I was wondering if somebody could educate me on this. Up until the huge collapse, banks kept the bare minimum required by the government stored up in their vaults. And this makes sense, why keep money in your vaults when you can invest it to make more money? I mean, banks have over a trillion dollars waiting to be spent (and using the money multiplier that is significantly more than that which could be on the market for basic economic growth).
So, why arent they spending? Why is the government STILL printing money if there is still all of this unused money? Will interest rates automatically rise if printing stops? Why are the banks collecting interest on this money too?
I herd in the first debate, Romney said that one of the presidents regulations on banks, made it so that there are steep penalties for loaning money to unqualified persons or companies.
However where Romney criticized this regulation wasn't the rule in its self, he said that the rule didn't clearly define the threshold of what constituted a person or company that should be deemed unqualified / qualified.
So this makes banks afraid to lend money, because they fear this penalty.
I suppose this could just be one aspect, and given it came directly from a candidates mouth it probably has spin.
This is the result of the bailout. We gave a bunch of money to the banks and hoped they would start lending, and they didn't, and we were like "aw shucks."
Reserves ensures the ability to withdrawals are always possible. There are other macroeconomics that factor in to the amount - but you won't understand it without a good understanding of economics.
Why is the government giving them interest on it though? They are basically printing their own money by not spending the money that the government gave them.
EDIT
Lots of money printed=low interest rates.
Reserves ensures the ability to withdrawals are always possible. There are other macroeconomics that factor in to the amount - but you won't understand it without a good understanding of economics.
The image I posted has the reserves held for 2000-2008, then the massive spike from the crisis for 2008-2010. I have a pretty decent understanding of macroeconomics, so please try me.
EDIT2: I also posed the question of "if printing stops will interest rates automatically rise?" which shouldve indicated that I understood printing = lower interest rates
I don't work at any of the big banks. I would guess they are having a hard time finding good loans to place all their excess reserves into. That may be part of the reason why they got so aggressively into sub-prime lending in the first place. They kept holding onto more and more money for their clients, but couldn't find enough qualified borrowers to profit from. So they started adding in sub-prime borrowers. Now, they've gotten burned (and maybe regulated) into not lending out to sub-prime borrowers, but they still have a crap ton of people wanting the big banks to hold onto their money.
The banks have nowhere profitable to put that money, so the banks are just holding onto their reserves.
It's basically because of quantitative easing, an unconventional approach to monetary policy. The government essentially dumps a ton of printed money into the economy. Usually the government tries to lower interest rates to encourage spending, but they lowered interest rates almost to zero and it wasn't enough. So the government buys up financial assets with newly printed money, increasing the banks' excess reserves in the hopes that they will lend it and stimulate the economy. But this didn't work out that well: banks are holding onto it (because they're afraid to lend out more money, and people are afraid to borrow more money), and it hurt the credit quality of the United States, among other things, lol.
On October 26 2012 12:58 RenSC2 wrote: I don't work at any of the big banks. I would guess they are having a hard time finding good loans to place all their excess reserves into. That may be part of the reason why they got so aggressively into sub-prime lending in the first place. They kept holding onto more and more money for their clients, but couldn't find enough qualified borrowers to profit from. So they started adding in sub-prime borrowers. Now, they've gotten burned (and maybe regulated) into not lending out to sub-prime borrowers, but they still have a crap ton of people wanting the big banks to hold onto their money.
The banks have nowhere profitable to put that money, so the banks are just holding onto their reserves.
And to add to this, wouldn't the continuous printing of money from government the banks the incentive to start finding a place to spend?
On October 26 2012 12:56 Djzapz wrote: I was writing but then it occurred to me that this kind of looks like a homework thread.
I have a 95.5 in the class and this is not at all related to homework. These are questions that I have in regards to that graph because I found it alarming. My homework in the class is all online with multiple choice.
On October 26 2012 12:56 Djzapz wrote: I was writing but then it occurred to me that this kind of looks like a homework thread.
I have a 95.5 in the class and this is not at all related to homework. These are questions that I have in regards to that because I found it alarming. My homework in the class is all online with multiple choice.
Even if I took your word for it, what kind of person gets 95.5% and is unable to answer to those questions which are essentially elementary? (Edit: I guess classes that have online multiple answers homework x_x). Anyway come on. Worst case scenario, google it. Easymode.
On October 26 2012 13:02 sam!zdat wrote: Yeah, this seemed far too dangerous and intellectually stimulating a question for homework...
zzzzing!
Definitely quite interesting though, cool that you're wondering about these kinds of things and getting some discussion going :D
This has been an awesome semester for me so far. Love my classes and I am taking a government and macroeconomics class during an election cycle (and one that has a heavy focus on the economy at that!). Learning so much and seeing everything in action and its all relevant to what is going on!
On October 26 2012 12:56 Djzapz wrote: I was writing but then it occurred to me that this kind of looks like a homework thread.
I have a 95.5 in the class and this is not at all related to homework. These are questions that I have in regards to that because I found it alarming. My homework in the class is all online with multiple choice.
Even if I took your word for it, what kind of person gets 95.5% and is unable to answer to those questions which are essentially elementary? (Edit: I guess classes that have online multiple answers exams x_x). Anyway come on. Worst case scenario, google it. Easymode.
Alright, so: 1) The bank is given over a trillion dollars from the government to bail them out because hey.. they needed the money! 2) The bank then spends basically NONE of it. But, I thought they needed it? 3) Interest rates are lower because of it, but did they really need to be lower? Which leads me to another question, couldnt there have been a more effective distribution than giving it to banks then letting them sit on it and collect interest? This wouldve kept interest rates low but mightve stimulated spending from the public, no? I mean if you give it directly to people, they will either spend it or save it. Either way, giving a trillion to the public couldve done a great deal more. Right?
On October 26 2012 13:06 XoXiDe wrote: If you feel like reading, this is interesting.
On October 26 2012 12:56 Djzapz wrote: I was writing but then it occurred to me that this kind of looks like a homework thread.
I have a 95.5 in the class and this is not at all related to homework. These are questions that I have in regards to that because I found it alarming. My homework in the class is all online with multiple choice.
Even if I took your word for it, what kind of person gets 95.5% and is unable to answer to those questions which are essentially elementary? (Edit: I guess classes that have online multiple answers homework x_x). Anyway come on. Worst case scenario, google it. Easymode.
Banks aren't lending their excess reserves for two main reasons.
1) There isn't enough demand for loans. Some people borrowed too much before the crisis and so they are preoccupied paying that debt back. Other people don't want to borrow when they are unsure if they will be able to pay it back due to a crummy economy. Businesses could borrow more but don't see the economy as strong enough to justify large expansions.
2) Banks got burned badly with foreclosures - hundreds went bust - and they don't want to repeat past mistakes. So now they are being ultra-careful with who they lend to. While not a bad thing necessarily, it does mean that fewer loans will be made.
Now why is the Fed still printing money? Because printing money will make money cheaper - interest rates will fall and entice people and businesses to borrow more. So a $200K mortgage that doesn't work at 5% works when the mortgage rate falls to 3% both from the perspective of the homeowner and the bank.
On October 26 2012 12:56 Djzapz wrote: I was writing but then it occurred to me that this kind of looks like a homework thread.
I have a 95.5 in the class and this is not at all related to homework. These are questions that I have in regards to that because I found it alarming. My homework in the class is all online with multiple choice.
Even if I took your word for it, what kind of person gets 95.5% and is unable to answer to those questions which are essentially elementary? (Edit: I guess classes that have online multiple answers exams x_x). Anyway come on. Worst case scenario, google it. Easymode.
Alright, so: 1) The bank is given over a trillion dollars from the government to bail them out because hey.. they needed the money! 2) The bank then spends basically NONE of it. But, I thought they needed it? 3) Interest rates are lower because of it, but did they really need to be lower? Which leads me to another question, couldnt there have been a more effective distribution than giving it to banks then letting them sit on it and collect interest? This wouldve kept interest rates low but mightve stimulated spending from the public, no? I mean if you give it directly to people, they will either spend it or save it. Either way, giving a trillion to the public couldve done a great deal more. Right?
EDIT: Grade since you seemingly dont believe me. Only 94.9 not 95.5 as I thought. + Show Spoiler +
On October 26 2012 12:56 Djzapz wrote: I was writing but then it occurred to me that this kind of looks like a homework thread.
I have a 95.5 in the class and this is not at all related to homework. These are questions that I have in regards to that because I found it alarming. My homework in the class is all online with multiple choice.
Even if I took your word for it, what kind of person gets 95.5% and is unable to answer to those questions which are essentially elementary? (Edit: I guess classes that have online multiple answers exams x_x). Anyway come on. Worst case scenario, google it. Easymode.
Alright, so: 1) The bank is given over a trillion dollars from the government to bail them out because hey.. they needed the money! 2) The bank then spends basically NONE of it. But, I thought they needed it? 3) Interest rates are lower because of it, but did they really need to be lower? Which leads me to another question, couldnt there have been a more effective distribution than giving it to banks then letting them sit on it and collect interest? This wouldve kept interest rates low but mightve stimulated spending from the public, no? I mean if you give it directly to people, they will either spend it or save it. Either way, giving a trillion to the public couldve done a great deal more. Right?
EDIT: Grade since you seemingly dont believe me. Only 94.9 not 95.5 as I thought. + Show Spoiler +
On October 26 2012 13:06 XoXiDe wrote: If you feel like reading, this is interesting.
On October 26 2012 13:17 JonnyBNoHo wrote: Banks aren't lending their excess reserves for two main reasons.
1) There isn't enough demand for loans. Some people borrowed too much before the crisis and so they are preoccupied paying that debt back. Other people don't want to borrow when they are unsure if they will be able to pay it back due to a crummy economy. Businesses could borrow more but don't see the economy as strong enough to justify large expansions.
