />"You can see how the more money created doesn't equal inflation unless it's lent and spent..."<br /><br />Yeah. And that's the problem. If they're going to create money, why do they use it to create more debt? The problem in a nutshell is the ratio of debt to M1 money, or credit-in-use to spending-money. If they print money, it isn't yet spending-money. If they use it to increase lending, they only make the ratio even more lopsided.<br /><br />ArtThe Arthurianhttps://www.blogger.com/profile/16501331051089400601noreply@blogger.comtag:blogger.com,1999:blog-2098432983500045934.post-916255538126520672010-09-12T02:04:50.729-04:002010-09-12T02:04:50.729-04:00I love your idea to use Fed money to pay off exist...I love your idea to use Fed money to pay off existing debt. Perhaps the best example would be paying off mortgage debt. We all know the mortgage values are unrealistically high, something like one in every four homeowners under water.<br />The reason not to declare a mortgage renegotiation/payoff is twofold. First, the banks would lose out on interest. This prevents the Fed--made up of banks and representing them--from lowering mortgages.<br />Letting homes foreclose appears to be worth it in some twisted way. Perhaps the real purpose of TARP was to allow recipients to buy out smaller regional banks weakened by bad loans. Look no farther than the purchase of Indymac by OneWest, which allowed OneWest to write off the value of foreclosed mortgages but only if they foreclose, as part of a guarantee issued by the FDIC to OneWest upon the buyout of Indymac. So Fedgov subsidizes the acquirers losses.<br />See how the banks are obstructing economic recovery? By leaning on the FDIC's very meager assets, they're also exploiting their Too BIg To Fail status. "Don't let us collapse or we'll not loan" they might say. Well , they aren't lending anyway.<br />Another reason not to allow mortgage renegotiations/writedowns is the effect on prices of all those MBSs that are still out there, held by very politically influential companies. The lower quality tranches aren't worth anywhere near their par value. Yet because of the Fed's intervention, swapping Treasuries for trash, the MBSs didn't fall to prices where they'd become attractive.<br />It can't be said enough how Fed discount windows and other lending programs extended over $2 trillion to the banks.<br />With mortgage prices artificially inflated, and no renegotiations allowed, more homes get foreclosed and homeowners face a depressed market.<br /><br />I'd look at deflation more as measure of the velocity of money. So what if we've printed quadrillions if the money doesn't enter into circulation or goes under mattresses? As The Arthurian says, our economy is based on borrowing and the loans aren't there.<br />The 2008-9 crash sucked so much money out of the system (over $15 trillion in home and stock equity) that it could take some time to re-inflate the bubble. Then of course valuations will grow too high and the bubble would crash once again, probably harder. <br /><br />You can see how the more money created doesn't equal inflation unless it's lent and spent so another crisis is looming which could further depress home and equity prices. That's a depression, which could spiral into a hyperinflationary depression as more and more gov't spending tries to soften the crashing economy. Crowding out will ensue and make borrowing harder, thus slowing growth further and necessitating even bigger gov't bailouts (G), like we're starting to see...jbpeebleshttps://www.blogger.com/profile/11386620564536871255noreply@blogger.com