with all due respect, the father's analysis is wrong. The truthful answer is nothing can stop what is happening. We have moved past the too big to fail period into the too big for government to save. The government cannot fix what the market must undo. It can only distort and lengthen. Fr. means well but he's caught up in the same flawed monetary theory that has dominated the right (via Friedman's ideas) and the left (via Keynes' ideas) for decades.
Dittos to anon. Fr is wrong. In fact, today's market activity is an indicator. As moral matter, the US cannot be the final backstop to the US, much less, world economy. The Congress did the right thing. How dare any one outside of our country suggest that we US citizens had the obligation to save their bacon.
Congress members have a right and ethical responsibility to pay attention to the people who instinctively see the wrong in this. The carte blanche that would have been given to Paulson and any successor, would have been unconscionable. Hoorray for both GOP and Dem Congressmen followed the will of the people!
Not only is father wrong in his analysis but he is a bit condescending with his bag of marbles metaphor. Does he really believe that Congress writing a blank check out of the treasury with money we do not have is going to prevent the misery that is surely coming? What he fails to account for is that the Fed is already massively inflating the money supply, even without the Congress as an accomplice, and the many poor and middle class people of the world will suffer for their wealth being so diluted. Keynesians seem so afraid of their deflationary bogeyman that they cannot see the inflation in front of their eyes.
Fr. Thomas Dowd is a young and good priest, one of those whom your Fr. Greely calls "young fogeys" (although I am not sure he would appreciate that 
)Why not visit his blog and send him your comments directly? He will surely appreciate being corrected.
Elise B.
Michael:
I don't see deflation as a bogeyman. Bogeymen are imaginary. I see deflation as a real threat, and I gave reasons for it.
Proper control of a money supply is essential. When the supply collapses, more money must be injected if deflation is to be avoided. That money can come from different sources. The Fed can create it, as you have correctly stated it is doing, but also with the consequences you have stated. Another alternative is to time-shift the money by borrowing it. That is what the bailout package was. And the advantage of the package, as opposed to the Fed creating new money, it is provides a timed mechanism to remove that money from the money supply afterwards.
There are three alternatives: deflation; create new money; or borrow and pay back. Of the three, the third is (it seems to me) the least problematic.
Peggy:
According to the analysis I've read, today's market is rising on hopes the bailout bill can be rescued, not because the last one was defeated.
It is not a question of being a "backstop" to the economy. Ultimately what makes an economy strong is the presence of people with virtues like hard work, honesty, the ability to delay gratification, etc. I am simply trying to point out that, because the economy connects us all, even the virtuous can suffer if the vicious fail.
Living a healthy lifestyle will tend to increase life expectancy, but even the healthiest athlete is at risk if an epidemic starts to spread. It does not bother me that much if those responsible for these original bad investments suffer a bit, as moral hazard is meant to help sharpen the mind and prevent the bad investments in the first place. What bothers me is the idea that the "disease" of these bad investments can now infect the economy as a whole. Lots of decent folks and their families will then suffer.
Anon:
You've proposed that the "market" must fix the problem. I have no quarrel with this in principle, but the problem as I see it is that the "market" is ultimately composed of people who will pay a price.
In my article, I gave the example of unemployment. In a perfect market, prices are free to fluctuate as necessary. But the labour market is not a perfect market. The cost of labour does not fluctuate as freely, because of a whole host of human factors. This is why fluctuations must take time if they are not to cause undue misery.
You've critiqued modern monetary theory across the board, albeit without offering reasons. What do you see as an alternative?
Elise:
I've never been called a "young fogey" before, and I don't mind.
