Saturday, October 04, 2008

James Grant - The editor of the Grant Interest Rate Observer and one of the earliest canaries in the coal mine to point out that easy money was going to lead to our undoing - penned a nice piece in the Washington Post summarizing the current crisis.

"Low interest rates, easy money and malleable accounting rules are what plunged Wall Street into crisis. Yet it is low interest rates, easy money and malleable accounting rules that top the list of federal fixes. The unifying theme of the new bailout bill, all 451 pages of it, is the hair of the dog that bit you.

The unblinkable fact is that Americans own too much house. We overpaid and overborrowed, and many of us are "upside down," as the car dealers say. What to do? Recognize the losses and write them off. What not to do? Inflate the currency and debase accounting standards
(but that is exactly what the bailout bill does).

Too little inflation was the problem, not too much, Greenspan and Bernanke insisted. Easy money and low interest rates were the answer. American consumers pinched themselves. Could they really borrow more than 100 percent of the price of a house at an unimaginably low teaser rate without so much as presenting proof of employment? Indeed, they could. House prices went up and up.

Prices can be unwelcome pieces of information. When an especially unwelcome batch wells up after a financial collapse, governments try to quash it. So it is today. The SEC has suppressed short selling. The bailout bill will open the door to the suspension of market-value accounting. The Fed is moving heaven and earth to cheapen the value of the dollar.

* I'll note just a couple of the many, many problems with devaluing the US dollar - commodity prices tend to explode (remember the joy of $145 a barrel oil) and foreign investors take a hit on their government holdings (which leads to less funds available to borrow).

We've been talking about it for two months now, but the pending fiscal crisis facing New York State is particularly grave. Wall Street's direct and indirect effect on the NYS economy is enormous and we are going to see just how large of an impact over the next 6 months. I commend the current crop of politicians for honestly facing the issue (Republican and Democrats have both shown leadership during this period). The choices are going to be difficult ones and the residents of New York State need to be prepared for a reduction in services, job cuts, and/or higher taxes. Wouldn't you love to be running for office right now?

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