Friday, September 26, 2008

Dumb and Dumber

Fortunately, it appears that the House GOP is going to scuttle Paulson's plan that would have the government buy $700 Billion worth of bad mortgages from banks and hold them. Unfortunately, their plan to create a government sponsored insurance program under which banks would pay premiums to the Treasury for this insurance isn't much better.

The real explanation of what has happened and a permanent solution is offered here by Dr. Reisman. This should be required reading for anyone concerned with the current crisis.

Short of such a radical plan, anything the government does in the direction of liberating the economy should be supported and anything that increases the role of government should be opposed. Abolishing the Federal Reserve Bank and returning to a gold standard, massively cutting the government budget deficit with corresponding reductions in income taxes, eliminating capital gains taxes on investment gains and especially on home sales, eliminating all goverment agency backing for mortgage backed securities, removing regulations that prevent or impede bank mergers and acquisitions, would be incredibly bullish developments with the result of creating confidence and encouraging capital investment in the American economy.

Unfortunately, the politicians in both parties will take the path of least resistance, i.e., they will grasp at policies that may appear to be beneficial in the short run at the expense of the long run. Creating money out of thin air to buy bad mortgages may be temporarily beneficial to those who sell the mortgages to the Treasury (and their investors), however, such a scheme does nothing permanently to change the system that caused this crisis (credit expansion caused by the government coupled with government backing of mortgage securities) and in fact exacerbates the problem long term by inflating the money supply again. I'm prepared for the worst.

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