Eric, Goldstein’s analysis, as Ed Whelan points out, omits en banc decisions — including two whoppers. In Hayden v. Pataki, Sotomayor took the unusual position that the equal protection clause barred states from disenfranchising felons. Yes, really. In Brown v. City of Oneonta, she took the position that it was an equal protection violation for police to focus on African America male suspects after a woman was attacked by an African American male and provided a description to the police. Really.
I would also caution against these superficial statistical studies. They show nothing about the issues that were at stake, the facts, and the degree of ambiguity in existing law in these specific cases. More important, if there are two or three instances in which Sotomayor attempted to propagate odd new law — all which tend toward radical new theories of equal protection jurisdprudence – isn’t that sufficient reason for concern even though she has a dozen run of the mill dismissals of ordinary Title VII claims? She would, after all, have the chance to do this all the time if confirmed. And if that is combined with a jaw-dropping speech shedding doubt on the role of impartiality in judging and suggesting there is some “Latina” brand of jurisprudence?
In this case it is not the media which has created an issue. It is Sotomayor’s own words and opinions which deserve a full review.
“What no one really knows yet is the exact linkage between the formation of new money, and the formation of new credit.”
I’ve been commenting on the financial crisis for some time on Contentions,and the above is getting close to what I’ve been opining except that instead of new money;we are going to need a new currency that is asset backed. The new currency will kill the derivatives problem if it’s introduced properly. It’s obvious to me that our current currency system,universal exchangeable fiat money, is mortally wounded. The debt obligations cannot be paid or unwound beause the amount of “new” money needed to acconplish either would in itself inflate our existing money to oblivion like Germany before WW2. So we’re in a financial double bind trap. If this were a chess game,we could see that twenty moves from now,we are mated,so instead of resigning the game,we need to change the game/rules altogether.
We should be rewarding profit centers. This new money will only produce more housing inventory and marginal borrowers. It is socialized shelter by other means with the banks as patsy faux capitalists.
RCAR – while I will never agree that an “asset based” monetary instrument is any different than what we choose to base it off of now – my warning about the Chinese and their willingness to purchase more US debt in a post from JR a day or so ago, is probably what has created this monster. I have always debated thaat currency is more a marker for productivity and is better rationalized on this basis. But you can believe in gold or productivity, or leprechauns for all that matters, but you cannot do what the treasury did yesterday and not expect massive inflation, especially when you know your biggest client for your debt has said I am done. You can be GOP, Dem, Independent, Socialist, Communist, etc, the fact of the matter is our current president and his administration has pretty much decided that our currency isn’t worth crap.
You can argue Bush II, CLinton, Bush I, Reagan, Carter all made their mistakes and Obama is allowed his. But this one is pure amateur hour. Even Larry Kudlow, the biggest economic cheerleading optimist you can ever find, said the stock market liked it, but everything else tanked. He doesn’t like this at all and sees just one thing – stagflation.
#3,”—-our currency isn’t worth crap.”
This is the bottom line;you can have Capitalism with worthless currency. We will never restore our currency unless we have a bonfire and burn 2\3s of it. So what does simple logic suggest what we do?
Say’s Law suggests that the enhanced supply of credit will create its own demand. Sooner or later people will want new cars, better homes and big ticket appliances, and near-zero interest rates are a powerful inducement. The question is whether new taxes and regulations will artificially obstruct supply. If not, some inflation is not necessarily fatal. Otherwise, welcome to Weimar.
#5,”welcome to Weimar”
We can prevent that if we want to,but I’m afraid what we want is “more Bubble please”.
Correction to #4,”You CAN’T have capitalism with worthless currency.”
What’s the lag time between money creation and the onset of inflation?
You CAN’T have capitalism with worthless currency
As long as TPTB say it has value and citizens are prevented from paying for goods and services with gold, the dollar will remain the medium of exchange. It may require $1,000 to buy groceries and $300 to fill your tank but the shops and gas stations will still be open for business.
#8
We’ll have a black market barter system also. The Germans reissued their new currency after a loaf of bread cost a trillion Marks. I hope we want to be smarter than Germany was in the 1930s.
Gentlemen,
I am truly confused. The banks don’t want to lend money so you lower the interest rate to encourage them?