Fr.:
What I am telling you is that paying a price is not possible to avoid. It is the natural consequence of the underlying problem: prices don't correspond to underlying value. Deflation must happen. Propping up prices will not work. Now you may think that it is a bad thing but necessary to smooth out the fall. I question the evidence that it will actually smooth out the fall. The Fed has already injected close to a trillion in liquidity into the marketplace and this has only gotten worse. I'm not prepared to blame the worsening on that act, but clearly it hasn't delayed the problem. We can try every contraption and "smart" fix you can think of, but this problem is beyond the scope of government to fix. I think you are falling for the same trap most of us fall for in various areas of life: an assumption that action is better than inaction, when in fact there is nothing that makes that true. Action might be, but it could also be worse, and what it clearly does is cause the problem to expressly be spread to the whole economy. Predictions that this will clean up the economy, are at best, grossly overstated. And they are overstated because they are built on flawed assumptions about the impacts of monetary policy and the continued ability for the US to live in a debtor's paradise.
Talk to some actual economists. Despite what I would suggest is a great deal of academic willful blindness on the subject of monetary policy, besides network talking heads, you will actually find that hundreds upon hundreds of economists have sent letters to Congress condemning this bailout plan as a collosal mistake. They have offered alternatives. I need not outline all of them here.
Look, economics is hard to discuss because so many people suffer from one of two problems. Either they feel like they are incompetent and defer to others who don't really know more but have fancy degrees and talk in academically reassuring tones. Or they graduated from the North American college system where economics is one of those disciplines that has been unfortunately highly politicized and converted into an ideology. Whole schools of economic thought that show merit on both a theoretical and experimental level are not only not taught but are derided in our academia. And so we have a bunch of people with degrees in economics who really don't know more than what they memorized in some undergraduate course from an idealogue. I'm not faulting them -- I too have a degree in economics from such a place and opted for law schol when I saw how difficult it was going to be to get my PhD in my desired research area given the academic politics (an area that now, ironically, is considered the hot new thing) -- but I at least was able to call a spade a spade and realize that I had to explore what Austrian Economics, Institutional Economics and Behavioral Economics had to say in addition to the slanted stuff I was being fed in the class room. Frankly, it was necessary as a Catholic to do that to more accurately reflect what I know from the Church to be true about the nature of the human person in examining economic behavior and being faithful to reality in all its factors.
I would generally agree with you that an appropriation is better than a simple Fed creation of credit. Of course, that's as much from legal/constitutional reasons as economic ones. But let's be blunt -- the difference is pretty much moot when you don't actually have any of the money you are appropriating. (Also think through how we are actually going to "borrow" this money.)
The case for fed manipulation of interest rates and the money supply is in fact always assumed and not proven. Look, we aren't on the gold standard so the challenges (good constraints in my view) that that standard presents should stop being trotted out like bogeyman. Why on earth can't we, at least, have market set interest rates instead of manipulated rates? If people had to pay the true price of money a lot of this wouldn't have happened.
I come from this not just from a theoretical perspective but from being able to observe just how Wall Street responded to the credit in the first place and the whole securitize everything trend. (I declined when I started practicing law joining such a practice out of concerns about what it would lead to.)
I understand the drop in prices is going to be painful. But there's not much that can be done about that.
Fr.:
Neither are market bubbles, malinvestment, currency debasement, and inflation bogeymen but they are hardly even considered in the reckonings of some economists.
A market correction is unavoidable. Trying to paper over it or delay it with yet more easy credit and freshly printed money (which is what the bailout would be as there is no surplus in the budget and taxes would not be raised to cover it) will only make the correction worse in the long run. Further, we are staring into the hyperinflationary abyss now and at least some of us question the wisdom of jumping.
http://network.nationalpost.com/...s-
comeback.aspx
ditto Anon, Peggy and Michael
Here's my counterpoints (basically the Austrian School's critique of FIAT currencies and fractional reserve banking, neither of which Father incorporated in his "narrative" explanation, which is incredible since its exactly these two factors that are in such crisis)
This high-school textbook explanation of the way things work is logical positivism at its Keynesian best, pure poison (like so much of the dehellenized secular pablum published by modern school textbook publishers). No where does the holy man give us a __moral__ explanation for what evils tempted those acting persons charge with fiduciary trust in fractional reserve banking to countenance embezzlement on this vast scale, nor the reasons for or against "regulation" of how those reserves (of our deposits, ie our property) are put at risk. Not is there an moral defense of monetarism (there is none, mercantilism is inherently inflationary and therefore dishonest) just an erroneous explanation of how hard currencies are backed by gold (the money supply is more than the specie - the bills and coins - it includes ALL the sitting deposits and ALL checks drawn on the funds, not just cash-in-hand/cash-in-cash-register, no bank in history has ever backed deposits with large enough gold reserves, or any other suitable precious resource).
