See Brad DeLong on Greenspan’s reasons for not trying to tamp down or limit the housing bubble … abjuration and penitence from DeLong…

http://delong.typepad.com/sdj/2008/09/delong-smackdow.html

Back to the original topic …

Now, I don’t know what Paulson’s philosophy is, but maybe he should be sacked, simply because he has gotten the situation so wrong for a year and a half. Maybe his guiding philosophy about this is half- or non-baked.

Thanks for the analysis, JThomas.

The Chinese are still buying US dollars in the form of Treasury bonds at this point, I believe? They are “paying” for them with their exports, subsidizing our lifestyle in the process.

James Fallows from The Atlantic seems to have thought about these issues …

http://www.theatlantic.com/doc/200801/fallows-chinese-dollars

TheWesson, this is the part that I think isn’t getting enough attention. This is what it was about all along.

Look at our balance of payments. Look at the exchange rates for currencies that aren’t pegged to the dollar.

Since 2003 or so, the US dollar has lost about a third of its value against the euro, the hungarian forint, the brazilian real. It’s gained a bit of that back in 2008. How can you have a dollar be worth 2/3 what it was on one market, and worth just as much as it used to be on another? Is that cause for currency speculation? No, the currencies that are pegged to ours fall into two groups. There are countries that vitally depend on exporting to us—if they can’t export to us they get massive unemployment and social unrest. So they are basicly subsidising their exports, they sell very cheap so that their workers can continue to work hard at low-paying jobs. And then there are countries that are waging economic warfare against us.

Our trade balance continues to stay unbalanced. So we need foreigners to loan us money. If we want to continue our imports we need lots of loans.

There’s a market in T-bills, but for various reasons we set the interest rates on them very very low. We cannot finance our imports that way.

So we came up with the idea of selling mortgages on homes. We persuaded foreigners with money that these would not default, that they were almost as safe as T-bills but they got much more interest. Foreigners bought lots of US houses, in big groups so the risk was spread out.

We decided that US houses were getting more and more valuable. Americans could buy a starter house and sell it pretty quickly for considerably more money. Then they’d owe taxes on their profit unless they bought a more expensive house. So they bought another house that was worth more, and then sold it. The prices kept going up so we could get more money from foreigners to finance the same houses. Also we built new houses. We found more people to live in the houses and get mortgages. And this kept going until the foreigners decided they didn’t want any more US home mortgages.

When the money dried up people had trouble getting new larger loans for their houses. So the houses stopped increasing in value. Many of them declined in value. We couldn’t use that collateral to get loans from foreigners any more.

Then the companies that were supposed to sell mortgages to foreigners were in trouble. They had a lot of merchandise that they couldn’t move. They were in immediate trouble because they were supposed to value their unsold inventory by “mark-to-market”. They were supposed to say it was worth what they could sell it for, which was something like 10%. If you look at it another way they shouldn’t have to do that. If they just hold onto the mortgages themselves, something like 94% will probably come out fine. So they should be worth 94%, not 10%. Similarly, back when Ford had a whole lot of unsold merchandise they could have turned it all into company cars and profited that way.

So anyway, the companies who can’t sell their houses to foreigners at anything like the price they want are in trouble, and they want the US government to buy their unsold inventory.

So what are we going to do for foreign exchange? What can we do to get foreigners to keep giving us money? Unless we find something we’ll have to depreciate the dollar a lot more. Imports will get more expensive. There may be a big surge in exports as foreigners buy up our cheap lumber, coal, oil, wheat, etc. Note that as food gets cheaper for foreigners to buy from us, it gets more expensive for use to keep for ourselves.

What about oil? If things get bad enough at some point we will switch from being an oil importing nation to an oil exporting nation. Oil is fungible, it gets shipped to those who can pay.

The immediate crisis—the stuck credit market—is a publicity stunt. It’s hard to get foreign credit because foreigners no longer trust the dollar or US collateral. But the Fed can provide as much liquidity as they want. Within very broad limits they can print money. Nobody needs to do without a loan just because foreigners don’t loan us the money.

The bigger crisis—the trade imbalance, that might get balanced for us against our will—that one is serious.

But I don’t understand the issues. Why has the US dollar gone up since January 2008? Makes no sense. Who could afford to buy large numbers of worthless dollars and store them, at this point?

If you happen to be lucky enough that all the odds are stacked on your side, then you can win without being smart. Doesn’t say how smart you are then.

One of the most encouraging signs I see these days is National Enquirer is publicising up Palin and McCain scandals. If NE has deserted the GOP, can Fox News be far behind?

Evil does not necessarily prosper, but Rove sure did. There was an additional ingredient.

You are a moron, only in part because you do not understand why Rove was successful.

I don’t. I call that despicable, and relying on an eagerly complicit media to spread such nastiness. Kinda helps to have the media ready, willing, and eager to disseminate your propaganda while suffocating the other guy by refusing him equal air time. No, that’s not particularly smart.

Maybe you’re thinking of when Rove blanketed South Carolina with ads describing how McCain had a black child out of wedlock, that he was a closed homosexual, etc. This is what you think is evidence that Rove is ‘smart’? Again, to me, it looks an awful lot like ‘unprincipled.’ Not something that was particularly inspired or the result of some cerebral heavy lifting.

But . . . if that’s your definition of smart, well, okay. All I can say is, it’s certainly not mine.

There’s an alternate, purely academic definition of “smart”, but that’s an inferior definition because it describes bright, clueless, highly verbal people as smart.

Does the equation change if that person was able to make say $150k a year doing it?

As to whether Rove was smart or had a simple pattern that worked and also he got lucky, we’ll have to wait for historians. Like, if he was involved in passing forged information about Bush’s military records to Dan Rather and then later exposed the forgery, I’d have to say he was pretty smart. But if he didn’t plan it then I guess he was just lucky.