2) Banks got burned badly with foreclosures - hundreds went bust - and they don't want to repeat past mistakes. So now they are being ultra-careful with who they lend to. While not a bad thing necessarily, it does mean that fewer loans will be made.
Now why is the Fed still printing money? Because printing money will make money cheaper - interest rates will fall and entice people and businesses to borrow more. So a $200K mortgage that doesn't work at 5% works when the mortgage rate falls to 3% both from the perspective of the homeowner and the bank.
I can understand a lower demand for loans, so did the government simply over-correct? Or did the government misappropriate the money by giving it to banks instead of finding other uses for it?
Also, arent rates low enough? They are below 3% now for a 15 year.
On October 26 2012 12:56 Djzapz wrote: I was writing but then it occurred to me that this kind of looks like a homework thread.
I have a 95.5 in the class and this is not at all related to homework. These are questions that I have in regards to that because I found it alarming. My homework in the class is all online with multiple choice.
Even if I took your word for it, what kind of person gets 95.5% and is unable to answer to those questions which are essentially elementary? (Edit: I guess classes that have online multiple answers exams x_x). Anyway come on. Worst case scenario, google it. Easymode.
Alright, so: 1) The bank is given over a trillion dollars from the government to bail them out because hey.. they needed the money! 2) The bank then spends basically NONE of it. But, I thought they needed it? 3) Interest rates are lower because of it, but did they really need to be lower? Which leads me to another question, couldnt there have been a more effective distribution than giving it to banks then letting them sit on it and collect interest? This wouldve kept interest rates low but mightve stimulated spending from the public, no? I mean if you give it directly to people, they will either spend it or save it. Either way, giving a trillion to the public couldve done a great deal more. Right?
EDIT: Grade since you seemingly dont believe me. Only 94.9 not 95.5 as I thought. + Show Spoiler +
On October 26 2012 13:06 XoXiDe wrote: If you feel like reading, this is interesting.
On October 26 2012 12:56 Djzapz wrote: I was writing but then it occurred to me that this kind of looks like a homework thread.
I have a 95.5 in the class and this is not at all related to homework. These are questions that I have in regards to that because I found it alarming. My homework in the class is all online with multiple choice.
Even if I took your word for it, what kind of person gets 95.5% and is unable to answer to those questions which are essentially elementary? (Edit: I guess classes that have online multiple answers exams x_x). Anyway come on. Worst case scenario, google it. Easymode.
Alright, so: 1) The bank is given over a trillion dollars from the government to bail them out because hey.. they needed the money! 2) The bank then spends basically NONE of it. But, I thought they needed it? 3) Interest rates are lower because of it, but did they really need to be lower? Which leads me to another question, couldnt there have been a more effective distribution than giving it to banks then letting them sit on it and collect interest? This wouldve kept interest rates low but mightve stimulated spending from the public, no? I mean if you give it directly to people, they will either spend it or save it. Either way, giving a trillion to the public couldve done a great deal more. Right?
Well, the bank bailouts are separate from the issue of banks sitting on their deposits. The bailout money wasn't something the banks could lend out - it was used to shore up their balance sheets - while the Federal reserve printing money is what ended up deposited at the banks.
As far as giving money to the public in lieu of printing money the problem is the reversal. Printing money gets reversed when the economy picks up to hold back inflation. So just giving the money away wouldn't work.
On October 26 2012 12:56 Djzapz wrote: I was writing but then it occurred to me that this kind of looks like a homework thread.
I have a 95.5 in the class and this is not at all related to homework. These are questions that I have in regards to that because I found it alarming. My homework in the class is all online with multiple choice.
Even if I took your word for it, what kind of person gets 95.5% and is unable to answer to those questions which are essentially elementary? (Edit: I guess classes that have online multiple answers exams x_x). Anyway come on. Worst case scenario, google it. Easymode.
Alright, so: 1) The bank is given over a trillion dollars from the government to bail them out because hey.. they needed the money! 2) The bank then spends basically NONE of it. But, I thought they needed it? 3) Interest rates are lower because of it, but did they really need to be lower? Which leads me to another question, couldnt there have been a more effective distribution than giving it to banks then letting them sit on it and collect interest? This wouldve kept interest rates low but mightve stimulated spending from the public, no? I mean if you give it directly to people, they will either spend it or save it. Either way, giving a trillion to the public couldve done a great deal more. Right?
You've been given sources explaining this way better than I ever could, and I don't have insight on the situation for every bank but.
1- No single bank has been "given" a trillion dollars, not even close. The bailout money was spread across a bunch of different businesses. Also, the money isn't given, it's loaned - and the majority of it has been paid back WITH interests. I'm sure some of the banks didn't need it, it doesn't matter - those banks already paid back their debt and the government actually collected interests and turned a profit off those. The money that's in the banks is NOT the bailout money. 2- It's part of the government's strategy for the crisis. Read the sources you've been given. Precaution against some risks, and also not too many people are demanding bank credit right now. 3- Interest rate doesn't need to be low. The fine folks at the federal reserve decide that it should be this low to favor spending.
Your next question shows that you don't understand the strategy behind saving those banks. People are incredibly dependent on their banks. If a bank falls, those people lose their life savings. You can throw piles of money at people if you want, but the idea behind this kind of interventionism is that if you let those huge behemoth banks fall, some people will be fucked beyond belief.
Still not convinced that this isn't a homework thread but either way like I said read the papers you've been given here. Of course you can disagree with the government's way to go about this. Anyway I need to sleep really badly. Cheers!
On October 26 2012 13:17 JonnyBNoHo wrote: Banks aren't lending their excess reserves for two main reasons.
1) There isn't enough demand for loans. Some people borrowed too much before the crisis and so they are preoccupied paying that debt back. Other people don't want to borrow when they are unsure if they will be able to pay it back due to a crummy economy. Businesses could borrow more but don't see the economy as strong enough to justify large expansions.
2) Banks got burned badly with foreclosures - hundreds went bust - and they don't want to repeat past mistakes. So now they are being ultra-careful with who they lend to. While not a bad thing necessarily, it does mean that fewer loans will be made.
Now why is the Fed still printing money? Because printing money will make money cheaper - interest rates will fall and entice people and businesses to borrow more. So a $200K mortgage that doesn't work at 5% works when the mortgage rate falls to 3% both from the perspective of the homeowner and the bank.
printing money also is to maintain it's current interest rate. with the high RR ration, the interest would rise without any interference.
The problem with printing money is of cause inflation, devalue compared to foreign currency etc
On October 26 2012 12:56 Djzapz wrote: I was writing but then it occurred to me that this kind of looks like a homework thread.
I have a 95.5 in the class and this is not at all related to homework. These are questions that I have in regards to that because I found it alarming. My homework in the class is all online with multiple choice.
Even if I took your word for it, what kind of person gets 95.5% and is unable to answer to those questions which are essentially elementary? (Edit: I guess classes that have online multiple answers exams x_x). Anyway come on. Worst case scenario, google it. Easymode.
Alright, so: 1) The bank is given over a trillion dollars from the government to bail them out because hey.. they needed the money! 2) The bank then spends basically NONE of it. But, I thought they needed it? 3) Interest rates are lower because of it, but did they really need to be lower? Which leads me to another question, couldnt there have been a more effective distribution than giving it to banks then letting them sit on it and collect interest? This wouldve kept interest rates low but mightve stimulated spending from the public, no? I mean if you give it directly to people, they will either spend it or save it. Either way, giving a trillion to the public couldve done a great deal more. Right?
EDIT: Grade since you seemingly dont believe me. Only 94.9 not 95.5 as I thought. + Show Spoiler +
On October 26 2012 13:06 XoXiDe wrote: If you feel like reading, this is interesting.
What interest? How can they collect interest when that money is doing absolutely nothing while kept in reserve?
Banks collect a .25% interest on all reserves.
How can they collect interest on something kept in reserve?
I've looked into the fractional reserve system to get a basic understanding of how banks can seemingly pull money out of nowhere, and somehow charge interest on money that doesn't actually exist, but how the fuck can they actually pull money out of thin air (interest on money literally doing nothing)?
On October 26 2012 12:56 Djzapz wrote: I was writing but then it occurred to me that this kind of looks like a homework thread.
I have a 95.5 in the class and this is not at all related to homework. These are questions that I have in regards to that because I found it alarming. My homework in the class is all online with multiple choice.
Even if I took your word for it, what kind of person gets 95.5% and is unable to answer to those questions which are essentially elementary? (Edit: I guess classes that have online multiple answers exams x_x). Anyway come on. Worst case scenario, google it. Easymode.
Alright, so: 1) The bank is given over a trillion dollars from the government to bail them out because hey.. they needed the money! 2) The bank then spends basically NONE of it. But, I thought they needed it? 3) Interest rates are lower because of it, but did they really need to be lower? Which leads me to another question, couldnt there have been a more effective distribution than giving it to banks then letting them sit on it and collect interest? This wouldve kept interest rates low but mightve stimulated spending from the public, no? I mean if you give it directly to people, they will either spend it or save it. Either way, giving a trillion to the public couldve done a great deal more. Right?
Well, the bank bailouts are separate from the issue of banks sitting on their deposits. The bailout money wasn't something the banks could lend out - it was used to shore up their balance sheets - while the Federal reserve printing money is what ended up deposited at the banks.
As far as giving money to the public in lieu of printing money the problem is the reversal. Printing money gets reversed when the economy picks up to hold back inflation. So just giving the money away wouldn't work.
Ah I see. I was under the impression that the money sitting in their reserves was from the bailout, rather than from the money that has continued to be printed.
