Tuesday, March 24, 2009

Taking a Look at Geithner's Plan

I'm not a hardcore economist, but I read a lot of commentary on the subject. As far as this crisis goes, I've seen its potential causes be a variety of things, from lack of regulation to low taxation. So when the big news was Geithner's new plan, I made an extra effort to find some good info on the subject. If you don't read Mish's Global Economic Trend Analysis, then you should. Mish did a good overview of the Geithner plan, with some very interesting analysis.

He sums up the root of the crisis in one sentance.

Actually the root cause is simple to understand, micro-mismanagement of interest rates by the Fed, Fractional Reserve Lending, and Congressional spending run rampant.

I tend to agree with that. Basically we set up the system so individuals and corporations could become dangerously over-leveraged. In the mean time, our debt was being carried by foreign investors. Many of these foreign investors are also bondholders in our largest financial corporations. This is one of the main reasons for our government's unwillingness to let these organizations fail. If the foreign investors lose, then we have a bigger problem: they'll stop buying our treasury bills, which means we can't survive.

We now sit in a cycle that will at some point be inflationary, but it may take some time. Here are Mish's thoughts on that.

Once again the hyperinflationists will be screaming at the top of their lungs over this plan. The plan is certainly worth screaming about, but not because it will cause hyperinflation.

Indeed, the real danger is that Geithner's plan will prolong the agony further zombifying taxpayers by saddling them with debt that cannot be paid back, while doing nothing to spur lending.

The chart above in conjunction with changing consumer attitudes toward debt, ensures that hyperinflation is not remotely in the picture. All Geithner is doing is making the problem worse. Tim Geithner is the most dangerous man in America, and Obama is too blind to see it.

So there you have it. We'll continue to monitor this situation and the market's subsequent reaction.

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