Why the government borrows money from itself and then pays interest on this money smacks of pure lunacy.

And the income tax implications of this move are absolutely delicious.

Um maybe lower bonuses? Maybe even 0 bonuses and salary cuts? Let’s not forget that Morgan Stanley last year paid out twice in bonuses than what it got from recapitalization. The numbers for employee pay-out are not trivial and are a real drain on the real economy. CB support should not go into the undeserving pockets of bankers – which is exactly where it’s ending up now. Once the salaries and bonuses are brought back to normal numbers (60 000 USD / year should be tops for a banker who’s basic job is to f**k things up in the rest of the economy), then maybe we can begin to talk about CB help for banks.

Actually, I got the monetary base versus money supply stuff from Krugman of all people, who IMHO was being far too deferential in a review of a book on Friedman.

I will confess I have not studied Bernanke’s comments and papers on the Depression in depth, so please amplify or correct as needed. However, I found one quote very troubling if it does represent his thinking accurately.

Bernanke has said something along the lines of ” A determined monetary authority can always reflate” and used the US in 1934 as proof. The US in 1934 was AFTER the banking system had collapsed and after the FDIC had been created.

This is like a bad three stooges film. Here’s a suggestion: although Americans can hardly believe it, people don’t like being bombed. Although it is just our way of saying hello. And in fact, those people just might include the Shi’a majority in Iraq. They might not like Iraq’s airspace used for the U.S. to bomb Iraq’s neighbor.

Somehow, I’m such a sucker that I believe the collective wisdom of the oil futures market over a man who has his assistant dig up Tallyrand quotes.

Yves the Rothbardian.

Agreed. They need the oil income, and the West needs the oil, so regardless of all the saber-rattling, it is highly likely that conflict will be avoided.

“The big question is, what do we replace it with?”

Excellent question. I don’t think anyone has the answer to it, but we had better start thinking fast, because unless someone puts something else forward, we could be looking at Smoot-Hawley II.

According to the CIA guessb…er…factbook, oil provides 85% of Iran’s government revenue.

Coupled with almost 20% inflation, it looks like Iran can ill-afford to shut-in oil production for very long (counted in days, maybe?).

The critics are wrong. The Fed then did increase what it controlled, namely the monetary base, Money supply shrank anyhow because people didn’t trust banks (with good reason, they were failing right and left) and hoarded cash.

The modern analogue would be a dramatic fall in the velocity of money, which is not impossible, particularly given how consumers voluntarily and involuntarily will probably be using a ton less credit.

I don’t know whether they will do that – they’re probably hoping that by restoring confidence they won’t have to, but the odds are greater that they will than that they won’t.

If they do, hyperinflation is indeed a threat.

Steven Randy Waldman at Interfluidity had several excellent posts on the subject months ago, even before the Bear Stearns bailout. It was remarkably prescient.