Thursday, September 25, 2008

Senator Hatch on Bailout

This financial train wreck has brought me out of my blogging slumber to make a few comments. I hope to make this a more permanent stretch of blogging.

Being an LDS Utahn, I am both writing my congressman persuading them to oppose this bailout, and interested to see what they are saying. I found out via the local public radio station that Senator Hatch had given a 20 minute speech earlier this week about the Paulson/Bernanke plan. When I got home I looked it up, and read through it.

You can find the text here.

I must admit that I'm not a big fan of Senator Hatch. I think he's been in Washington much too long and should be replaced by a vote of the people, but I do have to give him partial props for this speech. He correctly identifies the major driver of the problem, unlike so many others who are trying to divert attention the other way, but fails to deliver in the end, weaseling out of the real solution to deliver the same-old "congress has to do something message."

Here's the diagnosis:

Right now, we are seeing the consequences of a long series of policy errors, both in the private and public sectors, which combined to create a perfect storm of financial instability. Many of our problems stem from our monetary policy at the Federal Reserve. From 1988 to 1999, the Fed pursued a relatively stable monetary policy. However, in anticipation of serious problems with the financial sector's computer systems as the year 2000 approached, the Fed flooded the system with money in 1999. This contributed to the ``dot com'' bubble, and subsequent efforts to take out the excess cash contributed to the recession of 2001.
+1 on identifying the Fed, and its loose monetary policy in the dot-com bubble.

In order to spur the economy, the Federal Reserve held short-term interest rates too low for too long, well below the expected rate of inflation. The money that subsequently poured into housing and commodities created excessive demand, contributing to the housing and commodity price bubbles, both of which burst due to the most recent efforts of the Fed to return to a less- inflationary stance.
+1 on identifying the Fed for fueling the housing boom.

So here's the logical leap he's not willing to make:

The Fed is the thing that drives the large boom-bust cycles so prevalent in the 20th and 21st century. The Fed is the thing that is the cause, so that is where the cure must land. And its not that the Fed just needs new leadership that is more skilled that the current. The Fed, the central bank, and fiat money in general is the culprit.

No one is smart enough to set interest rates and monetary policy for a market as large as the US. Price is something that socialist, planned economies can never set correctly. The Fed sets the price of new money, and there's no way that will ever be as good as letting the market forces, including supply and demand.

Anyway, Senator Hatch can't go here, fiat money by nature allows unfettered government spending. The powerful rarely, very rarely lay power down, so Hatch argues for congressional intervention in any case.

And though I hesitate to support the idea, it is not unreasonable to conclude that the proposed bailout can provide immediate relief and prevent any more catastrophic losses in the near future and give the financial market time to sort out the mess.

These are indeed difficult times for our financial markets and the housing sector of our economy. I agree with my colleagues that we need to act fast.
-10, Sen. Hatch, your conclusion doesn't match your thesis. This crisis calls for the most powerful medicine we can throw at it: a market correction. Powerful medicine indeed, and no politician can take credit for "doing something."

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