Is this also why they are collecting interest from the government for their reserves? A kind of means for the government to continue to print money?
On October 26 2012 12:56 Djzapz wrote: I was writing but then it occurred to me that this kind of looks like a homework thread.
I have a 95.5 in the class and this is not at all related to homework. These are questions that I have in regards to that because I found it alarming. My homework in the class is all online with multiple choice.
Even if I took your word for it, what kind of person gets 95.5% and is unable to answer to those questions which are essentially elementary? (Edit: I guess classes that have online multiple answers exams x_x). Anyway come on. Worst case scenario, google it. Easymode.
Alright, so: 1) The bank is given over a trillion dollars from the government to bail them out because hey.. they needed the money! 2) The bank then spends basically NONE of it. But, I thought they needed it? 3) Interest rates are lower because of it, but did they really need to be lower? Which leads me to another question, couldnt there have been a more effective distribution than giving it to banks then letting them sit on it and collect interest? This wouldve kept interest rates low but mightve stimulated spending from the public, no? I mean if you give it directly to people, they will either spend it or save it. Either way, giving a trillion to the public couldve done a great deal more. Right?
EDIT: Grade since you seemingly dont believe me. Only 94.9 not 95.5 as I thought. + Show Spoiler +
On October 26 2012 13:06 XoXiDe wrote: If you feel like reading, this is interesting.
What interest? How can they collect interest when that money is doing absolutely nothing while kept in reserve?
Banks collect a .25% interest on all reserves.
How can they collect interest on something kept in reserve?
I've looked into the fractional reserve system to get a basic understanding of how banks can seemingly pull money out of nowhere, and somehow charge interest on money that doesn't actually exist, but how the fuck can they actually pull money out of thin air (interest on money literally doing nothing)?
I dont know why they are getting interest on it, just something that the government has in place.
EDIT:
Your next question shows that you don't understand the strategy behind saving those banks. People are incredibly dependent on their banks. If a bank falls, those people lose their life savings. You can throw piles of money at people if you want, but the idea behind this kind of interventionism is that if you let those huge behemoth banks fall, some people will be fucked beyond belief.
Actually the question was operating under the belief that the banks didnt need the bailout money after all (as I assumed the reserves were from that). So I was under the assumption that the banks wouldnt have failed. But I have been corrected in this.
On October 26 2012 12:56 Djzapz wrote: I was writing but then it occurred to me that this kind of looks like a homework thread.
I have a 95.5 in the class and this is not at all related to homework. These are questions that I have in regards to that because I found it alarming. My homework in the class is all online with multiple choice.
Even if I took your word for it, what kind of person gets 95.5% and is unable to answer to those questions which are essentially elementary? (Edit: I guess classes that have online multiple answers exams x_x). Anyway come on. Worst case scenario, google it. Easymode.
Alright, so: 1) The bank is given over a trillion dollars from the government to bail them out because hey.. they needed the money! 2) The bank then spends basically NONE of it. But, I thought they needed it? 3) Interest rates are lower because of it, but did they really need to be lower? Which leads me to another question, couldnt there have been a more effective distribution than giving it to banks then letting them sit on it and collect interest? This wouldve kept interest rates low but mightve stimulated spending from the public, no? I mean if you give it directly to people, they will either spend it or save it. Either way, giving a trillion to the public couldve done a great deal more. Right?
EDIT: Grade since you seemingly dont believe me. Only 94.9 not 95.5 as I thought. + Show Spoiler +
On October 26 2012 13:06 XoXiDe wrote: If you feel like reading, this is interesting.
What interest? How can they collect interest when that money is doing absolutely nothing while kept in reserve?
Banks collect a .25% interest on all reserves.
How can they collect interest on something kept in reserve?
I've looked into the fractional reserve system to get a basic understanding of how banks can seemingly pull money out of nowhere, and somehow charge interest on money that doesn't actually exist, but how the fuck can they actually pull money out of thin air (interest on money literally doing nothing)?
The fed pays interests on bank reserves to keep the money in the coffers. You're right that it doesn't come from thin air, obviously. It's a monetary policy like the low interest rate, and likely a means to keep inflation where they want it, among other things.
The Federal Reserve used all the weaponry in its arsenal during the financial crisis, and created some new ones. The Treasury’s decision to pull back one innovation — in which the Treasury sold bonds and put the money on deposit at the Fed — has put the spotlight on another one. Because of an act of Congress, the Fed now has the power to pay interest on the reserves that banks leave on deposit at the Fed. That’ll change the way the Fed manages the economy in the future — but only in ways that credit market geeks can understand.
For years, the Fed’s primary tool has been the federal funds interest rate, the rate that banks charge each other for overnight loans. Banks with more reserves than they need to comply with legal minimums lend to others who need reserves. The Fed’s policy committee — the Federal Open Market Committee — sets a target for that rate, but doesn’t control it. It influences it by affecting the supply and demand for reserves in the open market. In the past, when it wanted rates higher, it would announce a new target with much fanfare and then the next day reduce the supply of reserves — usually by selling securities from its portfolio which drained cash from the banking system. Rates usually responded to the announcement in anticipation of the actual Fed market maneuvers. When the Fed wanted rates lower, it did the opposite. Changes in the fed funds rate ricochet through the economy. Higher rates tend to discourage consumer and business borrowing and slow economic activity.
Today, the Fed’s target for the fed funds rates is near zero and the banking system is awash with reserves. Many of those reserves aren’t being lent to other banks which can then use them to lend them to customers. Instead, they’re on deposit with the Fed. Until recently, the Fed didn’t pay interest on these reserves. Now it does.
That changes things.
Someday, the Fed will declare the emergency over and decide to tighten credit. There’s concern that because there are so many reserves sloshing around the banking system and all sorts of ordinary relationships have been distorted by the crisis and the Fed’s response that it won’t be able to get the fed funds rate up simply by announcing a new target and then reinforcing that with open-market operations. After all, as the Federal Reserve Bank of New York acknowledged earlier in the crisis, from “time to time” its trading desk has been “unable to prevent the federal funds rate from falling to very low levels.”
So now when the Fed decides it wants to raise the fed funds rate, it now has two options: It can affect the SUPPLY of reserves as it used to by buying and selling Treasury securities on the open market. Or it can influence the DEMAND for reserves. If it raises the interest rate it pays on reserves, it will encourage banks to put more reserves on deposit at the Fed and lend less of their reserves to other banks in the interbank market. That should push the fed funds rate up. This, the Fed says, will mean less credit and higher interest rates throughout the banking system. “Paying interest on excess balances just makes it easier for the [New York Fed trading] Desk to implement the target federal funds rate chosen by the FOMC,” the New York Fed says.
“Raising the rate of interest paid on reserve balances will give us substantial leverage over the federal funds rate and other short-term market interest rates, because banks generally will not supply funds to the market at an interest rate significantly lower than they can earn risk free by holding balances at the Federal Reserve,” Fed Chairman Ben Bernanke told Congress earlier this year. “Indeed, many foreign central banks use the ability to pay interest on reserves to help set a floor on market interest rates. The attractiveness to banks of leaving their excess reserve balances with the Federal Reserve can be further increased by offering banks a choice of maturities for their deposits.”
This new tool, the Fed says to anyone who will listen, should reassure anyone that’s worrying that the Fed has the technical capacity to raise interest rates when the time comes.
A longer explanation from the NY Fed here. <-- looks like a good read if you are having trouble falling asleep.
On October 26 2012 12:56 Djzapz wrote: I was writing but then it occurred to me that this kind of looks like a homework thread.
I have a 95.5 in the class and this is not at all related to homework. These are questions that I have in regards to that because I found it alarming. My homework in the class is all online with multiple choice.
Even if I took your word for it, what kind of person gets 95.5% and is unable to answer to those questions which are essentially elementary? (Edit: I guess classes that have online multiple answers exams x_x). Anyway come on. Worst case scenario, google it. Easymode.
Alright, so: 1) The bank is given over a trillion dollars from the government to bail them out because hey.. they needed the money! 2) The bank then spends basically NONE of it. But, I thought they needed it? 3) Interest rates are lower because of it, but did they really need to be lower? Which leads me to another question, couldnt there have been a more effective distribution than giving it to banks then letting them sit on it and collect interest? This wouldve kept interest rates low but mightve stimulated spending from the public, no? I mean if you give it directly to people, they will either spend it or save it. Either way, giving a trillion to the public couldve done a great deal more. Right?
EDIT: Grade since you seemingly dont believe me. Only 94.9 not 95.5 as I thought. + Show Spoiler +
On October 26 2012 13:06 XoXiDe wrote: If you feel like reading, this is interesting.
What interest? How can they collect interest when that money is doing absolutely nothing while kept in reserve?
Banks collect a .25% interest on all reserves.
How can they collect interest on something kept in reserve?
I've looked into the fractional reserve system to get a basic understanding of how banks can seemingly pull money out of nowhere, and somehow charge interest on money that doesn't actually exist, but how the fuck can they actually pull money out of thin air (interest on money literally doing nothing)?
I dont know why they are getting interest on it, just something that the government has in place.