"Money has value only because we, as a society, say it does." WRONG money has value becasue human beings have free will to choose to exchange something of value for a token placeholder representing that value. Society has no say, unless the people elect a gummint that cedes their authority to private interests (as the US congress did to the consortium of Banks called "the Fed")
"as bad as inflation can be for an economy, deflation is far, far worse" is a non sequitur, the one causes the other, the severity of the one leads to the miserable consuences of the other, unemployment. Inflation is evil, like lying and stealing is evil. Deflation is the consequence of malice, like the loss of trust after lying, or hunger after stealing. You cannot eradicate malice and rebuild trust by repeating the lie, nor replenish the empty larder by stealing from another larder. That's irrational.
"so we naturally want more of it(money)" WRONG! we don't naturally want more money, most of us pursue desirable ends means of money, money is not a desirable end.
"Interest rates therefore match inflation rates, plus a little bit." WRONG in America the Federal Reserve sets the interest rate and it is currently 1% LESS THAN published CPI inflation (or as much as 7% less than other indexes measuring our rising prices).
"This extra money will act like “grease” in the “motor” of the economy," WRONG - human beings create wealth by adding valie to the goods they trade for a just price. The number and variety of the financial media used to arrive at that price do not alter the value judgment of the human beings involved - that's irrational, playing us for dumb. Depreciating assets are priced abve the what folks judge to be fair value - no amount of "new" money can prop up unjust prices. THAT's what led to the Depression!
"giving banks and other financial institutions time to reorganize their portfolios." WRONG - depreciating assets need to be traded not "reorganized" to discover the just price.
" Again, it is like the marbles. The banks will still get hit in the head by the marbles, but those marbles will at least be spread over time rather than coming in all at once." WRONG - the effect of deflation in FIAT fractional reserves will continue unabated until the just price is reached, and only then will the marbles stop flying! Why? Well the good Father's sin of omission fails to tell you why - Have faith in his tyranny of relativism.
"The bailout package is not designed the prevent the pain, just to keep it from spreading to the innocent." WRONG
The bailout is "designed" ie arbitrary not natural in any way, and that's why it going to hurt the innocent - by delaying the day that their money remains their property and is not expropriated by the gummint.
Clare:
My goal in writing my post was not to critique the overall set of problems within the economic system we presently have. I think they are severe, and I suspect you and I would agree on many of them, particularly the moral questions.
But the system we have is the system we have, and it is the crisis in this system that I was trying to explain. *Explain*, not necessarily justify.
Again, I think much needs to change. The question is how, and at what pace. My point is simply this: if we change too fast, people will suffer. I have no illusions the so-called "bailout" would fix things. I am simply stating it might help things become less broken by spacing out the necessary structural economic changes over time.
Now I do think some of your critiques of my position do suffer a bit from oversimplification. Take this first rebuttal, for example:
"money has value becasue human beings have free will to choose to exchange something of value for a token placeholder representing that value"
Actually, it is a little more subtle than that: it is because those same human beings freely choose to exchange something of value for a placeholder that has its own value *as a placeholder*.
Suppose I buy a $100 gift card for someone. I have suddenly converted my $100 of paper into $100 of plastic. Both are placeholders. But the second placeholder has less value than the first, because it can only be exchanged for real goods at a single store. It is not as good a placeholder as the actual cash.
In addition, the value of a placeholder is related to its position within time. What would the average person prefer: $100 now, or $100 a year from now? It may very well wind up being the same physical banknote, but it has time-sensitive value *as a placeholder*.
