QUALITATIVE EASING : INSURING ARTIFICIAL PRICE LEVELS CAUSED BY STATE MONETARY P

http://blogs.wsj.com/economics/2013/12/19/how-to-stop-financial-panics-say-hello-to-qualitative-easingCONTRA QUALITATIVE EASING : INSURING ARTIFICIAL PRICE LEVELS CAUSED BY STATE MONETARY POLICY

(un-libertarian) (recession insurance) (PSST) (insuring against busts)

This solution in the paper that is referred to in the article is weaker than simply buying down debt on real property from consumers and SMB’s that do not have access to capital markets,in sectors of the economy undergoing crashes. Further, buying down debt by fiat allows the state to penalize lenders by paying them off at a discount, by fiat. This is a better incentive than regulation of inputs. Because consumers are protected by the state and lenders are harmed in terms profits but not balance sheets.

Reasons are multiple, but mostly, that the preservation of false price levels is distortionary, while the redistribution of discounted debt restores balance sheets. And specific sectors can be addressed quickly, which reduces downward pressure on prices.

In effect, by this method, the state insures large asset prices against booms and busts.

I recommended this solution in 2008, and Galbraith did as well, before he died.

And the longer I have worked on the problem the more certain I am that it is a MUCH MORE effective policy than either government spending or lowering interest rates. Neither of which help the PSST (pattern of sustainable specialization and trade) within a given sector.

Prices are information. We can insure the quality of information. And this method insures that bottom end of the asset price even if all profit is wiped from the transaction.

This puts cash in people’s pockets within a collapsing sector without allowing the repricing in that sector to easily spread to the broader economy.

Imagine if every home owner had received a formulaic payment against his or her home’s debt, and contributions to 401K’s for any balance over their debt amount. This would rapidly have put cash in everyone’s hands, while adjusting balance sheets, and would have stopped the fear of prices falling.

I’ve written enough about this. But the point is, libertarian or not, just or not, insuring state induced prices is the most effective technique for controlling the spread of relative price changes as they percolate through the economy and cause disruptions in additional patterns of sustainable specialization and trade.

Cheers.