Eminent Domain, Deflation and It's Still a Wonderful Life

The Treasury Department is about to pony up $250 billion to recapitalize US banks in a move that was initially reported as “not voluntary,” though that phrase seems to have disappeared from online press reports. (Perhaps it was a mistake in an initial wire service report.) If the capital injections are not voluntary, that would make this move the biggest case of eminent domain in world history and all without benefit of a single court hearing.

I mentioned earlier the threat of deflation. That threat is out the window in a big way. $250 billion is over 1/6 of the total M1 money supply (consisting of cash and demand deposits at banks). This injection of capital will represent an 18% increase in the monetary base. Between Paulson and Bernanke, they could write the Complete Idiot’s Guide to Creating Hyperinflation. Hopefully NORAD can use it’s Santa Tracker to point us in the direction of Bernanke’s choppers.

In the Washington Post, Ross Douthat blames the Panic of 2008 on George Bailey. (via Volokh Conspiracy) He’s finally put a familiar face and a useful metaphor to a suggestion that I’ve seen time and again recently. Specifically, the contention that this is all the fault of people who want to own homes and people who want to loan money to help them own homes. The crisis didn’t happen because risk was underpriced, because underwriting standards on the properties themselves were ignored and it certainly wasn’t because Mr. Potter’s latter day fellows like Franklin Raines, Martin Sullivan and Barney Frank raided the deposits. It’s all because these “others” who don’t deserve to own homes in the first place were allowed to buy them. Bah, humbug.

In fact, there may be a parallel in It’s a Wonderful Life. That movie ended with all the people George Bailey had helped to own a home showing up and giving money to save the Bailey Building and Loan Association. For all their faults, Fannie Mae and Freddie Mac performed the same function as Bailey Building and Loan successfully for 70 years. They helped millions of people become homeowners, generated tens of trillions of dollars in economic activity and trillions of dollars in tax revenue and the final bill for that is somewhere under 1% of the uncompounded benefit by my quick back of the envelope calculations. In the last 10 years, and from 2003-2006 especially, the Mr. Potter’s stepped in and stole the deposits. Now, 210 million people, roughly, are putting up the money to save the system that bought them their homes, to save their friend George Bailey’s Building and Loan. Let’s hope by New Year’s Eve we’re all singing Auld Lang Syne while Clarence gets his wings. If not, Raines, Frank, Sullivan and all their spa soaking friends might want to consider what happened in the Lost Ending to It’s a Wonderful Life.

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