My Visit to the US Treasury, Part 4

So, who did I recommend for the next meeting at the Treasury? (I think there will be one.)

Economists View
Cafe Americain
Greg Mankiw’s Blog
Carpe Diem
Credit Writedowns
Gregor Macdonald
Jeff Miller
Floyd Norris — NYT
Market Beat — WSJ and their real time economics blog, deals, and real estate blog…
FT Alphaville —
James Pethokoukis — Reuters (also Matt Goldstein and Rolfe Winkler at Reuters)
Curious Capitalist — Time
Matt Taibbi — (And others at the same site)
Trader Mark
The Epicurean Dealmaker
Ultimi Barbarorum
Zero Hedge (ask for Tyler Durden or Marla Singer)
The Reformed Broker
Crossing Wall Street
Cody Willard

Add to that good ideas from my readers:

Warren Mosler
Bill Cara

Now, Treasury responded to me, thanking me for the list, but said that the mainstream media bloggers already have access.  Fine with me — I was just gauging talent and reach.

The Nature of a Liquidity Trap

Go back in history over the last 25 years.  How did the Fed manufacture recoveries?  They lowered interest rates enough so that borrowers would be willing to borrow and refinance assets that had cash flow streams that were not financable in the higher interest rate environment, but financable in the lower interest rate environment.

With each successive rescue, interest rates at the trough were lower than before, inviting borrowers that were increasingly marginal to buy assets, borrowing money at cheap rates to pay them off over time.  We thought we saw the bottom, 2002-2004, but no.  The Fed Funds rate can go to zero, and what’s more the Fed can buy longer dated Treasuries, Agencies, and Mortgage Bonds, lowering interest rates on the longer end of the yield curve.  This allows even more marginal borrowers to buy assets. If they face some hiccup in their cash flow, they will default, and quickly.  If you doubt this, consider the high currently expected rate of default on FHA loans originated over the last two years.

Yes, low rates can get them to buy, but it cannot get them to hold on.  But wait, these are criticisms of the Fed, not the Treasury.  Mostly so, but what of the expensive housing tax credit  and cash for clunkers.  Those belog to the Treasury.  They are not economic programs — the costs far outweigh the benefits.  But wait.  Those shouldn’t be pinned on the Treasury; Congress, bought and paid for, are pushing these programs on behalf of their lobbyists.

If so, where is the administration to shame Congress over such behavior?  Where is the President who should press for a line-item veto?  (I like Wisconsin’s version. 😀 )  Let the Treasury, backed by Obama, ascend to the bully pulpit, and say that such programs are a waste of taxpayer dollars.

The Fed and Treasury have been able to touch of a speculative rally in financial assets, which benefits financials, but with weakness in  end-user demand, the lower rates do nothing to stimulate investment in plant and equipment.

All that said, there are three things that could go wrong here:

  1. Contrary to the expectations of the Fed, inflation could rise, and cause the Fed to tighten.
  2. All of the excess dollar claims could lead to greater depreciation of the dollar.
  3. Defaults could cause credit spreads to widen.

Those have not gone wrong yet, but they are all threats.  More tomorrow, when I discuss difficulties with entitlement programs.