This is basically exactly what you would expect during a Liquidity trap:
A liquidity trap is a situation described in Keynesian economics in which injections of cash into the private banking system by a central bank fail to lower interest rates and hence fail to stimulate economic growth. A liquidity trap is caused when people hoard cash because they expect an adverse event such as deflation, insufficient aggregate demand, or war. Signature characteristics of a liquidity trap are short-term interest rates that are near zero and fluctuations in the monetary base that fail to translate into fluctuations in general price levels.[citation needed] Contents [hide] 1 Conceptual evolution 2 Criticisms 3 See also 4 References 5 Further reading [edit]Conceptual evolution
In its original conception, a liquidity trap refers to the phenomenon when increased money supply fails to lower interest rates. Usually central banks try to lower interest rates by buying bonds with newly created cash. In a liquidity trap, bonds pay little to no interest, which makes them nearly equivalent to cash. Under the narrow version of Keynesian theory in which this arises, it is specified that monetary policy affects the economy only through its effect on interest rates. Thus, if an economy enters a liquidity trap, further increases in the money stock will fail to further lower interest rates and, therefore, fail to stimulate. In the wake of the Keynesian revolution in the 1930s and 1940s, various neoclassical economists sought to minimize the concept of a liquidity trap by specifying conditions in which expansive monetary policy would affect the economy even if interest rates failed to decline. Don Patinkin and Lloyd Metzler specified the existence of a "Pigou effect," named after English economist Arthur Cecil Pigou, in which the stock of real money balances is an element of the aggregate demand function for goods, so that the money stock would directly affect the "investment saving" curve in an IS/LM analysis, and monetary policy would thus be able to stimulate the economy even during the existence of a liquidity trap. While many economists had serious doubts about the existence or significance of this Pigou Effect, by the 1960s academic economists gave little credence to the concept of a liquidity trap. The neoclassical economists asserted that, even in a liquidity trap, expansive monetary policy could still stimulate the economy via the direct effects of increased money stocks on aggregate demand. This was essentially the hope of the Bank of Japan in the 1990s, when it embarked upon quantitative easing. Similarly it was the hope of the central banks of the United States and Europe in 2008–2009, with their foray into quantitative easing. These policy initiatives tried to stimulate the economy through methods other than the reduction of short-term interest rates. When the Japanese economy fell into a period of prolonged stagnation despite near-zero interest rates, the concept of a liquidity trap returned to prominence.[1] However, while Keynes's formulation of a liquidity trap refers to the existence of a horizontal demand curve for money at some positive level of interest rates, the liquidity trap invoked in the 1990s referred merely to the presence of zero interest rates (ZIRP), the assertion being that since interest rates could not fall below zero, monetary policy would prove impotent in those conditions, just as it was asserted to be in a proper exposition of a liquidity trap. While this later conception differed from that asserted by Keynes, both views have in common first the assertion that monetary policy affects the economy only via interest rates, and second the conclusion that monetary policy cannot stimulate an economy in a liquidity trap. Declines in monetary velocity offset injections of short term liquidity... Much the same furor emerged in the United States and Europe in 2008–2010, as short-term policy rates for the various central banks moved close to zero. Paul Krugman argued repeatedly in 2008-11 that much of the developed world, including the United States, Europe, and Japan, was in a liquidity trap.[2] He noted that tripling of the U.S. monetary base between 2008 and 2011 failed to produce any significant effect on U.S. domestic price indices or dollar-denominated commodity prices.[3][4]
Basically, interest rates can't go much (any) lower and there's still not enough demand for this money: no one wants to invest during a bad economy, and the economy is bad because no one wants to invest. This is why most Keynesian economists argue that in a liquidity trap, you have to focus more on fiscal stimulus rather than monetary stimulus (since fiscal stimulus directly injects the money into the system, whereas monetary does not). In other words, you're right that the money could have been spent better elsewhere, but since the money isn't really in the economy it doesn't really cost anything--printing money that doesn't do anything is pretty much the same thing as printing nothing in the first place--and it's better to overshoot monetary policy in this case than undershoot.
The metaphor that always stuck out in my mind is that monetary policy is like a string or a rope: you can pull it to great affect, but trying to push it is downright frustrating.
Unfortunately, in the current political atmosphere, trying to pass a fiscal stimulus motion will only allow your political opponents to tell the public that you're a money-spending socialist who is driving the country up debt-mountain, so clever monetary policy (see Quantitative Easing controversies) is basically trying to compensate for the lack of political will.
The Federal Reserve used all the weaponry in its arsenal during the financial crisis, and created some new ones. The Treasury’s decision to pull back one innovation — in which the Treasury sold bonds and put the money on deposit at the Fed — has put the spotlight on another one. Because of an act of Congress, the Fed now has the power to pay interest on the reserves that banks leave on deposit at the Fed. That’ll change the way the Fed manages the economy in the future — but only in ways that credit market geeks can understand.
For years, the Fed’s primary tool has been the federal funds interest rate, the rate that banks charge each other for overnight loans. Banks with more reserves than they need to comply with legal minimums lend to others who need reserves. The Fed’s policy committee — the Federal Open Market Committee — sets a target for that rate, but doesn’t control it. It influences it by affecting the supply and demand for reserves in the open market. In the past, when it wanted rates higher, it would announce a new target with much fanfare and then the next day reduce the supply of reserves — usually by selling securities from its portfolio which drained cash from the banking system. Rates usually responded to the announcement in anticipation of the actual Fed market maneuvers. When the Fed wanted rates lower, it did the opposite. Changes in the fed funds rate ricochet through the economy. Higher rates tend to discourage consumer and business borrowing and slow economic activity.
Today, the Fed’s target for the fed funds rates is near zero and the banking system is awash with reserves. Many of those reserves aren’t being lent to other banks which can then use them to lend them to customers. Instead, they’re on deposit with the Fed. Until recently, the Fed didn’t pay interest on these reserves. Now it does.
That changes things.
Someday, the Fed will declare the emergency over and decide to tighten credit. There’s concern that because there are so many reserves sloshing around the banking system and all sorts of ordinary relationships have been distorted by the crisis and the Fed’s response that it won’t be able to get the fed funds rate up simply by announcing a new target and then reinforcing that with open-market operations. After all, as the Federal Reserve Bank of New York acknowledged earlier in the crisis, from “time to time” its trading desk has been “unable to prevent the federal funds rate from falling to very low levels.”
So now when the Fed decides it wants to raise the fed funds rate, it now has two options: It can affect the SUPPLY of reserves as it used to by buying and selling Treasury securities on the open market. Or it can influence the DEMAND for reserves. If it raises the interest rate it pays on reserves, it will encourage banks to put more reserves on deposit at the Fed and lend less of their reserves to other banks in the interbank market. That should push the fed funds rate up. This, the Fed says, will mean less credit and higher interest rates throughout the banking system. “Paying interest on excess balances just makes it easier for the [New York Fed trading] Desk to implement the target federal funds rate chosen by the FOMC,” the New York Fed says.
“Raising the rate of interest paid on reserve balances will give us substantial leverage over the federal funds rate and other short-term market interest rates, because banks generally will not supply funds to the market at an interest rate significantly lower than they can earn risk free by holding balances at the Federal Reserve,” Fed Chairman Ben Bernanke told Congress earlier this year. “Indeed, many foreign central banks use the ability to pay interest on reserves to help set a floor on market interest rates. The attractiveness to banks of leaving their excess reserve balances with the Federal Reserve can be further increased by offering banks a choice of maturities for their deposits.”
This new tool, the Fed says to anyone who will listen, should reassure anyone that’s worrying that the Fed has the technical capacity to raise interest rates when the time comes.
A longer explanation from the NY Fed here. <-- looks like a good read if you are having trouble falling asleep.
That second link there is a pretty heavy read. I'm going to read it again tomorrow to make sure I'm understanding this properly.
If I am, then this is a fucking brilliant tool for the Fed to use to control the banks, yet, at the same time, is going to be extremely expensive for taxpayers..... And it failed pretty hard during the crisis for some reason, because it should have been able to help curb the effects of the housing bubble a lot better than it appears to have. I know I'm going to be looking into this a bit more.
EDIT - by extremely expensive, I mean it is not necessarily going to directly use tax money, but it will make an effect on everyone.
On October 26 2012 13:41 TheKwas wrote:no one wants to invest during a bad economy, and the economy is bad because no one wants to invest.
Is this the whole story, though?
Nope. Part of the story is that the graph is nonsense. They have absolute dollars in millions as an axis as though the fractional reserve ratio were not a percentage which will entail a different absolute amount from bank to bank and even a different percentage from bank to bank. It's a contextless graph which doesn't mention the banks, their market capitalization, they reserve percentages.... The graph is designed to make an extreme statement and therefore to evoke a clear answer.
The other part of the story, which you will hear from practically no one, is that the reason the economy is "bad" is because it is correcting for previous OVER-investment. And so the claim that the lack of continued over-investment is the problem with the economy is to ignore that economies should operate around an average equilibrium and deviations from that equilibrium cannot be considered "good" in an objective sense since they will result in corrections in the future with a net negative loss for the economy in comparison.
What most people will hear from their professors, however, is simply that rich entities hoard money and so we need Obama, errr... government to spend trillions in stimulus dollars and tax more because trickle-down economics doesn't work. It's like three straw men rolled into one.
On October 26 2012 12:33 TheRabidDeer wrote: Picture taken from my economics text
I was wondering if somebody could educate me on this. Up until the huge collapse, banks kept the bare minimum required by the government stored up in their vaults. And this makes sense, why keep money in your vaults when you can invest it to make more money? I mean, banks have over a trillion dollars waiting to be spent (and using the money multiplier that is significantly more than that which could be on the market for basic economic growth).
So, why arent they spending? Why is the government STILL printing money if there is still all of this unused money? Will interest rates automatically rise if printing stops? Why are the banks collecting interest on this money too?