Roy
Seth, yes there is always a sweet spot – you want low taxes but at somepoint you need enough taxes to fund your government, and while reducing the rates increases revenue there certainly is a point where that will no longer be true. I am not arguing we are at that point, in fact the tax increases being proposed are more apt to reduce revenue than any reduction from current rates might. The biggest issue I would have with Say’s Law as you quoted it, is that absent new taxes and regulations, its the spending already committed to and the desire to spend twice as much again in the new budget proposals floating around that pretty much guarentee your unsustainable inflation rate.
Everything is now in place for a replay of the late 70′s. Obama has the tinder box and has pulled out the match. To all you Obama-ites out there, Obama owns this one.
To Seth Halpern: I’m very glad you made the point about Say’s law. The reality of today’s consumer markets is demand destruction, as people deleverage and try to improve their personal balance sheets. The personal savings rate recently shot up to 5%, from 2-3% in Q4, and from near-zero before the ongoing financial crisis spilled over into the economy.
There are many indicators of the reversal of private credit formation (both consumer and business), going back to 2007 or so. You can explain much of the reversal as extreme risk aversion by global investors, as well as asset-price collapses caused by forced deleveraging.
But I’m not willing to say that the abrupt change in consumer behavior starting last October (although I’ve seen indications that it started in mid-summer) is simply a response to tighter credit.
It’s possible that a qualitative shift in consumer sentiment has occurred, and that personal deleveraging is a sustainable phenomenon. That’s what I had in mind with the last paragraph of my post. If true, it means we’ll have a protracted period of economic underperformance, and the Fed’s actions will likely result in stagflation. Say’s law may be trumped by other factors.
#11,”"Obama owns this one.” Sure
The fact that our banking system suddenly vanished is not being examined by either Bernake or our own government. Their sole focus is to restart borrowing so we can continue being a consumer society, not a productive society. In Fact,our government has only one major reserve: Gold
But, we have no idea how much gold the US actually has due to our government refusing to do an accounting. But one thing is certain: the government benefits from gold shooting up in price IF WE HAVE GOLD. We are still the biggest gold holders on earth??we think.We don’t know. Uncertainty bedevils all systems which is why no one trusts anyone.
“This is also the biggest experiment in monetary policy in history.”
Not going to work, sorry…they are temporarily re-inflating the credit bubble, but making the eventual crash even worse (scary to think what it will look like).
Taking the opposite approach of the 1930s central bank failures may seem like the right thing to do — but in reality, it is probably just as dangerous, if not more so (no one knows yet). The real issue is what RCAR points out. Without asset backed securities (and currency), markets will eventually break down.
#14,
here’s a really smart tactic thought up by Judy Shelton,
“A limited issuance of gold-backed Treasury bonds would serve as a sign to U.S. citizens that the dollar will not be the default mechanism for governmental excesses. “The Honest Dollar Act” will function as a barometer measuring the fiscal rectitude of the Obama administration. If the promised deficit reduction has been sufficiently accomplished to stem inflationary fears, holders of gold-backed Treasury obligations are unlikely to redeem in gold; after all, gold pays no interest and normally engenders warehousing costs. Unless the utter lack of progress toward fiscally conservative goals has unleashed even more egregious levels of deficit spending, repayment in dollars will be preferred. But the right to convert the face value of the note for gold at a fixed rate — say, $1,000 per troy ounce — conveys a trust-but-verify provision that marks the first solid step toward sound money.”
If you read Bernanke’s speeches from years ago like this one: http://www.federalreserve.gov/boarddocs/speeches/2004/200403022/default.htm, it was obvious he was going to inflate.
Nothing gives a central banker schooled on the Great Depression the willies more than the prospect of deflation.
On the other hand, notice that the ECB –conditioned by Weimar — takes a much more sober view on inflation.
PTSD runs both ways.
I appreciate the excellent counterpoints of Mr. Cianfrocca and Seth Halpern. I tend to think Mr. Cianfrocca’s alternatives will be the ones that play out. While I am, granted, one person, I have made the following observation before, at this blog and others, and have gotten big assenting responses. I think it’s got a good chance of being the governing dynamic.
The observation is this: I don’t know a soul — not even one — who is not “deleveraging” right now, and it has nothing to do with the cost of credit, which is historically low. If you have reasonably good credit, you can do consumer borrowing at around 7-8%, much lower than the 15-18% of the 1980s, the 12-14% of the 1990s, or even the 10% of the early 2000s. Mortgages are widely available under 5%, the kind of rates my parents used to get in the 1960s.
