Monday, December 20, 2010

Monday items.

In a must-read at The WSJ, former El Salvador finance minister Manuel Hinds makes a strong case that floating currencies are incompatible with globalized markets.

On Forbes, John Tamny debunks Donald Trump’s anti-China rhetoric.

Also at Forbes, Steve Forbes explains the flawed root of the Fed’s QE2 policy:

On Seeking Alpha, Cam Hui frets about rising commodity prices.

At The Money Illusion, Scott Sumner puts commodities in context:

In his syndicated column, Paul Craig Roberts offers an interesting history of Reaganomics (along with an assessment of globalization since the early 1990s that omits dollar instability).

On Globe Asia, Cato's Steve Hanke explains why Fed policy isn’t stimulating economic production:

To understand why, in the Fed's sea of liquidity, the economy is being held back by a credit crunch, we have to focus on the workings of the loan markets. Retail bank lending involves making risky forward commitments. A line of credit to a corporate client, for example, represents such a commitment. The willingness of a bank to make such forward commitments depends, to a large extent, on a well-functioning interbank market — a market operating without counterparty risks and with positive interest rates. With the availability of such a market, even illiquid (but solvent) banks can make forward commitments (loans) to their clients because they can cover their commitments by bidding for funds in the wholesale interbank market.

At present, the major problem facing the interbank market is the zero interest-rate trap. In a world in which the risk-free Fed funds rate is close to zero, banks with excess reserves are reluctant to part with them for virtually no yield in the interbank market. Accordingly, the interbank market has dried up — thanks to the Fed's zero interest-rate policy — and, with that, banks have been unwilling to scale up their forward loan commitments.

In short, the Fed's zero interest-rate policy has created a credit crunch that is holding back the economy. The only way out of this trap is for the Fed to raise the Fed funds rate to, say, two percent.

At Forbes, Reuven Brenner examines the mentality behind successful risk taking.

On The Kudlow Report, Brian Wesbury
argues U.S. debt is high but manageable:

On NPR, The WSJ’s David Wessel tries to discredit U.S. Rep. Ron Paul’s sound money views:
Mr. WESSEL: Basically, he [Paul] wants to go back to an earlier era where gold and silver were legal tender, and where you could have your dollar bills exchanged for gold or silver at some fixed rate. It's an old system that's largely been discredited. Most economists - many Republicans in Congress think it's a little bit weird and extreme. And although he feels very strongly about it, it's unlikely to move into legislation or anything like that.

GONYEA: But how much support is there for that view?

Mr. WESSEL: I don't think there's very much support at all. There's kind of a romantic view that we could go back to something better. Maybe we'd have less chance of hyper inflation, but I think most people, most economists, and most members of Congress they want to have some control and accountability over the Fed, but they don't want to put it out of business and return to a gold standard; which, after all, was one of the reasons we had the Great Depression a generation, or two, ago.
From the archive, in ISI’s First Principles journal, historian Brian Domitrovic recounts William F. Buckley’s contribution to the supply-side revolution.

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