1. In 2008 what you had was a bank run. The traditional banking model is: I offer you 3% on your deposits, I take your deposits and loan them out at 6% and thats it. Maybe I buy some treasuries that pay at above 3% and coast on the difference. Since the 1980s biggest banks have moved away from funding themselves via depositors and instead use 'repo.' Basically they take their long term assets on their books mortgages/bonds/securities/whatever and they offer them at a very very tiny discount to someone who has a pile of money for a specific period of time. The pure investment banks like Bear Sterns and Lehman Brothers funded their entire daily operations via such repos. In the mornings their repo desk would call up other banks or big corporations and say we need this much cash and we are willing to pay this much interest and also we will put up bonds and other securities worth this much. The financial crash happened because a larger and larger portion of the bonds used to collateralize these repo agreements were structured products (CDOs) of mortgage backed securities that, theoretically, were as good as government bonds but paid higher interest rates, which made them very appealing. [In a repo transaction even though I am paying you an interest rate for the cash you lent me and you get an interest payment from me and also my bonds to hold onto the interest that those bonds pay to me belong to me and has to be paid back when you return the bonds] As you are probably aware, despite "AAA" moniker slapped onto these bonds a lot of them had various sub prime mortgages, or even worse, synthetic sub-prime 'mortgages' that mimicked a real CDO but without any actual underlying collateral. So when the various sub prime CDOs started failing, many things that were rated 'AAA' turned out be rated '????' and so banks stopped entering into repo agreements with each other or started demanding insane haircuts [Hand over 10 billion dollars in bonds and ill give you 5 billion in cash] which started outright blowing up people who depended on day-to-day funding like Bear and Lehman but it also put giant holes into banks balance sheets. You see, as part of the entire securitization process through which banks handed over money to mortgage originators to get loans and then in turn repackaged them into bonds there was a tremendous amount of raw material, CDOs themselves or just mortgages being stored in a metaphorical 'warehouse' legal entity while the bankers got to it, on the balance sheets of banks. In theory this was great because banking regulations required them to hold back certain reserves and a AAA rated bond required almost no haircut whereas an actual loan to a corporation was haircuted much more severely. So almost every bank in the world that was a major player in the capital markets game has a ton of things on its balance sheet that is on paper "AAA" but in reality "???." Banks stopped trusting each other and stopped re-rolling each others repos. Which is essentially what a bank run was in the old days before deposit insurance, customers stopped trusting their banks and asked to take out their money. Because banks are always borrowing short and lending long they found themselves with a funding mismatch and started dying
2) The governments' response, eventually, was to bailout the banks. There were actually several different degrees of respones. Firs there was an idea that the Fed would become the repo counter party to the banks, but because banks didnt trust each other and the Fed and the banks were worried that if they appeared to be going to the bank they would look in danger and would further deteroirate the trust other counterparties the solution was to do 'anonymous repos.' The fed would offer loans and in an anonymous auction banks would get to bid how much they were prepared to pay the Fed for its generosity. [Some might find this strange but in Sept of 08 there was 0 inter bank lending. So those institutions that enjoyed borrowing at 2-3% found themselves unable to raise cash even at 10%!] Anyway, that sort of worked but it wasnt enough as Citi and BofA were essentially walking bankrupts. So the solution was TARP, which gave government money to the banks in exchange for bonds that may or may not have been worth anyway. The Fed did its part by loaning money to banks at nothing, some might even say negative real rates, and the banks used it to shore up their balance sheets. To replace the "???" stuff with actual AAA treasuries. The fact that the banks could borrow at 2% from the Fed and then buy a Treasury bond that paid 4% and make money on that 2% was just another form of bailout. It was essentially a way to sidestep the nasty political issue, after all it was reckless lending by banks that torpedoed the capitalist system yet here they were getting bailed out while your dad was losing his job and your house was worth 1/2 of what it was last year. Since most common people dont understand what the Fed is, much less how it operates, it was a great way to get some liquidity back into a system desperate for it.
As to why the banks are sitting on those 'massive' reserves? We dont actually know what the banks have on their balance sheet. Lehman Brothers' latest quarterly statement said it had 64 billion in Assets over Liabilities. Then it went bankrupt and it turned out it had between 40-80 billion in Liabilities over Assets. Identifying what is on a banks' balance sheet is notoriously difficult, just today Credit Suisse reported that they have 21% "total capital" yet when you look at their balance sheet you see 43 billion of equity onto approximately trillion in assets. So does it have 21% 'total capital' or only 4%? Banks have also taken advantage of accounting rules that let them reclassify assets as either 'ready for sale' (I think thats the most liquid designation of an asset? Accounting guys correct me.) which means that those assets have to be marked to the market as it is [so if you had a bunch of Greek 'AAA' loans on your balance sheet and now that stuff is trading at a discount of almost 50% you feel pretty dumb and also you need a lot of capital quick] or 'held to maturity', which means you can classify this as assets worth as what you paid for it and are stating that you will hold onto this asset all the way until it matures and pays back. So again, if you were clever and put all your Greek debt into hold for maturity it *looks like* you have a bunch of AAA rated capital on your balance sheet but you and I both know that that stuff is dodgy.
Oh and, of course, there are also things still being litigated over the crisis. For example, both Bank of America and Citi are still dealing with lawsuits pertaining to bad mortgages. Because Bank of America bought a bunch of really dodgy mortgage companies right up to 2008 they also have to deal with all those legacies costs. What the ultimate legal costs for all of those things are is also unclear.
So basically, that chart can be taken at face value to mean that 'according to the filings to their regulators, banks appear to have a lot of capital on hand.' Just like Bear Sterns and Lehman brothers did until they didnt.
3) And of course demand for loans have declined dramatically. As housing prices continue to be in the crapper with little sine of an actual improvement, the demand for new mortgages and household formation has declined dramatically. All those kids in their 20s who are either renting or still living at home despite having a job [plus all those who live at home because after college they cant find jobs] are a weighing down on loans. Plus, corporations, freaked out in 2008 by the fact that their banks were going bankrupt [and corporations like everyone else embraced 'modern finance' which meant maximizing your leverage and relying for banks for your funding while deploying your cash in money market funds or some repos pre 2008] would also mean that the corporations themselves would find themselves temporarily unable to cover their costs because their 'efficient' finance relied on access to loans/trade finance/etc. took the lesson to heart and started hording massive amounts of cash. All those people who were fired and all those people who had to work harder, longer and for, in real terms, less pay meant that at least American corporations reached impressive peaks of efficiency. All that extra efficiency went into hording money due to the fear of another 2008 style melt down.
TL;DR 1) Banks still need the money 2) Despite what they officially report a lot of them can still blow up at any time 3) Demand for loans is at an all time high but for various political and ideological reasons no one is going to try and ramp up demand further to restore growth to trend level
anyway, sorry for sloppy spelling and lack of certain details but I just wrote this off the top of my head as a way to avoid some more of my mind numbing work.
On October 26 2012 13:25 ETisME wrote: printing money also is to maintain it's current interest rate. with the high RR ration, the interest would rise without any interference.
The problem with printing money is of cause inflation, devalue compared to foreign currency etc
You talk like devalue compared to a foreign currency is bad? It is a very good thing for an export based economy. Last I heard the US wasn't really one though so it might not be true for the US and just increase the amount their trade balance is negative in.
On October 26 2012 13:41 TheKwas wrote:no one wants to invest during a bad economy, and the economy is bad because no one wants to invest.
Is this the whole story, though?
Nope. Part of the story is that the graph is nonsense. They have absolute dollars in millions as an axis as though the fractional reserve ratio were not a percentage which will entail a different absolute amount from bank to bank and even a different percentage from bank to bank. It's a contextless graph which doesn't mention the banks, their market capitalization, they reserve percentages.... The graph is designed to make an extreme statement and therefore to evoke a clear answer.
The other part of the story, which you will hear from practically no one, is that the reason the economy is "bad" is because it is correcting for previous OVER-investment. And so the claim that the lack of continued over-investment is the problem with the economy is to ignore that economies should operate around an average equilibrium and deviations from that equilibrium cannot be considered "good" in an objective sense since they will result in corrections in the future with a net negative loss for the economy in comparison.
What most people will hear from their professors, however, is simply that rich entities hoard money and so we need Obama, errr... government to spend trillions in stimulus dollars and tax more because trickle-down economics doesn't work. It's like three straw men rolled into one.
Title of graph: Required and Total Reserves of Banks You also do see that the amount of required reserves increases in the 2008+ range. http://www.newyorkfed.org/research/current_issues/ci15-8.pdf (linked in this thread) has a very similar graph.
Also, the theory that people hold is that the economy is OVER correcting for the previous over-investing. This in addition to the uncertainty about the USD and jobs and the economy on the whole.
Also, I live in texas. I am fairly certain my professor is a republican as well.
They are scared shitless of people defaulting, and return on investments are generally speaking at an all time low.
Have you seen the rates you can get for bonds and shit with your own money? It's like nothing. It's largely in part a byproduct of the Fed keeping interest rates down to attempt to stimulate the economy and boost investment, but clearly the banks don't seem to care.
On October 26 2012 13:25 ETisME wrote: printing money also is to maintain it's current interest rate. with the high RR ration, the interest would rise without any interference.
The problem with printing money is of cause inflation, devalue compared to foreign currency etc
You talk like devalue compared to a foreign currency is bad? It is a very good thing for an export based economy. Last I heard the US wasn't really one though so it might not be true for the US and just increase the amount their trade balance is negative in.
If I am, then this is a fucking brilliant tool for the Fed to use to control the banks, yet, at the same time, is going to be extremely expensive for taxpayers
Why would it be extremely expensive? The money inside of the Fed is not 'the tax payers' Its literally a guy on some computer screen allocating computer numbers to some other guys account. At the end of the year if the Fed finds itself at a profit it sends that profit to the Treasury. But otherwise, if tomorrow everyone and their mom demand that the Fed pay of their debt [the way some people who dont understand how central banking works keep worrying China will act] then the Fed will do so via a few key strokes.
..... And it failed pretty hard during the crisis for some reason, because it should have been able to help curb the effects of the housing bubble a lot better than it appears to have.