But almost everyone I know has taken major asset losses from the stock market (401(k)s) and home equity that has either evaporated, shrunk considerably, or not risen at all since they bought their homes. The only people I know who have not taken financially alarming home equity hits are older people, who paid off their mortgages some time ago. They’ve still seen the value of their retirement trusts decline substantially, though, and in general, they are not big consumer debt borrowers anyway.
Some of the working adults are concerned about how long they’ll have their jobs. Their main financial goal right now is to pay off debt and have an unemployment cushion saved. They are pretty scared that they couldn’t sell their homes for enough to pay off the mortgage, if they found themselves in extremis. Many, many working people in the 30s and 40s have used some version of a rule of thumb throughout their adult lives, relating their total debt to their total of home equity and investment assets. The asset side of that equation has taken a big hit since 1-2 years ago, and the priority has to be working down the debt side.
Others have been in the $250K income category that Obama has promised to come after with a jackhammer and a blowtorch. They fully expect their tax bills to go up substantially. They’ve just seen their million or so in investment assets cut in half, and their home equity take a big dive. Their dreams for retirement are fading rapidly, and they’re growing concerned about the kids’ college prospects. But they know that if they keep making what they’ve been making, in income, they’ll keep less of it anyway. Why go as sheep to the slaughter? Since they won’t starve if they change what they’re doing, one (a physician) is cutting back her hours with her partnership; one (an accountant) is taking, along with the other partners in the firm, a pay cut, in the interest of the firm’s health, and its ability to retain the salaried and wage workers; another (an engineer) is taking a junior faculty position with the state university system instead of a much-better-paying position with industry. They are all PLANNING to make less income. They have that option, and they’ll be switched if they keep working the long hours for Obama’s benefit instead of their families’.
People are putting what remains of their assets in trusts, to try to shield them from further taxes on the ALREADY-TAXED income streams that comprise their assets. Perhaps more safety from confiscation — DEFINITELY less availability for consumption. Tying up assets in trust, and taking less income, mean, precisely, planning to spend less.
Even those who live on fairly reliable fixed incomes expect their taxes to go up in 2011. It will be a dramatic hit, when the Bush tax cuts expire. People I know also understand that any version of cap-and-trade is going to make every aspect of the cost of living go up. It won’t just be our electric bills, and our tanks of gas: it will be WalMart’s, and the delivery driver’s, and the dairy farmer’s, and the cost of everything will go up. This is over and over the inflation inherent in the insane debt-spending career of the current Congress and president.
People aren’t stupid. They won’t salivate like Pavlov’s dog at the ringing of the “Fresh credit!” bell. All things are not equal, here in March 2009. People with good credit see only the prospect of more asset and income confiscation on the horizon. They have absolutely no intention of getting themselves into a debt spending jam. They are endeavoring to present the lowest “tax-cross-section” they can to the government, spend commensurately less, and hope to ride out the political storm.
If I learned nothing else as an economics major in college, I learned how the govt. debased the currency by “monetizing” its debt. I don’t know when, but I know for sure that we are headed for significant inflation. Buy gold!
J.E. – “If you have reasonably good credit, you can do consumer borrowing at around 7-8%,”
Perhaps you’re not reading your junk mail. A couple of weeks ago I borrowed $26K from Bank of America at 0% interest (and no fee) for 12 months. I promptly used some of it to pay off last years 0% credit card loan (although they’re rules made me launder it through my checking account first). I used the rest to buy a 3% CD from another bank that offered me a better rate than BofA.
Last week they sent me another offer but this time it’s only $10K at 0% and they want a $75 upfront fee.
The banking system is run by idiots.
Everyone has posted thoughtful analyses so I will only add this:
Bernanke learned the wrong lesson from the Great Depression. The lesson he should’ve learned was that excessive government meddling in the economy always leads to disastrous effects.
Sully — LOL, you’re right, I don’t read my junk mail. I just throw all the credit solicitations away. But the 0% offers for a limited time have been out there for a while. I don’t count those, since most borrowers probably wouldn’t pay off an entire balance in the 0% interest period, and the rate would skyrocket to 16.99% or whatever at the end of it.
JE. – Even counting the time it takes me to carefully scan the fine print so I can discard the offers that want a 3% upfront fee I figure that I earn a lot more per hour kiting credit card debt than I’ve ever earned as a consultant.
