Former Federal Reserve Chairman Paul Volcker speaks in New York about the impact of the financial crisis on the U.S. economy.

I don't really agree with him about inflation. Prices are up. Prices for homes are up substantially in Atlanta versus 10 years ago and this is a market that isn't thought to have seen substantial price increases relative to some of the markets at the epicenter of this crisis. But its not just houses. Cars are substantially more expensive than they were ten years ago. For example, I drive a 1998 ford explorer, which is a pretty popular American car. The MSRP in 1998 was 18 to 30 thousand, today it is between 30 and 40 thousand. Thats a 60% increase in price! The price inflation has already been built in, but there hasn't been a simultanous wage inflation - as Volcker notes, the difference was sucked up by the incomes of a small segment of society and not broadly distributed in the economy, and the whole system continued to function by offering unsustainable credit.

I think you have two choices. You can either inflate the currency such that salaries come in line with current prices on a nominal basis, or you can deflate assets until prices come in line with present salaries on a nominal basis. Either way, somebody gets fucked. You are either going to fuck people who own assets, which is what you are currently doing, or you are going to fuck people who own debt. A reasonable compromise would split the difference.

TARP and this anti-foreclosure bill seem to be attempts to get out of this situation without having to make this hard choice. I don't see how thats possible, because it presumes that the present situation is sustainable. Something must give.

Calculated Risk: Volcker Speech: Economy May Suffer for a `Long Time’