The problem is that Chairman Greenspan and Bernanke do not believe you can spot a bubble until its too late.
On October 26 2012 13:17 JonnyBNoHo wrote: Banks aren't lending their excess reserves for two main reasons.
1) There isn't enough demand for loans. Some people borrowed too much before the crisis and so they are preoccupied paying that debt back. Other people don't want to borrow when they are unsure if they will be able to pay it back due to a crummy economy. Businesses could borrow more but don't see the economy as strong enough to justify large expansions.
2) Banks got burned badly with foreclosures - hundreds went bust - and they don't want to repeat past mistakes. So now they are being ultra-careful with who they lend to. While not a bad thing necessarily, it does mean that fewer loans will be made.
Now why is the Fed still printing money? Because printing money will make money cheaper - interest rates will fall and entice people and businesses to borrow more. So a $200K mortgage that doesn't work at 5% works when the mortgage rate falls to 3% both from the perspective of the homeowner and the bank.
I can understand a lower demand for loans, so did the government simply over-correct? Or did the government misappropriate the money by giving it to banks instead of finding other uses for it?
Also, arent rates low enough? They are below 3% now for a 15 year.
On October 26 2012 12:56 Djzapz wrote: I was writing but then it occurred to me that this kind of looks like a homework thread.
I have a 95.5 in the class and this is not at all related to homework. These are questions that I have in regards to that because I found it alarming. My homework in the class is all online with multiple choice.
Even if I took your word for it, what kind of person gets 95.5% and is unable to answer to those questions which are essentially elementary? (Edit: I guess classes that have online multiple answers exams x_x). Anyway come on. Worst case scenario, google it. Easymode.
Alright, so: 1) The bank is given over a trillion dollars from the government to bail them out because hey.. they needed the money! 2) The bank then spends basically NONE of it. But, I thought they needed it? 3) Interest rates are lower because of it, but did they really need to be lower? Which leads me to another question, couldnt there have been a more effective distribution than giving it to banks then letting them sit on it and collect interest? This wouldve kept interest rates low but mightve stimulated spending from the public, no? I mean if you give it directly to people, they will either spend it or save it. Either way, giving a trillion to the public couldve done a great deal more. Right?
EDIT: Grade since you seemingly dont believe me. Only 94.9 not 95.5 as I thought. + Show Spoiler +
On October 26 2012 13:06 XoXiDe wrote: If you feel like reading, this is interesting.
What interest? How can they collect interest when that money is doing absolutely nothing while kept in reserve?
Banks collect a .25% interest on all reserves.
Let me see if I can take a crack at putting this into simple terms.
Start with a simple model. The world is has people and one bank. The world has $100 and 1 person starts with it all. Required reserves are 10%. Assume the bank always lends out the all that it can. Thus the person with the money starts by putting their money into the bank. What happens? The bank keeps 10%, lends out $90, someone uses that to pay for something, the person who then receives the $90 puts that into the bank, the bank then lends out $81, etc etc.
So now the question is, how much money does the world have? Well you can say $100, but how much is in circulation? It turns out to actually be $100 + $90 + $81 + ..., a whole lot more than $100! This effect is known as the money multiplier.
Now we fall back to understand the real model. Notice that this shows us that if you have a given amount of cash, you have A LOT more in the banks. That's a given, and the assumption that the money will end up in the banks is pretty much true because most businesses and households will put their money in a bank. But what assumption can be violated? Well, banks will not always lend out what it can. Reasons for this were already discussed in this thread and you can think of more.
So now think about what happens when the mortgage crisis hits. Banks start lending out less money meaning more reserves. This means that the multiplier falls. Instead of going $100 + $90 + $81 ..., you're going $100 + $50 + $25 + ...! This decreases the money in circulation by a large amount, and so money is pumped into the economy not to cause inflation, but counteract the deflation that could be caused by a large decrease in the money multiplier. However, notice that by putting a lot of money into the economy, a lot of money will go to bank reserves if they are not entirely lending.
So this is one factor of the problem. Another factor is how financial institutions work. Most of the money is brought into the economy by the government buying bonds of financial institutions. How else are you going to efficiently pump money into the economy at any given moment? If you want to do it through construction you have to keep finding projects or something of this sort whereas this avenue is always open, predictable, and the Fed has the jurisdiction to do it this way (that doesn't mean other ways, like tax cuts and funding of public projects, are not available, just different). So this also puts money into banks... who are not lending.
But anyways, from the multiplier you already see that if you pump money in any other way, the banks will still get a lot of the money into reserves.
So there. Other people gave answers as to why the amount of reserves went up, and here's an introduction into what happens when the bank reserves increase and the money multiplier decreases.
Qualifications first: I work for a major bank as a credit analyst in the Corporate Banking division. Should anyone find out which bank, the opinions expressed here are my own (I <3 HR).
Quantitative easing is only a magnifying factor in this situation. With QE, the Fed prints money and buys assets from banks, which only affects the reserve ratio (Bank assets (loans, bonds, etc.) / Funds held in reserve) by removing some bank assets from their balance sheets, not by forcing the banks to reserve more money. Actually, the Fed wants the opposite outcome: for banks to lend this freshly printed cash to businesses to kickstart a weak recovery.
Sadly, the opposite is happening. Banks turn around and deposit the liquidity (cash, in this instance) back into the fed to be held as reserves. There are three major causes:
1) Say what you will about banks, but the people running them are not stupid, and they're still human. CEOs, credit officers, and portfolio managers saw what happened during the financial crisis, and they understand that it was caused by a culture of unchecked risk-taking. Underwriting standards were weak, due diligence was a tall stack of paper you stuck in front of the compliance officer to appease him, and all of the incentives were geared towards doing more deals rather than smart deals. After the crisis, underwriting standards were increased drastically, due diligence reached the level it should have been at pre-crisis, and the bankers who still had jobs entered the shitstorm. I want to destroy the people who bitch about bankers getting rich while the world burns down around us. Did you see my bonus check last year? Yeah, neither did I.
Now, I may be the first person to say this aloud (and sincerely), but bank executives are people, too. They, too, are subject to irrational decision making based on anecdotal evidence and imagined threats. Our chief credit officer won't even look at a handful of industries because of situation X that happened with company Y and lost us Z million dollars.
2) Not all of this fear is irrational. Company creditworthiness dropped out of the sky in 2007. It's tough to find a strong company to lend money to for a reasonable spread, notwithstanding the increases in credit quality requirements.
3) Most importantly: Uncertainty. Bankers are good at dealing with risk. We have some pretty crazy excel models, and our companies drop Brinks trucks on risk management software. Uncertainty is a different animal. In every analysis for every company I touch, I have to consider the possibility of Europe imploding. Of the U.S. Congress writing 2700 more pages of reactionary regulation, or even worse, doing absolutely nothing in the face economic relapse. You know what's worse than regulation stifling industry? The THREAT of regulation stifling industry. Uncertainty has always been there, but in this environment, it's palpable, and it's choking the markets.
Wow, this is turning into an essay. I'll stop now. Here's to hoping the posts below me don't scapegoat one individual or some piece of legislation.
On October 26 2012 13:17 JonnyBNoHo wrote: Banks aren't lending their excess reserves for two main reasons.
1) There isn't enough demand for loans. Some people borrowed too much before the crisis and so they are preoccupied paying that debt back. Other people don't want to borrow when they are unsure if they will be able to pay it back due to a crummy economy. Businesses could borrow more but don't see the economy as strong enough to justify large expansions.
2) Banks got burned badly with foreclosures - hundreds went bust - and they don't want to repeat past mistakes. So now they are being ultra-careful with who they lend to. While not a bad thing necessarily, it does mean that fewer loans will be made.
Now why is the Fed still printing money? Because printing money will make money cheaper - interest rates will fall and entice people and businesses to borrow more. So a $200K mortgage that doesn't work at 5% works when the mortgage rate falls to 3% both from the perspective of the homeowner and the bank.
I can understand a lower demand for loans, so did the government simply over-correct? Or did the government misappropriate the money by giving it to banks instead of finding other uses for it?
Also, arent rates low enough? They are below 3% now for a 15 year.
On October 26 2012 13:18 Impervious wrote:
On October 26 2012 13:09 TheRabidDeer wrote:
On October 26 2012 13:04 Djzapz wrote:
On October 26 2012 13:00 TheRabidDeer wrote:
On October 26 2012 12:56 Djzapz wrote: I was writing but then it occurred to me that this kind of looks like a homework thread.
I have a 95.5 in the class and this is not at all related to homework. These are questions that I have in regards to that because I found it alarming. My homework in the class is all online with multiple choice.
Even if I took your word for it, what kind of person gets 95.5% and is unable to answer to those questions which are essentially elementary? (Edit: I guess classes that have online multiple answers exams x_x). Anyway come on. Worst case scenario, google it. Easymode.
Alright, so: 1) The bank is given over a trillion dollars from the government to bail them out because hey.. they needed the money! 2) The bank then spends basically NONE of it. But, I thought they needed it? 3) Interest rates are lower because of it, but did they really need to be lower? Which leads me to another question, couldnt there have been a more effective distribution than giving it to banks then letting them sit on it and collect interest? This wouldve kept interest rates low but mightve stimulated spending from the public, no? I mean if you give it directly to people, they will either spend it or save it. Either way, giving a trillion to the public couldve done a great deal more. Right?
EDIT: Grade since you seemingly dont believe me. Only 94.9 not 95.5 as I thought. + Show Spoiler +
On October 26 2012 13:06 XoXiDe wrote: If you feel like reading, this is interesting.
What interest? How can they collect interest when that money is doing absolutely nothing while kept in reserve?
