With hindsight, should Lehman have been bailed out?

[Toke]

Hyperinflation would solve the problem of bad debt in housing and credit cards, right?
What are the downsides, and are there a choise?

 

[geni]

Hyperinflation would solve the problem of bad debt in housing and credit cards, right?
What are the downsides, and are there a choise?

Dirrectly an inability to import anything.

 

[geni]

We needed someone like Lehman's to fall over to deal with the moral hazard issues. Against that it was a really bad time to have someone like Lehman's fall over so rock meet hard place.

 

[Francesca R]

A one-off (large) rise in general prices, or even a credible announcement that there will be such, would depreciate the purchasing power of all nominal assets and cash, and that of nominal income streams. In theory real assets (equities, real estate and index linked bonds) and inflation-linked income streams (most wages) should retain their purchasing power, and therefore nominal debt should shrink in value relative to these. The exchange rate should fall by an offsetting amount to the rise in domestic prices, so foreign currency debts would rise (although in theory not relative to the value of domestic real assets)

In practice I don't think this kind of trick has ever been achieved without a great deal of losers (wage earners, savers, investors, pensioners) because there are extreme economic costs involved in bringing the inflation rate back down again. In short, nobody would believe that a one-off dose of "hyperinflation" would be just that (particularly international investors).

 

[brumsen]

Well I certainly read that type of analysis a lot but it has been doing the rounds for almost a decade. There has been no significant move away from US dollars in the reserve portfolios of central banks (beyond that which can be accounted for by exchange rate movements themselves). There is no indication whatsoever of any shortage in demand for US treasuries, which can be demonstrated by their extremely low yield to maturity, which has plummeted in the last month from what were already multi-decade low yields. And this is in an environment where ballooning issuance (in order to pay for government ownership of bailed-out institutions and for Obama's expected-to-be-forthcoming trillion dollars or so of fiscal stimulus) is public knowledge. And the trade-weighted dollar has been the second strongest majoy currency since mid year (after the yen, actually).

It seems to me that if the dollar was going to "collapse" then the time to do that would have been rather recently. If the current mess didn't trigger it, what will?

You seem to think that the worst is over. I don't.
Moreover, I fail to see how the fact that until now a ballooning trade deficit has not caused a drastic depreciation of the dollar until now, enables us to conclude that there will not at some point be a stampede out of the dollar.
Let us hope that you are right.

 

[The Central Scrutinizer]

There is no crisis in "free-market capitalism" because there hasn't been anything resembling a free market since the creation of the Federal Reserve System in 1913. Why you and others confuse the monopoly of the most important thing in any economy - the money supply - with free markets is unclear.

It's dah joohs!

Folks, what he's calling for here is a free market for the money supply. Which means anyone can print any money they want. Your employer pays you in Hefedrees, but every store in your town only accepts Kollopseez? Well, too bad for you! I guess you'll have to move. That's the free market in action! But at least we got rid of those jooh conspirators at the Fed!

 

[Francesca R]

Moreover, I fail to see how the fact that until now a ballooning trade deficit has not caused a drastic depreciation of the dollar until now, enables us to conclude that there will not at some point be a stampede out of the dollar.

It doesn't, but you were rather more direct than saying "we cannot rule out a dollar devaluation sometime". You said it was inevitable, now.

It is anybody's guess whether that will be before or after the dollar has crumbled. Possibly before - but then again I think the events that are going to cause a collapse of the dollar have already been set in motion, and are pretty unstoppable now.

 

[Toke]

Dirrectly an inability to import anything.

I see some humorus aspext to soviet style euro/yen/ruble shops in the US.

Particulary when economists try to defend unleashed capitalism.

 

[brumsen]

It doesn't, but you were rather more direct than saying "we cannot rule out a dollar devaluation sometime". You said it was inevitable, now.

I said: the collapse of the dollar seems to me inevitable now.

YOU said: at various states of the trade deficit there have been doomsayers, until now they've always been wrong.

I said: That they've been wrong in the past does not mean that they'll always be wrong.

YOU say: but your original point was stronger than that.

I say now: indeed it was. I have merely shown that your reply can hardly be thought to have proved me wrong. So what I said could still be right. If you want to prove me wrong you'll need another argument than the one you gave.

 

[Francesca R]

I have merely shown that your reply can hardly be thought to have proved me wrong. So what I said could still be right. If you want to prove me wrong you'll need another argument than the one you gave.

No it doesn't "prove you wrong" (IE prove an exchange rate forecast wrong). But you are basing the forecast on the US trade and current account deficit, which has been around for decades. So it's more that that argument for a $ collapse is weak.

(In fact, FX forecasts are very much a lottery.)

 

[brumsen]

No it doesn't "prove you wrong" (IE prove an exchange rate forecast wrong). But you are basing the forecast on the US trade and current account deficit, which has been around for decades. So it's more that that argument for a $ collapse is weak.

(In fact, FX forecasts are very much a lottery.)

OK. Agreed. Both of our arguments are weak, because you can't predict exchange rates any more than lottery outcomes.

Well, I still wonder if that statement is literally true. Can't you at least point at certain tendencies in exchange rates, and make predictions about the general direction? (Which is more than what you can say about lotteries.) Surely you would agree that things don't look all that rosy for the dollar, even if you don't believe in an imminent collapse?

 

[Francesca R]

Well, I still wonder if that statement is literally true. Can't you at least point at certain tendencies in exchange rates, and make predictions about the general direction? (Which is more than what you can say about lotteries.) Surely you would agree that things don't look all that rosy for the dollar, even if you don't believe in an imminent collapse?

The most reliable (IMO) tendency is that real exchange rates of developed countries (FX rate deflated by the differential time series of traded goods prices) show stationarity, or mean reversion over periods of several years. So for example, the yen, dollar and euro (Deutschemark or ECU before 1999) are more or less at the same level against each other today (give or take 10%) as they were in the 1970s when the post WW2 "Bretton Woods" arrangement was abandoned, but they have fluctuated a lot and for sustained periods in the interim.

As to whether things "look rosy", FX rates are relative prices. Things don't look peachy for the euro either, nor the yen*. They can't all go down against each other.

*or the pound or the yuan or the rupee or the (Latvian) lat or (Swedish) krona or . . .

Or course, this type of thinking cues up commodity bugs.

 

[skepticalbeliever]

I think Lehman brothers should have been allowed to fail. The people there took big stupid risks that were unmanageable. These types need to be allowed to fail or we'll have to give everybody a bailout.

 

[Toke]

Looks like everybody IS getting a bailout.
Exept the taxpayers.