Stoking the Bailout Paranoia

[LA_Renter]

I am noticing an increasing level of concern / paranoia of a potential housing bust bailout. I am in this camp. Rather than research why this would be a bad thing…by the way it is a bad thing…..I am seeking arguments why such a bailout will occur. I came across this article written by a history teacher at Rutgers

“Why All of Us Have to Keep Spending Like Crazy–Or Else!”

http://www.hnn.us/articles/42215.html

Here is the excerpt towards the end of the article that makes me want to vomit. I don’t agree with this but this article is very informative and thought provoking. Just thought I would stoke the fires here a little bit.

“And here is the long answer. “Nothing that has happened has been a product of Fed folly alone. Its monetary policy may have been loose too long. The regulators may also have been asleep. But neither point is the heart of the matter. Assume that the US remains a huge net importer of capital. Assume, too, that US business sees no reason to invest more than its retained profits. Assume, finally, that the government pursues a modestly prudent fiscal policy. Then US households must spend more than their incomes [to offset the size of the current account deficit, and to absorb—that is, to buy—the increase of Gross Domestic Product]. If they fail to do so, the economy will plunge into recession unless something else changes elsewhere.”

So the Fed clearly has no choice except to risk the “moral hazard” of propping up a mortgage market saturated by speculation, imprudence, and criminality. In the historical moment when net private investment became almost irrelevant as a source of economic growth—the moment named the “disaccumulation of capital” by the historian Martin J. Sklar—the Fed clearly had no choice except to validate consumer preferences, even when they’re financed out of household deficits.”

[donaldduckmoore]

That means we need to keep spending more than we can afford and to keep inflating everything in order to keep our economy alive. This is absurd. Everything is up up up. Japan had deflation before. Why not us.

[stansd]

The alternative view is that a recession is needed and is actually a good thing. We are rapidly approaching a state where if the excesses (specifically, the debt/income ratio of americans, the current account deficit, the capital surplus, the impending retirement of the baby boomers, the debasement of our monetary base, etc.) aren’t purged, we will wind up with a greater or depression later on.

We’ve already avoided at least one as the dot com bubble imploded-we need the positive sobering impacts of this one. The great depression changed the mindsets of that generation toward money forever. I pray that we don’t need to go that far, but a recession would go along way toward reminding this generation that you can’t outpsend your income forever and that the beat the joneses hedonism, narcissim, and ostentatious displays that have become so common are not worth the financial risks most must take to sustain them.

[Bugs]

The longer you allow an infection to fester the more damage it does. We’ve already allowed this thing to turn so gangrenous that we’re going to have to lose an arm. Left untreated it WILL eventually spread to the heart.

[JWM in SD]

Once again, the FED doesn’t give a shit about the price of someone’s SD condo or SFH.

[SHILOH]

“Assume that the US remains a huge net importer of capital. “

How does he define imported capital?

Just become slaves to foreign money…if we aren’t already there.

Foreign banks and governments are really going to keep propping up US Mortgages (disguised/hidden in investment “products”)while the $ is devaluing?
When the investment evaporates why would they pour more of their capital into the US?

[no_such_reality]

I am seeking arguments why such a bailout will occur.

Because it’s giant pork barrel politics and it’s an election year. What do we get in election years? Promises that can’t be kept and sound byte solution to major problems. Like “put it in a Lock-box”.

[LA_Renter]

Martin Feldstein is one of the most prominent economist in the country. He was actually Greenspan’s first pick for Fed Chairman and judging from the comments in his speech I wonder why??

“Feldstein Speech From Jackson Hole”

http://online.wsj.com/article/SB118870740032215760.html?mod=googlenews_wsj

“Even with the best of policies to increase liquidity, future aggregate demand is likely to be depressed by weak housing construction, depressed consumer spending and the impaired credit markets. Lower interest rates now would help by stimulating the demand for housing, autos and other consumer durables, by encouraging a more competitive dollar to stimulate increased net exports, by raising share prices that increased both business investment and consumer spending, and by freeing up spendable cash for homeowners with adjustable rate mortgages.”

>

“But what if the outcome in the absence of a substantial rate cut would be more benign and yet the Fed nevertheless cuts the federal funds rate? The result would be a stronger economy with higher inflation than the Fed desires, an unwelcome outcome but the lesser of two evils. If that happens, the Fed would have to engineer a longer period of slower growth to bring the inflation rate back to its desired level. How well it succeeds in doing this will depend on its ability to persuade the market that a risk-based approach in the current context is not an abrogation of its fundamental pursuit of price stability.”

In other words….Yea I know its a bubble but its a hell of alot better than having a correction…..I mean people love bubbles, think how popular you’ll be Ben. C’mon play ball, forget about tomorrow we’ll worry about that when we get there.

That is what is transpiring at Jackson Hole this weekend.

[Author]

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