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Originally Posted by sebastian_dangerfield
I agree with Krugman's suggestion that unconventional purchases of debt by the govt may be helpful. We've already wildly expanded the FHA's exposure, the Fed's bond holdings. Why not go further and create a massive federal "bad bank" to run off the bad mortgages? We could fix housing tomorrow by setting up a shit bank and letting it convert all the distressed mortgages to longer term, more manageable debt.
But the rest of Krugman's suggestions are hollow. The govt can't create employment for all the workers being laid off in the private sector. The best it can do is maintain its own employment rolls, which isn't enough, and arguably damages the private sector over the longer term.
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Let's stop right there. First of all, the government (federal, state, local) isn't even maintaining its own employment. It is losing jobs, undercutting anemic private sector job growth.
Second, even if adding government jobs "isn't enough," whatever that means, why not do something beneficial?
Third, why do you think that government hiring "arguably damages the private sector over the longer term?" As I've said, that is arguably true in normal times, but these are not normal times. What's the mechanism you see by which -- right now -- government hiring crowds out private investment?
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Krugman and his ilk seem to think inflation is the only humane option. They seem to think its painless. That debasing the value of someone's savings is somehow different than simply allowing them to collapse. This is bizarre.
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What is absolutely bizarre is that you are talking about inflation as a problem when
the government is selling 10-year paper for the lowest rates ever:
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The Financial Times
The demand for 10-year notes suggests a significant buyer or group of investors expect US interest rates will remain low or fall further for several more years. It also demonstrates that some investors are using Treasury auctions as a vehicle to buy large amounts of bonds, rather than relying on securing such paper via the secondary market.
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In other words: No one in the market sees inflation on the horizon, and investors are parking their money in Treasuries for lack of good alternatives.
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Sebby again
If you have $500k, and due to govt policies allowing us to endure a collapse (think Hayek, or Mellon in the Great Depression), it drops to $200k, is this different than if due to a policy which causes hyperinflation (Keynes) the real purchasing power of your $500k becomes $200k?
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Yes. There is a trade-off between inflation and unemployment. Right now we have historically low inflation and painfully high unemployment. If we didn't have broken politics and institutions, there would be widespread consensus that we need to accept higher interest rates to get people working. But as you demonstrate, on the margin the interests of those with capital consistently trump the interests of everyone else -- even when things are this f*cked up.
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But we can get there by allowing this Depression to do what Depressions should: Force creditors to write off more debt, freeing more discretionary income.
The only way to get creditors to concede portions of what they're owed is through fear. Let things falter as they ought to and you will see banks engage in broad principal write-downs. You'll see Congress allow student debt to be discharged at least in part.
Lenders will loan to people coming out of bankruptcy, whereas a guy in deep debt struggling to stay current will receive no such offers. That's us right now. We can't get a fresh start because we're not working to remove the debt overhang aggressively enough. If our aim is to clear the decks of debt, why do it indirectly via monetary policy? Why not put the fear into investors that causes them to start conceding on the debts owed? There's certainly no moral argument against it. He who invests in something that made loans to dicey credit risks deserves to lose his ass.
The best course is a giant debt workout. It's faster and far more efficient than the current stumble>print>rally>stumble>print>rally scenario we have.
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So, I think we have a real problem in housing, with people who cannot get out from under debt for various reasons that boil down to a lack of willingness on the part of our political institutions to let less affluent homeowners get the advantage of crazy-low interest rates because it would affect the profits of various financial institutions that are sucking the blood out of that market. To their discredit and our harm, neither the Democrats nor the Republicans want to solve this problem -- the Republicans are openly captive to the interests of financial institutions, and the Democrats either lack conviction or will, or something worse.
But if what you're saying is that private money doesn't want to lend, instead of forcing private money to lend, the obvious answer is to have the government lend more. The solution is sitting in front of your nose but you refuse to see it.
