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Catching Elephant is a theme by Andy Taylor
Paul Krugman (via The New York Times)
Krugman continues his run as our most impassioned and rational voice during this crisis, increasingly criticizing the Geithner/Obama plan as the details continue to unfold. He reiterates another important piece here in a recap of post-Depression financial regulation, pointing out that financial industries used to concentrate on the simple business of attracting depositors and giving out (reasonable term) loans. Boring business, but sustainable and valuable.
Nowadays, we’re sifting through the wreckage of a financial system that was built on usurious loans on the credit side and making money out of money on the investment side. Other industries were no better, leaving us with a nation that builds very little and seems to be dominant only in advertising and increasingly tarnished financial products built around usury. GM didn’t sell cars - they sold “no money down, 0% APR loans!!!”. American Express is in the business of selling debt and collecting infinite payments, not helping people with credit (see the industry reference to those who pay every month as “deadbeats”). Insurance companies are designed to maximize the “float” and invest it in products designed to increase short term stock gains, not the health, life expectancy, or property/casualty security of their clients.
Time to take the necessary steps to dismantle these “too big to fail” zombie banks and get back to concentrating on sustainable growth and long-term goals.
I wrote a post about 3 weeks ago about the alarming news that I had heard from a bond trader friend of mine on how the Fed was trying to control the yield curve by buying at the long end and selling at the short end and how that gets us to hyperinflation. They did just that but in a massive scale - today comes the news that they are going to buy $1.2 trillion of long term government bonds.
Typically, the Fed buys and sells short term bonds to control the money supply. This is an unusual action in its size that significantly increases the money supply in the market - a lot of U.S. dollars all of a sudden appear out of nowhere.
This new infusion of cash in theory should lower the interest rate spread of treasuries and lending rates (i.e. banks will make loans at lower interest rates) and stimulate economic activity (i.e. people would start borrowing again to buy stuff).
On the other hand, increasing the money supply devalues the dollar. DJI went up 1.23% today but the JPY gained 2.47% against the dollar, the Euro went up 3.54% so actually today net net was a down day in the market for all of us.
The Fed is taking a big risk that could dilute the value of the dollar further and set the stage for future inflation. We still have to borrow and that is a lot harder to do with a weaker dollar.
Having studied mostly German history in college (and later worked for Allianz, the German insurer that is now the world’s largest financial company), the specter of hyperinflation is a pretty terrifying thought. It brings to mind ordinary Germans waiting in line at the bank in the morning, filling wheelbarrows with thousands of Deutschmarks, and rushing to the grocer to buy a loaf of bread before the money was devalued even further.
Even scarier: the paper I wrote as the ultimate summary of my history studies pointed to hyperinflation (and the very real fear of the middle class that it would give rise to Communist sympathizers) as a primary catalyst for Hitler’s rise to power. A man who was laughed at and jailed in the twenties for trying to spark what essentially was a populist revolution was looked at in a very different light by ordinary families who had lost everything in the crash and were now scared of being absorbed into a seemingly unstoppable Communist uprising.
More food for thought.
