Monday, September 29, 2008

Old Pirates, yes, they rob I

But not today, apparently. Maybe now we can let the markets sort themselves out like they are supposed to.

Nah, the Federal Reserve will probably find some other way to bail out the banks…. But I can hope that they don’t and those responsible for this mess get their comeuppance.

Rescuing the banks only rewards bad behavior, does nothing to change the failed business model and stokes the fire of inflation. Did anyone think that a crisis created by too much liquidity, too much credit, would be solved by an injection of even more credit? While true that staying drunk is a good way to avoid a hangover, it’s not such a good idea.

And why should taxpayers be on the hook for private companies’ losses? They shouldn’t. The fact of the matter is that the financial sector can work this out. It can be painful and take time, but the bailout would not have solved the underlying problems and may have made everything worse. If some firms need to go through Chapter 11, fine. If billions and billions of bonds need to be written off or down, fine.

My great fear in all this has been that in order to “save” the housing market, the government was more than happy to inflate the problem away. As long as prices do not fall in nominal terms, voters will be happy. A fall of half in real terms over a number of years will be much easier to take. But really, it will screw us all.

It is time for a real reckoning…. Let’s see if it comes.

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