FT.com The Economists’ Forum (cont.)

On 3/1/08, Wray, Randall wrote:

agreed supervisors/regulators need to do their job. however there is also something to be said for economic growth restoring balance sheets. i think his proposal to clamp down hard on banks now to get capital ratios up would make things worse.

Yes, seems it could hurt current demand. The government of Japan wound up buying preferred stock from the banks at the expense of shareholders, much like the sovereign wealth funds are doing today in the US.

No one seems to understand the US doesn’t ‘need money’ from any source, and instead feels the nation owes a debt of gratitude to those who invest $ here.

For a long time no one understood the fundamentals: exports are costs, imports benefits, no govt solvency issues, nominal vs real issues, what is and isn’t a function of interest rates, financial equity for one sector must come from another, savings is the accounting record of investment, loans create deposits, CBs are about price not quantity, etc.- but it didn’t matter that much they all had it wrong on the way up.

On the way down it is turning what was potentially a non-event for the US real economy into a massive real loss for the US standard of living.

The ‘answer’ to restoring domestic demand and enhancing price stability and real wealth remains:

Offer a public service job to anyone willing and able to work:

  1. better price anchor than unemployment
  2. can produce useful output
  3. reduces social costs of current system
  4. provides a channel to ‘distribute’ productivity gains from the bottom up
  5. let’s the market set the budget deficit

Eliminate using the liability side of banking for ‘market discipline’ by lowering the discount rate to the target interest rate and opening it to any bank with any ‘bank legal’ collateral for any gross $amount. The net will be very small in any case.

Use capital requirements for market discipline and also regulate assets as currently is the case.

Get the treasury out of the capital markets by eliminating government securities and leave the excess balances from government deficit spending in bank reserve accounts.

Leave interest rates at zero, and let the Fed concentrate on regulation.

Unilaterally eliminate restrictions on exports to the US apart from quality and env. concerns.

To keep domestic industries deemed essential for national security have government buy from them, but let the private sector source anywhere.

Restore the notion of real terms of trade to national politics.

But since none of that is going to happen, I see continued weakness and a lower standard of living via ever higher prices and deteriorating terms of trade.

And a Cervantesesque Fed pursuing a merchantalist ideal.