Economist John Taylor writes in “Getting off Track” that our current financial crisis was due to missteps in governmental monetary policy.

He faulted excessively low interest rates for fueling the housing bubble. Had the Fed followed the Taylor Rule for setting interest rates that had guided the relatively moderate period since the recession of 1982 Taylor believes that the bust would have been sooner and much less severe.

He also believed that the response to higher interbank rates in 2007 was mistaken. The Fed assumed that the problem was liquidity and thus injected liquidity. While it appeared to have some short term positive affect the rates spiked again.

The problem was not liquidity but counter party risk. Banks questioned the balance sheets of banks they were lending to. It was analogous to misdiagnosing a cancer patient with a gastro problem, leading to a weaker patient and a more advanced disease.

Taylor also was not surprised to see the first stimulus payment fail. Others have noted that single distributions have less stimulative effect than recurring payments (also known as tax cuts.)

In a Wall Street Journal article Alan Greenspan takes exception to the idea that the Fed caused the housing bubble with interest rates that were too low. Greenspan noted that there was a noted decoupling of mortgage rates from short term Fed rates. While there had been some relation it is not unusual that large capital purchases would be more tied to long term rates.

The growth in the global market economy, a healthy development, led to increased global savings in China and other developing countries. The increase in the global savings pool drove interest rates down and the Fed had no control over global savings rate, nor should they.

Greenspan and Taylor are leading economist and friends; yet they disagree on the precise causes of our current crisis. Yet they both warn that government micromanagement is counter productive. Greenspan suggests higher capital requirements and better enforcement of regulations.

Unfortunately debates on monetary policy is less satisfying for partisan ideologues who want to trash Bush and tax cuts rather than take the time to understand the problem. Like Taylor’s medical analogy they want to react quickly without a proper diagnosis. Doctors understand that a careful diagnosis is critical to proper treatment. The proper treatment for the wrong disease can kill a patient.

The first dictum for the doctor and our politicians should be the same. First, do your patient no harm.

“The bonuses bankers have handed themselves in recent years aren’t just excessive- they may have hastened Wall Street’s collapse. Although cash incentives tend to make people work harder, expending too much effort can actually hinder tasks that require creativity, problem solving and concentration. Anticipating large bonuses can lead to excessive self –consciousness and a focus so narrow that it warps perspective by blocking important outside information-like say common sense.”

- from “Large Stakes and Big Mistakes” Review of Economic Studies as excerpted in the May 2009 Atlantic

HKO Comments- Wall Street needs a deep look and its short term and destructive compensation systems.

I recommend that the Post Office deliver to your home only three times a week. Some will be on Monday, Wednesday and Friday and others on Tuesday, Thursday and Saturday.

There is little postage that is so time sensitive that a day’s delay will make any difference. The internet and e-mail has monopolized that instant communication. Postal delivery will never be able to compete with that.

For those that must have next day delivery there is Fedex and next day services. If you require daily delivery you get a box at a postal station. Many businesses already do that.

This would cut the fleet in half, one of the largest expenses of the Post Office.

Currently you pay to have a box at a postal station, yet they deliver to your house for free. When you think about it, this makes no sense.

Daily delivery should go the way of the pony express.

Israeli Guards on Italian cruise ship repel Somalian Pirates.

Read here.

from the WSJ Online

Henry Hazlitt writing in his book “Economics in One Lesson”:

The belief that labor unions can substantially raise real wages over the long run and for the whole working population is one the great delusions of the present age. This delusion is mainly the result of failure to recognize that wages are basically determined by labor productivity. It is for this reason, for example, that wages in the United States were incomparably higher than wages in England and Germany all during the decades when the “labor movement” in the latter two countries was far more advanced.

In spite of the overwhelming evidence that labor productivity is the fundamental determinant of wages, the conclusion is usually forgotten or derided by labor union leaders and by that large group of economic writers who seek a reputation as “liberals” by parroting them. But this conclusion does not rest on the assumption, as they suppose, that employers are uniformly kind and generous men eager to do what is right. It rests on the very different assumption that the individual employer is eager to increase his own profits to the maximum. If people are willing to work for less that than are really worth to him, why should he not take fullest advantage of this? Why should he not prefer, for example, to make $1 a week out of a workman rather than see some other employer make $2 a week out of him? And as long as this situation exists, there will be a tendency for employers to bid workers up to their full economic worth.