Responses to the Geithner Plan...

are lukewarm at best. Today's Wall Street Journal op-ed ("The Geithner Asset Play") raises the appropriate objections. The goal of the plan, which is to rid banks' balance sheets of unmarketable assets, really is something that has to be done if credit relations are to be restored. But it seems that Geithner wishes to accomplish this, once again, on the backs of the taxpayer. Why not try something such as was suggested by Larry Kudlow (see my blog here), whereby mark-to-market accounting rules are eased -- something which will cost the taxpayer nothing. John Berlau notes that Geithner's plan mentions nothing about mark-to-market.

Furthermore, Paul Krugman's running commentary on the plan ("The Conscience of a Liberal") is well worth perusing, even if sprinkled -- liberally -- with really funky liberalism.

What the Fed is Up To

The recently announced Fed action has been characterized as a massive exercise in printing money, in "pumping liquidity". But such characterizations, once again, are misleading.

Take a Wall Street Journal article from March 19th, 2009, by John Hilsenrath. In "Fed in Bond-Buying Binge to Spur Growth" he wrote,

The Fed had already cut its benchmark interest-rate target to near zero. Unable to go lower, the central bank now is essentially printing money to raise the supply of credit and thus push down the longer-term rates paid by families and companies on mortgages and other key loans. The impact was immediately felt.

First, has the Fed been "printing money"? Let's look at a few graphs, downloaded from the Fed web site, to determine if that's the case.

First, the trend line of the amount of assets on the Fed's balance sheet:










This means that the Fed has done a lot of buying since mid-2008. How has it paid for this? By printing money? Let's look at the trend line of liabilities over the same period:




Here you can see that the amount of currency in circulating (money printed) is roughly stable, while the amount of deposits at depositary institutions has ballooned. The Fed, thus, bought up all those assets by crediting the accounts of depositary institutions (mainly banks).

What does this do? It enables these depositary institutions to lend. How much they are able to lend is a function of how much they have on account at the Fed. Those Fed deposits, plus their own cash on hand (vault cash), constitute what is known as the money base. The money base was fairly stable through mid-2008, and then went through the roof, from $800-plus billion to over $1.5 trillion in March 2009 (see the table here).

So the money base, and thus the amount available to lend (which, with our fractional reserve banking system, is a multiple of the money base), has nearly doubled.

But the money supply, actual money put into the economy, has not. Here are the figures for the broadest money supply counter (monetary aggregate), M2. In March 2007, M2 stood at $7.111 trillion. In February 2009, it came to $8.275 trillion, an increase of about 16%. Nearly all of that increase has occurred recently: the year-on-year gain (February 2008-February 2009) was 9.8%, the six-month gain was 15.3%, and the three-month gain was 15.2%. Still, the gain is not nearly what one would expect given a near-doubling of the money base.

The conclusion: the Fed hasn't been printing money, it has been expanding the money base and thus the amount banks can lend. But even in that case, the banks can't lend what people won't borrow. Given the none-too-precipitous increase in the money supply, it doesn't appear that borrowing has increased much even given the enormous increase in potential for lending (look here for confirmation).

It would seem to me that the Fed's purpose in buying up the more unorthodox assets, which underlies the big increase in assets on its balance sheet, is 1) to stabilize the mortgage market by buying up mortgage-backed assets from Fannie Mae et al., 2) to bring down long-term interest rates by buying up long-term Treasury bills.

Bringing down long-term rates is a new way for the Fed to operate. It apparently is working, or at least has a chance of working. By bringing down long-term rates the Fed hopes to spur investment (see Hilsenrath's article from March 20th, 2009, "Excess Capacity Keeps Heat on Fed").

The danger is, of course, that by engaging in all this spending it has provided way too much lending potential to banks which could lead to inflation. Hilsenrath's "Excess Capacity" article shows just how much the Fed is expanding the money base by doing this. But on the other hand, it can head off the danger of rampant inflation by raising interest rates, as well as by selling off those self-same assets.

So this is an area which bears watching but is not yet cause for alarm. The Obama government's fiscal policy (not to mention war on capitalism) is where one really needs to watch out.

And We Have a Winner

The solution to the toxic asset problem, and the credit crisis, may well be the one propounded by Holman W. Jenkins in his Wall Street Journal column of March 18 2009: "Needed: A Bailout That Doesn't Look Like One." The root of the crisis is bad assets (securitized subprime loans) on banks' balance sheets. Mr. Holman's column discusses how these assets can be most easily taken care of. It looks so easy that a child could do it. But there's the rub. It's too easy. After all, it would constitute the waste of the opportunity this "crisis" affords to Cloverfield government.

(Update March 20th: Larry Kudlow offers an alternative approach to solving the crisis. He may be right that no further action is required than the switch to cash-flow accounting from mark-to-market accounting, together with the normalized yield curve on short- and long-term loans. Who's to say? Not me.)

