When Should the Fed Bailout the Economy?

Peter Bernstein, author of such books as Against the Gods: The Remarkable Story of Risk, has an interesting piece in the Sunday NYT, titled, When Should the Fed Crash the Party?.

"In the darkest days of the Depression, Treasury Secretary Andrew W. Mellon, one of the richest men in the United States, opposed any government action to stem the tide of plunging business activity and soaring unemployment. Instead, he urged a policy of supreme indifference.

“Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate,” he said. “It will purge the rottenness out of the system,” he added, and values “will be adjusted, and enterprising people will pick up the wrecks from less competent people.”

John Maynard Keynes, for one, thought that prescriptions like Mellon’s were preposterous. The economist called those who held such views “austere and puritanical souls” who believed that it would “be a victory for the mammon of unrighteousness” if general prosperity were not “subsequently balanced by universal bankruptcy.” Keynes perceived too much good in prosperity to treat it as the enemy, and he revolutionized economic theory to prove his point.

Keynes won the argument, and government intervention to overcome rising unemployment and falling profits has been standard operating procedure forever after. Nevertheless, the debate over intervention is not ancient history. It replays in today’s headlines."

Its an interesting debate, but I read Bernstein as discussing the wrong debate. He is reviewing criticism of the treatment of the problem, namely, the Fed’s clean up duties. But there is a debate brewing on preventative measures, also.

What makes this go round somewhat different is that the Fed’s intervention was forced large numbers of people who were exceedingly reckless. Even by comparison to LTCM or the S&L crisis, the risk embracement was unusually widespread.

As we have seen, there is a cost to this.

This is more than a question of creative Federal Reserve intervention. Right now, the nation is only beginning a debate on several related issues — including, ansd perhaps most importantly, regulation versus deregulation. If unrestrained financial engineering can lead to catastrophe requiring massive Fed intervention with great costs to the public (inflation, debt, etc.) than the "re-regulation" of the financial markets is a very likely outcome.

This is an important issue worth watching as the election season progresses . . .


When Should the Fed Crash the Party?
NYT May 11, 2008

Category: Credit, Economy, Federal Reserve, Inflation, Politics

Stiglitz on the Economy


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Stiglitz Says Bank Executives Too Optimistic About End to Rout

Mark Deen and Paul George
Bloomberg,  April 30 2008

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Category: Economy, Video

Wanna Bet ?

Category: Data Analysis, Economy, Financial Press

Halfway Through the House-Price Bust?

Category: Real Estate

Fooling_someEvery now and again, CNBC puts on a superlative show.  Friday morning’s Squawk Box was one of those times when they hit the ball out of the park.

As I was heading out the door to work, I heard David Einhorn of Greenlight Capital begin chatting about shorting stock, soft SEC enforcement, and Allied Capital (ALD). CNBC also announced that William Ackman of Pershing Square Capital was coming on in a while.

Einhorn discussed his presentation at Jim Grant’s conference Private Profits, Socialized Risk as well as his book, Fooling Some of the People All of the Time: A Long Short Story.

So before leaving the house, I TiVo’d Squawk, and then headed off to work. I watched the show Friday evening, and it was fantastic.  Watch the videos below and see if you agree.

• The Short & Short of It
Short selling can be good for the markets, with Owen Lamont, DKR
Fusion, David Einhorn, Greenlight Capital and CNBC’s Steve Liesman

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• Whistle-Blowing pt. 1

Activist investors face challenges convinsing regulators to face the facts, with William Ackman, Pershing Square Capital Management and David Einhorn, Greenlight Capital Management

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• Whistle-Blowing, 2

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• Hedging Your Bets

Discussing fraud on Wall St., with David Einhorn, Greenlight Capital Management president

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Fooling Some People site

The Speech

Book:  Fooling Some of the People All of the Time: A Long Short Story

Jim Grant’s conference presentation Private Profits, Socialized Risk

Category: Credit, Derivatives, Financial Press, Video

Quote of the Day: On a Great Danger Approaching

Category: Psychology

Oil Bubble?

Category: Commodities, Earnings, Energy, Psychology, Technical Analysis, Valuation

Signs of a Housing Bottom?

Category: Contrary Indicators, Real Estate

What’s Next for Crude Oil ?

Category: Commodities, Contrary Indicators, Energy, Psychology, Technical Analysis

Trichet Warns of `Protracted’ High Inflation

Unlike the Federal Reserve, Trichet and the EC are very concerned with high Inflation:

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Remember, the EC has a single charge — maintaining price stability — and is not concerned with maximizing growth . . .

Trichet Sees `Rather Protracted’ High Inflation
Gabi Thesing and Christian Vits
Bloomberg, May 8 2008

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Category: Federal Reserve, Inflation, Video