Vox Beats Down Rich Lowry

Vox Day also called the current economic bust. In response to “conservative” commentator Rich Lowry, who supported Henry Paulson’s shakedown bailout plan:

Mr. Lowry, with all due respect, you’re missing the point. The Paulson plan cannot and will not work. It is hopeless and was from the very moment of its conception. It’s a Keynesian solution to an Austrian problem; all the Treasury is doing is ensuring that the crisis is exacerbated and extended in exactly the same way that Hoover and FDR did. This is the classic “pushing-on-a-string” problem that all the contrarians have been warning about for some time now. You cannot correct fundamental investment misallocations caused by cheap money by providing more liquidity. It’s spraying gasoline on the fire.

This is not about “a crisis of confidence” or “animal spirits” or all the usual Keynesian blather that is spouted by the half-educated in political economy. They’re only addressing the symptoms, not the disease which as they try to fight off the contraction that inevitably stems from previous inflationary expansion. It worked in 1996 when they inflated equities. It worked again in 2003 when they inflated housing. Now, there’s nothing left to inflate and the contraction will be much more painful than it would have been if they hadn’t tried to fight it off the two previous times. So, it doesn’t matter when the Paulson plan was put into play, since it couldn’t have worked anyhow. I know Mr. Kudlow and your other mainstream Keynesian and Monetarist contacts will tell you otherwise; they are wrong, as you will see.

It’s a basic matter of defying economic gravity. After the boom, the bust must come eventually. And please don’t confuse the bounce coming next week with an actual recovery; because just when everyone breaths a sigh of relief and starts writing about how the worst has passed, the bear will return with a vengeance.

Gasoline on the fire. That about sums it up. Had the Federal Reserve not printed over $2 trillion in the last 6 weeks, the worst would be over. Unfortunately, they have stoked an inflation beast that is going to make the late ’70s and early ’80s look mild.

The sad part is that–if the government would just keep out of the mess–once the crash sets in, you will have rich people, private capital groups, hedge funds and the like, who will pool their capital, form their own banks, and they will emerge as the new investment banks that will challenge Citigroup, Goldman Sachs, Wells Fargo, and Morgan Stanley. Only they will have cleaner balance sheets and huge cash reserves that would translate to a major competitive advantage.

That would result in the flow of new capital, and the return of liquidity with a recovered dollar.

Instead, the Federal Reserve continues to dilute the dollar, prop up bad banks, and prop up over-valued homes and buildings. This will give us all the stagnation of 1990s Japan, with the hyperinflation we would otherwise associate with Weimar Germany, Bosnia-Herzegovina, Argentina, and Zimbabwe.

We’ve heard a lot of mucking and kvetching about greed on Wall Street, and for very good reason.

On the other hand, the sins of Wall Street pale in comparison to those of our Federal Reserve. The latter is nothing short of treason.