Banks collect a .25% interest on all reserves.
So now think about what happens when the mortgage crisis hits. Banks start lending out less money meaning more reserves. This means that the multiplier falls. Instead of going $100 + $90 + $81 ..., you're going $100 + $50 + $25 + ...! This decreases the money in circulation by a large amount, and so money is pumped into the economy not to cause inflation, but counteract the deflation that could be caused by a large decrease in the money multiplier. However, notice that by putting a lot of money into the economy, a lot of money will go to bank reserves if they are not entirely lending.
Right. When Lehman went bankrupt, it didnt just freeze out its own assets. There many many many hedge funds who held their money in Lehman and who found themselves unable to access that money because of the bankruptcy process. This caused them to either themselves go bankrupt, which removed more money from the system, or to sell whatever assets they could get a hold off and sell them into a failing market, not only hurting themselves but also hurting anyone else who was on mark-to-market accounting.
So yes, the basic point of the crisis was that in 2007 there was in theory 100 dollars and then following the Lehman bankruptcy the world found itself with 50 dollars. And yet it needed that full 100 to keep the economy running smoothly.
Aggregate Expenditure 1. Consumption Expenditure, households buy goods and services from firms (abbreviated C) 2. Investment Expenditure, firms buy good and servers from other firms (abbreviated I) 3. Government Expenditure, government buys goods and services from firms (abbreviated G)
Fiscal Policy 1. Government purchases of goods and services, if G increases then => Aggregate Demand (abbreviated AD) increases 2. Taxes (on income, not business profits), if taxes increase => C decreases => AD decreases
Monetary Policy (controlled by the Federal Reserve) 1. Money Supply (MS for short), when MS increases => C and I increase => AD increases 2. Interest rate, Interest rate increase => C and I decrease => AD decreases
That's like, all I remember from macro.
I was under the impression that printing more money (increasing the money supply), although it can stimulate an economy, is terrible in the long run, and never a good idea. Interest rates being decreased (I think?) is the first option they would take. If that's the case then why are they printing money, or do they have to do it at a constant rate in order to keep lost cash in check?
..... And it failed pretty hard during the crisis for some reason, because it should have been able to help curb the effects of the housing bubble a lot better than it appears to have.
The problem is that Chairman Greenspan and Bernanke do not believe you can spot a bubble until its too late.
I don't think that's giving proper credit to what had happened. Interest rates were low to stop the recession the recession that followed the dot com bust and the post-9/11 recession, they started creeping up but the low interest rates of those times set in to cause the housing bubble. To say it was just plain negligence or conspiracy is overlooking many of the details that many smart people were looking over, what it really comes down to is little differences in the numbers leading to big differences in the long run.
On October 26 2012 12:58 RenSC2 wrote: I don't work at any of the big banks. I would guess they are having a hard time finding good loans to place all their excess reserves into. That may be part of the reason why they got so aggressively into sub-prime lending in the first place. They kept holding onto more and more money for their clients, but couldn't find enough qualified borrowers to profit from. So they started adding in sub-prime borrowers. Now, they've gotten burned (and maybe regulated) into not lending out to sub-prime borrowers, but they still have a crap ton of people wanting the big banks to hold onto their money.
The banks have nowhere profitable to put that money, so the banks are just holding onto their reserves.
Perfect answer. This actually isn't that complicated.
The other issue your reply raises: why they (banks) got so aggressively into sub-prime lending, I think has another key component. Investment banks,between 2000 and 2007 drastically increased the market for 'collateralized debt obligation'. They would buy the sub prime mortgages (debt), and package them (securitize) into a huge group of debt called a CDO, which they could not only sell, but buy insurance from AIG on whether they could sell it.
I think that it's kind of fucked up that the field of economics has such a specialized vocabulary that it keeps most people out of the conversation.
On October 26 2012 14:20 contraSol wrote: Qualifications first: I work for a major bank as a credit analyst in the Corporate Banking division. Should anyone find out which bank, the opinions expressed here are my own (I <3 HR).
Quantitative easing is only a magnifying factor in this situation. With QE, the Fed prints money and buys assets from banks, which only affects the reserve ratio (Bank assets (loans, bonds, etc.) / Funds held in reserve) by removing some bank assets from their balance sheets, not by forcing the banks to reserve more money. Actually, the Fed wants the opposite outcome: for banks to lend this freshly printed cash to businesses to kickstart a weak recovery.
Sadly, the opposite is happening. Banks turn around and deposit the liquidity (cash, in this instance) back into the fed to be held as reserves. There are three major causes:
1) Say what you will about banks, but the people running them are not stupid, and they're still human. CEOs, credit officers, and portfolio managers saw what happened during the financial crisis, and they understand that it was caused by a culture of unchecked risk-taking. Underwriting standards were weak, due diligence was a tall stack of paper you stuck in front of the compliance officer to appease him, and all of the incentives were geared towards doing more deals rather than smart deals. After the crisis, underwriting standards were increased drastically, due diligence reached the level it should have been at pre-crisis, and the bankers who still had jobs entered the shitstorm. I want to destroy the people who bitch about bankers getting rich while the world burns down around us. Did you see my bonus check last year? Yeah, neither did I.
Now, I may be the first person to say this aloud (and sincerely), but bank executives are people, too. They, too, are subject to irrational decision making based on anecdotal evidence and imagined threats. Our chief credit officer won't even look at a handful of industries because of situation X that happened with company Y and lost us Z million dollars.
2) Not all of this fear is irrational. Company creditworthiness dropped out of the sky in 2007. It's tough to find a strong company to lend money to for a reasonable spread, notwithstanding the increases in credit quality requirements.
3) Most importantly: Uncertainty. Bankers are good at dealing with risk. We have some pretty crazy excel models, and our companies drop Brinks trucks on risk management software. Uncertainty is a different animal. In every analysis for every company I touch, I have to consider the possibility of Europe imploding. Of the U.S. Congress writing 2700 more pages of reactionary regulation, or even worse, doing absolutely nothing in the face economic relapse. You know what's worse than regulation stifling industry? The THREAT of regulation stifling industry. Uncertainty has always been there, but in this environment, it's palpable, and it's choking the markets.
Wow, this is turning into an essay. I'll stop now. Here's to hoping the posts below me don't scapegoat one individual or some piece of legislation.
I more or less agree with this. Banks realise that not understanding risk properly is bad. They dont want to loan out all the cash the fed is printing because there is nowhere smart to lend it at the moment.
On October 26 2012 14:20 contraSol wrote: . I want to destroy the people who bitch about bankers getting rich while the world burns down around us. Did you see my bonus check last year? Yeah, neither did I.
with all due respect for your hard work, we both know that bonuses in banking go to trading divisions and ibd for the most part and not credit analysts in corporate loans.
2) Not all of this fear is irrational. Company creditworthiness dropped out of the sky in 2007. It's tough to find a strong company to lend money to for a reasonable spread, notwithstanding the increases in credit quality requirements.
Its tough to find a company that is both creditworthy and wants to enter into a corporate loan you mean? With people reaching for yield, high yield bonds are down to like 8%. The other day dealbreaker had a story about a private equity fund's portfolio company that got away with placing 7.5% paper at the hold co level with a PIK trigger. If garbage like that gets bought up then strong companies with actual cash flows dont really need bank loans because they can place their own paper at even lower rates.
On October 26 2012 14:20 contraSol wrote: 3) Most importantly: Uncertainty. Bankers are good at dealing with risk. We have some pretty crazy excel models, and our companies drop Brinks trucks on risk management software. Uncertainty is a different animal. In every analysis for every company I touch, I have to consider the possibility of Europe imploding. Of the U.S. Congress writing 2700 more pages of reactionary regulation, or even worse, doing absolutely nothing in the face economic relapse. You know what's worse than regulation stifling industry? The THREAT of regulation stifling industry. Uncertainty has always been there, but in this environment, it's palpable, and it's choking the markets.
Interesting, I never really did consider the uncertainty due to potential regulation or the crisis in the EU as factors. What if the government actually did work and outlined a long term plan? That should ease tensions a little, right?
..... And it failed pretty hard during the crisis for some reason, because it should have been able to help curb the effects of the housing bubble a lot better than it appears to have.
The problem is that Chairman Greenspan and Bernanke do not believe you can spot a bubble until its too late.
I don't think that's giving proper credit to what had happened. Interest rates were low to stop the recession the recession that followed the dot com bust and the post-9/11 recession, they started creeping up but the low interest rates of those times set in to cause the housing bubble. To say it was just plain negligence or conspiracy is overlooking many of the details that many smart people were looking over, what it really comes down to is little differences in the numbers leading to big differences in the long run.
Conspiracy? No I dont think it was that. Negligence? Definitely on the part of the New York Fed, the SEC, and Congress for passing the 'commodity trading modernization act' of 2000.
But specifically Greenspan actually said that Central Banks cannot identify bubbles. And remember when Bernanke said that in 2007 subprime was contained? From his perspective, as an academic, it was contained because how could a tiny tiny tiny aspect of the bond market, less than 60 billion, affect the entire economy? What the Fed guys didnt seem to understand, maybe because they all came straight from academia to the Fed instead of doing a stint on a trading floor of a major bank, was how pervasive repos have become as a funding source and how pervasively deep junk that was masking as 'AAA' came to dominate the banks' balance sheets.
On October 26 2012 14:20 contraSol wrote: . I want to destroy the people who bitch about bankers getting rich while the world burns down around us. Did you see my bonus check last year? Yeah, neither did I.
with all due respect for your hard work, we both know that bonuses in banking go to trading divisions and ibd for the most part and not credit analysts in corporate loans.
2) Not all of this fear is irrational. Company creditworthiness dropped out of the sky in 2007. It's tough to find a strong company to lend money to for a reasonable spread, notwithstanding the increases in credit quality requirements.
