Good Post

I love this post by Rich Lowry of National Review. It's an e-mail from a reader and the emphasis is added by me:

More Paulson [Rich Lowry]
E-mail:

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.

10/09 06:57 PM