A follow-up from Paul Krugman

Posted on March 17th, 2008 in Economy,Politics by Robert Miller

As a follow up to my previous note, you might want to read Paul Krugman’s article in the NYT today. In his column he cites precisely the kind of issue that we are facing and wonders too about the extent of our obligation. A good read from a sensible, former academic economist. Bombs away!

A small cluster of people may have obligated us to an insurmountable debt!

Posted on March 17th, 2008 in Economy,Politics by Robert Miller

Hold on to your hats and check your wallet! Yesterday the Fed worked overtime to deliver what could turn out to be the largest public debt assumption in our history, at a time when we have already assumed more than a $ trillion in current and future obligations related to the war in Iraq. The Fed negotiated, in collaboration with JP Morgan Chase, a deal whereby Chase paid $2 per share to buyout Bear Stearns, a price that was less than 1/10 of last Friday’s market value of the troubled company. Apparently, after announcing the financial health of Bear Stearns last week, the Bear Stearns executives were preparing to file for bankruptcy. Both JP Morgan Chase and the Fed have partnered in guaranteeing the enormous trading obligations of the firm. In essence then, what happened yesterday was that the Federal Reserve went beyond its 30 day loan to Bear Stearns of late last week and committed all of us to a permanent obligation and did so before the stock market opens today, hoping that this will head off the giant, momentum gathering storm that is building in the financial markets.

What was de-regulation all about?

Posted on March 15th, 2008 in Economy,General,Politics by Robert Miller

When Ronald Reagan became President, he introduced us to supply-side economics and accelerated the trend, started under Carter, to de-regulate our economy: that is, further remove the Federal Government from intrusions into the private sector. Reagan and other Republican Presidents installed large numbers of judges and economists who all shared the belief, like a religious conversion, that we should return to the type of economy we had before the depression of the 1930s: Laissez-faire all over again. Supply-side economics is the naive belief that our economic growth is directly related to the tax rate. Lower the tax rate and you raise economic activity and actually improve tax revenues, especially if the tax rate reductions are given to higher income earners who create the “trickle down” economy on which Ronald Reagan campaigned. The huge tax cuts Reagan introduced directly stimulated a dramatic, additional rise in the Federal deficit, associated with an increase in the interest rates. Unlike the supply side theory, the debt created by the drop in Federal revenues, triggered a sharp increase in interest rates and choked off the economy (future iterations of supply-side tax cuts, like those of the current president, would create huge new deficits, but would not be pegged to the interest rates in the same way, once a free market Federal Reserve chair was established, i.e., Alan Greenspan: he would claim that with the Chinese buying up the new debt, he could actually lower interest rates). Reagan’s tax cut led directly to our first ‘supply-side recession’ which was one of our most serious recessions since the depression. Even veterinarians didn’t get paid during that one. But, despite the evidence to the contrary, such as the economic growth period when Clinton increased tax rates in the early 1990s, the current administration dismisses that kind of negative evidence for supply-side theory and has interpreted the “Clinton” growth as a delayed benefit of the Reagan supply side tax cuts. With supply-siders you can’t really win. By throwing away the time sync, supply-siders attribute all positive growth as related to tax cuts and all negative growth or recessionary periods as those created by tax cuts. This makes life exceedingly simple, no matter what appears to be a cause and effect in the timing of the events. How many times have you heard Dick Cheney say “Reagan proved that the Federal deficit didn’t matter.”

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