Mike's random thoughts and ramblings

I'm not an economist, but...

I just read the info on the new US mortgage bailout.

I'm bothered.

I can't figure out how this works. I mean, I get the idea - the federal government purchases (and later attempts to sell) "hundreds of billions of dollars" of bad paper.

But, if the paper is no good, it means there's no resale value.

So, that hundreds of billions of dollars gets piled on top of the federal debt.

It seems to me that, in the medium term, that extra debt exerts further downward pressure on the US dollar against other international currencies. (What's interesting is that, up to now, most of the US borrowing has been for international and discretionary purposes like war and trade - now we're borrowing large-scale for domestic purposes. It seems to me that it's like the difference between borrowing on a credit card to eat at restaurants and borrowing to buy groceries...)

As the dollar declines further, the US has a harder and harder time remaining solvent and inflation increases. At that point, more bad paper will emerge (i.e. more mortgage defaults as gas hits $10/gal and a loaf of bread costs $5), making this all get a whole lot worse.

This doesn't seem to be the right way out.

USA Today made a fantastic point today - the USA is not following its own counsel. From the article:

Throughout more than a decade of recurrent crises in nations such as Mexico, Russia and Thailand, the United States offered the same advice: Let the market solve the problem and get the government out of the way......

.... In the 1990s, officials of the U.S. Treasury and the U.S.-backed International Monetary Fund urged the leaders of crisis-hit countries to embrace market-oriented policies designed to put their economies on sounder, long-term footing. But the recommendations — to slash government spending and privatize bloated state companies — meant genuine pain for millions and thus real political costs for leaders.

It seems to me that we're taking massive short term action to avoid the long term consequences of our actions. It's like someone who is writing bad checks: you write one, then you write another to cover that one (plus a little more), then another, and another, until, eventually, you can't write a $1M check to cover everything you've done.

Unfortunately, as anyone who has piled lie on top of lie to avoid getting caught knows, if you come clean and pay the piper early, the pain isn't so bad. It's only by putting it off over and over again that we create a situation that ends up as a disaster.

It seems to me that this is just another way of putting off the inevitable. Anyone who has read the story of Japan's collapse in the 90s knows what eventually happens - you eventually can't cut the interest rate any further, and can't borrow any more.

At that point, everything comes back in to line with a snap. And putting it off another six months only makes it hurt that much worse.

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Michael Murray

Michael Murray