Listen to Larry

Uri Dadush and Moises Naim are as brave and as intellectually honest as Olivier Blanchard in pointing out that economics fundamentally isn't about absolute prices, but about relative prices.

But there is a way to correct relative prices that requires neither Greece, Spain, and Ireland pulling out of the Euro nor the ECB printing enough money to generate inflation in all the Euro countries apart from these three, who presumably, would keep their prices fixed while those of others rose.

"Greece is being victimized by its use of the Euro. Prices and wages within Greece are too high and can't readily be adjusted downward. Were the country using its own currency, it could simply devalue." This, together with profligate government spending, is the generally accepted explanation for the run on Greek bonds.

I know too little about the Greek economy to agree or disagree with this prognosis. The country is clearly running a large official budget deficit, but as a share of GDP it's roughly the same as that in the U.S. It's official debt is a much larger share of GDP than in the U.S. But U.S. implicit government debt may well swamp the corresponding GDP-scaled figure for Greece. (Implicit government debt includes commitments to make future entitlement payments).

The President has announced his intention/desire to stop big banks from engaging in proprietary trading. (see here)

This is one of the first steps called for in my Limited Purpose Banking proposal (see Jimmy Stewart Is Dead, forthcoming Feb. 22nd by John Wiley and Sons).

The President is clearly heading in the right direction. The question is whether he understands the final destination -- transforming all banks, insurance companies, hedge funds, and other entities with limited liability into pass-through mutual fund companies.

And "all banks" means all banks. There are plenty of small banks around the country that are failing because they engaged in the same "borrowing to gamble, and leave the losings for the taxpayer" business plan that was followed by Bear, Lehman, AIG, Citigroup, etc.

The House of Representatives just passed the Administration's Financial Overhaul Bill. It includes the creation of a Consumer Financial Protection Agency. This is real progress. The rest seems a real sham and a real shame.

Re the Consumer Financial Protection Agency, unwary consumers continue to be fleeced left, right, and center by the financial industry. A new study by economists Susan Woodward and Robert Hall (see the report here.) shows just how badly low income households with little financial acumen are routinely taken to the cleaners by "reputable" financial companies.

Two personal experiences in the past couple of months confirm this.

"Listen to Larry" is a bit presumptuous. It suggests I know what I'm talking about and others don't. I don't feel that way. I chose the title despite my concerns about sounding presumptuous in order to convey an alternative sound bite to "Talk to Chuck."

I haven't talked to Chuck and can't speak about his advice or his company's products. But my general view and that of what I sense is the vast majority of economists is that the financial industry and financial "experts" are selling large quantities of financial products of highly dubious value.

So "Talk to Chuck, but Listen to Larry" is an admonition that economists view things very differently than other so called financial professionals.

Full disclosure: I do have a personal financial planning program, called ESPlanner, that I market via my company (www.esplanner.com). But at www.esplanner.com/basic there is a simplified, on-line version that you can run for free.

As Dubai World’s default shows, the financial crisis is far from over. Surprise, surprise, among the creditors with the biggest exposure is Royal Bank of Scotland – a reminder that reckless lending by supersized banks was a global phenomenon. Taxpayers are entitled to ask for a radical reform of banking regulation to ensure they will never again have to foot huge bills for financial folly.

Limited Purpose Banking, which I discuss in my forthcoming (February 22, 2009 with Wiley and Sons)book, Jimmy Stewart Is Dead -- Ending the World's Financial Plague Before It Strikes Again, provides a credible and simple solution to our financial debacle.