I side with El-Erian and Stiglitz on this one. Here is the Problem: Current officialdom–both Government and Banking leadership–passed the buck, insisting such regulation would apply only after their own tenure. This means that they will be fully empowered to continue doing business as usual, while placing the onus of failure upon their replacements. These replacements will find a much greater need to raise capital to maintain loan levels, and at a lower Profits rate per issuance. It might have been the only way to gain agreement for Basel III, but no one expects their successors to be genuinely in love with the restrictions; and there will be a Basel IV before Basel III is implemented. One can study the implications of Basel III here.
David Leonhardt may be a very smart young individual, but sometimes even the wisdom of age cannot cull the essential information. David claims that Inflation is nonexistent, and has not been present for almost two years. The hidden aspect behind this datum comes in the formation of the basket of Goods used to determine Inflation, and How that basket is used. I call this the Lux Rule, basically because I don’t think anyone else contemplated it. No Good should be used to balance the basket of Goods–not included in the Averaging of Prices–if over 20% of its Consumer Demand has dissipated through lack of Sales since the height of the last Boom. The Rule insists that the Good must still be within the Basket based upon Consumer Preference. A drop in Consumer Demand for a Good thereby cannot be accounted to be Deflation. Such a Drop from the basket is quite acceptable, because such Consumer Demand loss does not incite Inflation, but straightens the considerations in determining the Inflation in necessary Products which the Consumer cannot avoid.
I will finish Today with a rant against the Geithner plan to stimulate small business. Granting small business Tax advantages and loan guarantees will not increase Consumer Demand in any way. It will only result in higher business failures with a loss of equity for All concerned. Current successful business will splinter to meet the requirements for small business ventures with resultant loss of current management skills which have led to success. We need a reorganization of the Tax Code, not further confusion. The one thing we absolutely need to avoid is further Tax exemptions, deductions, and/or Tax Credits. The more you split the Taxpayer polity, the worse are all aspects for both business and Government. lgl