What is the Fed doing?

Trying to keep track of all the shenanigans innovation going on at the Federal Reserve is difficult.  Econbrowser and Interfluidity among others have been trying to help…  but every time I read about how our money system works, I find my head spinning in incredulity.  And that’s just when I’m reading about how it’s “supposed” to work.  It’s been getting more confusing lately.

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Rearranging vs. Reinventing the Global Economy

The US road to recovery runs through Beijing says Asia Times Online, and Thomas Barnett emphatically agrees.  Everyone is talking about how to reorganize the global economy, but mostly the discussion is about how to most efficiently export our recently collapsed model of growth to the developing world.  Better this time around for sure, we say, but not fundamentally different in any way.  The Chinese need (and want, it turns out) more domestic consumption and consumer debt.

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Too big to fail is too big, period

With the collapse of Bear Stearns and the US automakers and airlines tanking, and the prospect of a trillion dollar bailout of Fannie Mae, Freddie Mac, and who knows how many other large lenders, all because they are, putatively, “too big to fail” (by which is meant, obviously, not that they are so large as to be incapable of failing, but that they are so large as to make the consequences of their failing worse than the immediate, visible consequences of bailing them out), I’ve started wondering if perhaps what we really need is an update to our anti-trust laws, to the effect of: if you’re too big to fail, you’re just plain too big.

Instead of allowing corporate juggernauts to form, and then eventually being “forced” to save them from their own follies, why not just keep these captains of industry small enough that we never need to save them. The Feds already have to approve the bigger mergers and acquisitions – they already have this power by-and-large. Keeping our companies a little smaller would increase competition, and diversity within the corporate ecology of our markets. GM doesn’t want to make fuel efficient cars? Fine – their small-cars division can spin off and do its own thing. Sink or swim in its competition with Toyota, while GM itself just sinks, into an ever shrinking ocean of $150 oil.

Instead, we give taxpayer cash to large companies that have made bad business decisions, and absolve them of their obligations to pay the pensions they promised to their lifelong employees. We inflate the dollar and erode both our spending power, and our savings, while simultaneously crippling the long term competitiveness of our biggest industries. I don’t think the marginal increase in productivity from economies of scale that happens between being a $20 billion company and a $40 billion company is really worth it, if it means we’re all eventually on the hook for bailing out the $40 billion company, when we wouldn’t have to shovel mountains of cash at the two $20 billion companies… one of which might actually have made some good business decisions.