Thoughts on the Macro Paradigm, Arnold Kling | EconLog | Library of Economics and Liberty .

Everything the Fed has been doing over the past fifteen months makes sense if you think of their goal as transferring wealth from taxpayers to banks. If you try to explain it as an attempt to implement an expansionary monetary policy, you won’t even get past my high school students.

• Lending in the critical housing sector is still essentially frozen outside of government support. You are starting to see talk of FHA bailouts, so the critical element of new buyers with limited down payments will be slowed down. (That said, risky lending done by the government is even worse than that done by private institutions. We would be better off with a functioning market for higher LTV loan products with investors taking the risks they want).
• As history teaches us, the government’s attempts to prop up housing with homebuyer tax credits, refinancing of various borrowers, foreclosure moratoriums, or non-economic loan modifications will eventually all fail.
• It is not possible for the government to create economically valuable jobs (see the broken window fallacy). As charismatic as he is, even Obama cannot repeal this one.

Risk taking among private pools of capital and the creation of small business and startups actually are responsible for true job creation. This sector is in a severe crunch. See one of many stories on small business lending, or frozen venture capital fundings.

• As I’ve mentioned before, the US healthcare system is grossly inefficient and unproductive, and may be headed for a crisis.
• We are allowing our currency to fall. This might be good if we had meaningful exports or other activity, but as it is we need to attract foreign capital that is comfortable with our rock-bottom interest rates…

While this is still the most innovative economy in the world, and we will recover, the answer for our government is to allow new and existing corporations room to build and operate new businesses. Those are shocking words today, where most Americans still derive their livelihood from big corporations while decrying every minor misstep, cost cut or outsourced activity they engage in. Here is my politically infeasible recovery proposal:

• End government supported mortgage lending and all incentives for home purchasing. Replace it with a partial guarantee program for private label mortgage backed securities with significant limits. If you think this can’t be done, consider the massive liquidity that was willing to purchase all sorts of these mortgages with no safety net just 2 years ago.
• End all corporate taxes. Large, connected firms aren’t paying a major share of these taxes, and when they do it is simply passed on to all of us. Banks won’t pay them for a good while (due to credit loss offsets and mergers).
• Massively reform the personal tax code. Almost anything would be better.
• Take steps to end our foreign military involvement. Set up a temporary work program for all the displaced diplomats and soldiers if you have to (repairing broken windows? or making solar panels? )
• Offer buyouts and early forced retirement to 2 million Federal government employees. That’s only a small fraction.
• Work with investors and trade agencies to jump start asset securitization. This has got to happen, and the assets must be held outside traditional deposit-taking banks as much as possible. Create major tax incentives for private investors to hold business loans, consumer receivables, startup equity, etc.

I have a few more ideas, but that’s a start.

Accrued Interest

Google Reader found it for me somehow. Best of all, it includes bonus Star Wars references!