Ultimately, even physical objects do not have full value unless accompanied by the use of property rights associated with them. If I buy a car that I am subsequently not allowed to drive, not allowed to sell or rent, or not even allowed to look at, can it really be said to be mine? It is the respect of those *rights* that gives the physical object its full value. An apple has a certain value to me as nutrition. A thousand apples, on the other hand, does not beyond, say, the first few dozen, because the rest will rot before I can eat them. But if I have the right to *exchange* those apples for something else, the fact of having that *right* suddenly makes those apples more valuable. One could even say it is the right that possesses value, and not the apples themselves.
A right is something real, but intangible. We therefore represent them symbolically in things like contracts, gift cards, and money. But we should not confuse the symbol with the right it symbolizes.
In its most basic form, say in a terrible war zone where law and order have broken down, an economy is a system of exchange of goods and services only. But when property rights are recognized and accepted, an economy can now be taken to a higher level. The economy becomes a system for exchanging rights as well as mere goods and services.
This is why a placeholder is more than a token symbol. Just like the store gift card is backed by the store that issues it, the placeholder known as "money" is backed by an entire system of law and order that allows people to defend their property rights. It has true value, but only to the extent that it is backed by a system that defends those rights, and only in the degree that those intangible rights are related to associated tangible goods.
Clare,
I would not want to be uncharitable to the father and ascribe less than sincere or virtuous motives to his exposition. We must assume he believes what he has learned in business school just as many of the traders who got the financial markets into this bind believed what they were taught.
"The bailout package is not designed the prevent the pain, just to keep it from spreading to the innocent."
This is perhaps the most unintentionally dishonest statement of them all however. For at least the last 15 years our corrupt political class has been more than happy to be proxies of the economic elite in their war against the American middle class. This bill can plainly be seen as part of that larger war and an attempt to pillage what real wealth is left in the hands of middle America while at the same time cushioning the wealthy from the economic storms their unbridled greed has brought to the world. The effects of concupiscence are real and affect even the wealthy, Their motives are not virtuous or altruistic.
Dear Fr.,
First I wish to apologize for what I can see is a rather terse post by me.
I will certainly agree that sometimes we all must suffer when even just a few sin. And yes, it's painful. [The abuse lawsuits against various US dioceses are an example.] The American people do not have limitless resources or good will. I don't think the US taxpayer has an obligation to the rest of the world, though perhaps some US businesses are at fault. No one forced US or foreign banks into this mess.
I think I'd rather we all suffer through market actions of reductions in stock prices, gains in the US dollar, and increases in interest rates. I am not convinced that credit will be impossible for those who would normally qualify for a loan.
I know the press reported that the markets went up on hopes of a bail out bill. I don't know how much store I put by what the US media say, frankly.
The "bail out" proposals have angered me as a taxpayer and otherwise responsible citizen and economic agent. Paulson has offered no alternative. I might be open to alternative gov't action, perhaps what the House GOP has in mind. I might consider some House Dem ideas as well.
Too many questions abound with the Paulson plan: unchecked authority of an appointed SecTreas to purchase domestic and foreign bank assets; the fact that the US will have to borrow from abroad the funds needed to buy the assets; the implications of government ownership of banks and thousands individual home mortgages; the constitutional explanations. This makes little sense. I know that deficits are not always bad policy, but how far should we go? I also understanding the idea of increasing the money supply. But credit has been too easy. It is perfectly natural to tighten it up in response.
Why aren't feds trying to find other buyers? If the feds think they can can swing a profit in a few years, why doesn't Warren Buffett or George Soros make that investment? Why not other millionaire businessmen? There are at least a few with resources to spare. Why should the feds buy up all or most of the toxic assets? Why not buy a small portion to clear the pipes?
Also, the Congress put forward some regulations for the FMs, the source of the problem. The Dems must bite the bullet on this to stop the bleeding. At this point, I don't care whether Dem heads roll, but I want the problems they have denied to be addressed. This is most important to stabilize the economy on a going-forward basis.
Cheers,
Commenting by HaloScan