Cloverfield Government

Well it's about time I woke up from hibernation to begin posting again. Not much to say for awhile there, not to mention being preoccupied with finishing the next volume of the Stahl translation, about the state and constitutional law. I hope to have it published within a month (that's quite optimistic though). At any rate, I did have a thought to communicate! And that is this. I finally got around to watching the movie "Cloverfield." It's not one of those movies my wife likes to see, so it sat around gathering dust until she went out of town for a few days, at which point I blew the dust off of the said DVD and watched it. What a grotesque movie, yet very well done, because it seemed real enough to actually have happened. But, here comes the thought I wanted to communicate: the monster in Cloverfield, while highly believable, was not quite up to the times. If he really wanted to come over as a modern-day monster, he would have gotten on the national news, have blamed all the carnage in Manhattan on the army, and stated that he really was there to fix things, to restore order, to rebuild, he being the only entity large enough to be able to do that. After all, isn't that what our government has done? Destroyed the economy through years of either parasitic or blatantly destructive action (e.g., subprime mortgage sponsorship), and then blame the entire mess on the victims, to wit, business and the market. We have a Cloverfield government; but there are those who are filming with their camcorders for posterity's sake. This hopefully will allow future generations to learn from our mistake, not to listen to big ugly green monsters, replete with giant teeth, in politicians' clothing.

What Went Wrong

McCain-Palin lost this campaign when they fell for the Democrat bait in wrongly responding to the banking crisis. This post of mine explains the details.

The anti-capitalist mentality must be hit between the eyes once and for all. But when even conservatives fall into it, you know you have an uphill battle.

There are powers behind the scenes which seem to understand this. It could be that such powers (e.g., George Soros) precipitated the credit crisis, anticipating such an outcome. Somehow Henry Paulson got maneuvered into it. The arch-liberal Paul Krugman alludes to this.

Perhaps someday we'll know the truth about what actually happened in this election. Right now, our work is cut out for us.

Crossroads

America is at a crossroads.

This election can go one of two ways: victory for Barack Obama, or victory for John McCain.

If McCain wins, it will mean that God has granted us more time to get our house in order before He lowers the boom. The Constitution will continue on life support, so to speak, with issues regarding abortion, homosexual marriage, and the like -- fundamentally, the question of the source of law, God or man? -- still yet having to be dealt with decisively, or else He will give us over forever to the forces of the Kingdom of Man.

If Barack Obama wins, then all bets are off; God will have given us over to the forces of the Kingdom of Man, and Man, both through the legislature and through the courts, will enact an agenda of godlessness that will dwarf any previously enacted in the United States of America, making it difficult to see how we will ever get out of it.

If McCain wins, muddledness continues until America chooses for life, for godliness, for divine standards of justice (read: the Ten Commandments); if Obama wins, clarity obtains: the choice is made, the die is cast. It will spell the triumph of the Entitlement Mentality, which is the root of political evil.

(By the way, no, I do not speak for God, but I do claim to be able to speak in general accordance with His will; after all, I have His promise: "Then said Jesus to those Jews which believed on him, If ye continue in my word, then are ye my disciples indeed; And ye shall know the truth, and the truth shall make you free " (John 8:31-32).)

Turnabout is Fair Play

Well, the Democrats have fallen into the carefully laid trap laid for them by the devious McCain campaign. I say, turnabout is fair play. The Democrats started this by springing their carefully laid trap on McCain back in mid-September, when he was still enjoying the Palin Bounce. That's when Secretary Paulson (a Democrat) let Lehman Brothers go under, prompting Paul Krugman to write, "Henry Paulson’s decision to let Lehman fail, on Sept. 14, may have delivered the White House to Obama." It certainly precipitated the credit crisis and prompted McCain's knee-jerk condemnations of Wall Street greed, thus diverting criticism from where it truly was merited, namely, Washington Democrats and the sub-prime culture.

So McCain fell for their ruse. It has taken him a while to get back on message, more appropriately putting the criticism at the Democrats' doorstep. Then along came Joe the Plumber, who got Obama to admit that what he was after was wealth redistribution. This prompted shocked responses from the Obama campaign and from the media in general, who argued that it was not redistribution but "tax cuts" that Obama was after. (Joe the Plumber, they claimed, was a McCain plant, a Rove ruse. If so, perhaps the monicker "McBrilliant" will be dusted off for use again.)

They argue this because they know that opinion polls decisively show that Americans favor wealth creation over wealth redistribution to deal with economic difficulty. They do not like this line of questioning, as witness the over the top response to direct questions on the subject, asked by an honest journalist by the name of Barbara West.

But now there has surfaced audio of Obama arguing in favor of "economic justice" and "redistributive justice," that the very liberal Warren Court really wasn't that liberal because it did not take the step toward this kind of justice, and that community organizing is necessary to organize power to get redistributive justice accomplished in the legislature.

How is the Obama campaign and the media going to spin this? My guess is, by ignoring it. Will they get away with it? Time will tell. I'm sure that talk radio and Fox News, not to mention the blogosphere, will do their best to get this out there. If it does, perhaps people will begin to question the content of Obama "hope and change."

What a ploy, John! Well, perhaps it wasn't in your campaign strategy after all, but it sure couldn't have come at a better time. Or in a better way. They cannot argue their way out of this, they can only hope that people will not pay attention.