I’ve been doing it for more than 20 years since I realized that it was foolish to hold aside my own money from long term investments for emergency funds in a world where credit card companies would let you hold no fee cards that you never use and mortgage companies will fall over themselves to give you a home equity credit line that also has no carrying cost for availability of funds.
The best part is that the bank computer systems seem to love me for earning off them what has now become more than a thousand a year in arbitrage even though I’ve never paid a penny in credit card interest – ever.
My wife and I especially enjoy those first couple or three days of each vacation because it’s on the banks.
Bernanke, a close student of the early Depression, is determined to prevent the wicked asset deflation of 1930-32 that ruined so many lives.
Is it not a little late for a soft landing? TARP didn’t work, stimulus isn’t working, so what, other than a misguided sense of history, would lead a scholar to believe that this is a liquidity crisis and not an issue of solvency?
#23,
Nail on the head;this is about insolvancy. You won’t get much agreement about that on Contentions.
Thanks, I’m just a hit and run poster, but it is nice to get some validation every now and then in this crazy environment. Thanks again for the kind word.
“For every lender there is a borrower”
That is false. The converse is true.
I borrowed, years ago, for a house. The rest of the lenders have gone begging.
I hope they commit suicide too.
For every lender, there’s a borrower.
True if / when a transaction takes place, a loan is made. But would those with moxie want a loan to build wealth now when it appears that increased regulation will make wealth creation harder and higher taxes will diminish potential rewards?
What got us out of the mess in the early 1980s were incentives to risk capital. Reagan’s calm voice and optimistic attitude conveyed sincerely the notion that government would be rolled back; his tax rate reductions increased incentives, because those who took a risk knew that they’d keep the bulk of any reward. There was no plan in 1981 for a telecommunications / computer / IT boom. That happened because folks with ideas were able to convince those with money to fund their enterprises.
The outlook today is considerably bleaker with a political class determined to run the show for their benefit. Look at our tack: we’ll “invest” a bundle in producing electric cars that few will buy, and even some of those enthusiasts will have trouble getting and paying for the electricity to fuel them.
What a bizarre world lies ahead!
Inflation depends as much on Monetary Velocity (how quickly people spend their money) as it does on the Supply of Money. And when Velocity starts to take off – and it will someday – the effects will be breathtaking (in the sense that it will suck all the life-giving air right out of you.)
Google “Zimbabwe blog” sometime for an insider’s take on the hell-on-earth that is Zimbabwe today. It’s got stories like a bookkeeper’s daily challenge to pay bills like his company’s $77 TRILLION monthly Internet Access bill, when their computerized accounting system won’t accept anything larger than $99 BILLION. (The solution turned out to be a bit like buying $77 worth of groceries here in the U.S. and writing out 78 checks for 99 cents each. Ugh.)
Of more interest are the stories about how the government kept trying to “solve” the inflationary crisis by, for instance, freezing prices. They froze the price of bread when it hit the unheard-of price of $50,000 a loaf. Of course, they didn’t really understand that the baker would buy, say, $45,000 of ingredients to bake a loaf, sell it, and make enough profit to pay his workers and open the doors the next day. But since most of the ingredients in a loaf of bread had to be imported (making those prices impossible to freeze) and within a week the price of the ingredients were costing upwards of $55,000 (meaning that the baker would lose money on each loaf he sold at $50K), the only solution (from the baker’s point of view) was to simply….. STOP BAKING BREAD! I mean, expensive food is bad news indeed, but compared to NO FOOD? The government simply made things much much worse. Just one of many stories I’ve read there.
By the way – thinking of laying in a supply of gold and silver coins to protect your family when inflation takes off? Consider how long it took Congress (about 24 hours?) to pass a 90% tax on those AIG bonuses – and think about what they’ll do to YOU – now that you’re an EVIL SPECULATOR.
Ugh.
Buy Gold and TIPS– Euros and yuan not bad either.
We’re in big trouble, the Administration will burn down the house to kill a mouse that doesn’t even exist except in its overwroght imagination — carbon cap-and-trade — while ignoring the real threat.
That is, unless they WANT to trash the dollar and economy, figuring it’ll keep the crisis going and they can scare people into Stimulus 2???
I am so frightened for my country. How did we let this happen?
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