Its tough to find a company that is both creditworthy and wants to enter into a corporate loan you mean? With people reaching for yield, high yield bonds are down to like 8%. The other day dealbreaker had a story about a private equity fund's portfolio company that got away with placing 7.5% paper at the hold co level with a PIK trigger. If garbage like that gets bought up then strong companies with actual cash flows dont really need bank loans because they can place their own paper at even lower rates.
I highly doubt IBD is doing any better. All of my friends that work in Barclays, Deutsche, Credit Suisse, Macquarie, and Morgan Stanley have been bitching non stop for the past year about their non existent bonuses and I know Goldman pays below market rate so they can't be making anything either.
Now that I think about it, their industry pay on a hourly basis doesn't surpass a fast food worker's without bonuses...
On October 26 2012 14:38 yandere991 wrote: Now that I think about it, their industry pay on a hourly basis doesn't surpass a fast food worker's without bonuses...
Interesting. pay structure of low-level financiers motivating level of risk-aversion...
Its actually really simple, after the collapse of housing market (selling houses to people who couldn't afford it with money LOANED from banks) in addition to low interest rates (making loaning money not as rewarding) banks are very cautious.
with all due respect for your hard work, we both know that bonuses in banking go to trading divisions and ibd for the most part and not credit analysts in corporate loans.
The big bonuses absolutely do go to traders/ibankers. But, cuts in compensation expenses find their way to lowly credit analysts. My number may be lower, but relative to my (already much lower) base pay, it still hurts.
Its tough to find a company that is both creditworthy and wants to enter into a corporate loan you mean? With people reaching for yield, high yield bonds are down to like 8%. The other day dealbreaker had a story about a private equity fund's portfolio company that got away with placing 7.5% paper at the hold co level with a PIK trigger. If garbage like that gets bought up then strong companies with actual cash flows dont really need bank loans because they can place their own paper at even lower rates.
Most of our larger portfolio companies can get paper at 3-6% these days, but still hold on to bank revolvers at the very least for some flexibility in their capital structure. The HY world is stupid right now... shadow banks are gonna make a killing.
On October 26 2012 14:20 contraSol wrote: . I want to destroy the people who bitch about bankers getting rich while the world burns down around us. Did you see my bonus check last year? Yeah, neither did I.
with all due respect for your hard work, we both know that bonuses in banking go to trading divisions and ibd for the most part and not credit analysts in corporate loans.
2) Not all of this fear is irrational. Company creditworthiness dropped out of the sky in 2007. It's tough to find a strong company to lend money to for a reasonable spread, notwithstanding the increases in credit quality requirements.
Its tough to find a company that is both creditworthy and wants to enter into a corporate loan you mean? With people reaching for yield, high yield bonds are down to like 8%. The other day dealbreaker had a story about a private equity fund's portfolio company that got away with placing 7.5% paper at the hold co level with a PIK trigger. If garbage like that gets bought up then strong companies with actual cash flows dont really need bank loans because they can place their own paper at even lower rates.
I highly doubt IBD is doing any better. All of my friends that work in Barclays, Deutsche, Credit Suisse, Macquarie, and Morgan Stanley have been bitching non stop for the past year about their non existent bonuses and I know Goldman pays below market rate so they can't be making anything either.
Now that I think about it, their industry pay on a hourly basis doesn't surpass a fast food worker's without bonuses...
Thats okay. They are all bravely hoping that they'll stick it through, get to that sweet sweet promised land of private equity. I guess I dont blame them though, being a banker has social cache and its a nice pre-set path that most people like in life.
with all due respect for your hard work, we both know that bonuses in banking go to trading divisions and ibd for the most part and not credit analysts in corporate loans.
The big bonuses absolutely do go to traders/ibankers. But, cuts in compensation expenses find their way to lowly credit analysts. My number may be lower, but relative to my (already much lower) base pay, it still hurts.
Its tough to find a company that is both creditworthy and wants to enter into a corporate loan you mean? With people reaching for yield, high yield bonds are down to like 8%. The other day dealbreaker had a story about a private equity fund's portfolio company that got away with placing 7.5% paper at the hold co level with a PIK trigger. If garbage like that gets bought up then strong companies with actual cash flows dont really need bank loans because they can place their own paper at even lower rates.
Most of our larger portfolio companies can get paper at 3-6% these days, but still hold on to bank revolvers at the very least for some flexibility in their capital structure. The HY world is stupid right now... shadow banks are gonna make a killing.
Ya, I understand. My point is though that there is a difference between having a revolver as another risk mitigation tool and needing bank loans to actual run your business. With the HY the way it is, with company balance sheets rich with cash, and with hiring anemic to terrible I argue that only a really terrible corporation finds itself in a position that it needs bank credit.
On October 26 2012 14:20 contraSol wrote: Qualifications first: I work for a major bank as a credit analyst in the Corporate Banking division. Should anyone find out which bank, the opinions expressed here are my own (I <3 HR).
Quantitative easing is only a magnifying factor in this situation. With QE, the Fed prints money and buys assets from banks, which only affects the reserve ratio (Bank assets (loans, bonds, etc.) / Funds held in reserve) by removing some bank assets from their balance sheets, not by forcing the banks to reserve more money. Actually, the Fed wants the opposite outcome: for banks to lend this freshly printed cash to businesses to kickstart a weak recovery.
Sadly, the opposite is happening. Banks turn around and deposit the liquidity (cash, in this instance) back into the fed to be held as reserves. There are three major causes:
1) Say what you will about banks, but the people running them are not stupid, and they're still human. CEOs, credit officers, and portfolio managers saw what happened during the financial crisis, and they understand that it was caused by a culture of unchecked risk-taking. Underwriting standards were weak, due diligence was a tall stack of paper you stuck in front of the compliance officer to appease him, and all of the incentives were geared towards doing more deals rather than smart deals. After the crisis, underwriting standards were increased drastically, due diligence reached the level it should have been at pre-crisis, and the bankers who still had jobs entered the shitstorm. I want to destroy the people who bitch about bankers getting rich while the world burns down around us. Did you see my bonus check last year? Yeah, neither did I.
Now, I may be the first person to say this aloud (and sincerely), but bank executives are people, too. They, too, are subject to irrational decision making based on anecdotal evidence and imagined threats. Our chief credit officer won't even look at a handful of industries because of situation X that happened with company Y and lost us Z million dollars.
2) Not all of this fear is irrational. Company creditworthiness dropped out of the sky in 2007. It's tough to find a strong company to lend money to for a reasonable spread, notwithstanding the increases in credit quality requirements.
3) Most importantly: Uncertainty. Bankers are good at dealing with risk. We have some pretty crazy excel models, and our companies drop Brinks trucks on risk management software. Uncertainty is a different animal. In every analysis for every company I touch, I have to consider the possibility of Europe imploding. Of the U.S. Congress writing 2700 more pages of reactionary regulation, or even worse, doing absolutely nothing in the face economic relapse. You know what's worse than regulation stifling industry? The THREAT of regulation stifling industry. Uncertainty has always been there, but in this environment, it's palpable, and it's choking the markets.
Wow, this is turning into an essay. I'll stop now. Here's to hoping the posts below me don't scapegoat one individual or some piece of legislation.
i work in the trading division of a top investment bank and yeah, pretty much this! these days it is a little less about generating pnl and more about managing risk. manage risk first, look for return generating opps second.
On October 26 2012 14:20 contraSol wrote: . I want to destroy the people who bitch about bankers getting rich while the world burns down around us. Did you see my bonus check last year? Yeah, neither did I.
with all due respect for your hard work, we both know that bonuses in banking go to trading divisions and ibd for the most part and not credit analysts in corporate loans.
2) Not all of this fear is irrational. Company creditworthiness dropped out of the sky in 2007. It's tough to find a strong company to lend money to for a reasonable spread, notwithstanding the increases in credit quality requirements.
Its tough to find a company that is both creditworthy and wants to enter into a corporate loan you mean? With people reaching for yield, high yield bonds are down to like 8%. The other day dealbreaker had a story about a private equity fund's portfolio company that got away with placing 7.5% paper at the hold co level with a PIK trigger. If garbage like that gets bought up then strong companies with actual cash flows dont really need bank loans because they can place their own paper at even lower rates.
I highly doubt IBD is doing any better. All of my friends that work in Barclays, Deutsche, Credit Suisse, Macquarie, and Morgan Stanley have been bitching non stop for the past year about their non existent bonuses and I know Goldman pays below market rate so they can't be making anything either.
Now that I think about it, their industry pay on a hourly basis doesn't surpass a fast food worker's without bonuses...
i work for one of the banks you named (albeit in trading) and across the board, even at mid-markets and top boutiques, bonuses are still getting paid out, even to all of my friends who are 1st years. not sure what "non existent" means to your friends, maybe like 75% of base salary instead of 95%++? because that's what i know a lot of 1st/2nd years are getting, and from what i've heard (depending on the culture of the bank) it's still a sweet deal for 3rd year analysts/associates. goldman just recently announced that they're overhauling their entire analyst program so i can't comment on that as i don't know too much. i mean bonuses are definitely getting slashed, but to say that they are disappearing is being a bit overdramatic (unless you are only in it for the money, which, okay, to be fair, 90%+ of people get into banking solely for the monetary compensation, so i don't really have any moral defense for that). trading is a little different as our bonuses are more geared towards pnl, but yes we are getting cut as well.
hourly compensation without bonus for IBD just barely beats out a fast food job (assuming fast food workers are getting paid minimum wage in the US), with bonus makes it a little better, but really this only applies to 1st through 3rd years as they are the ones putting in 100+ hour weeks every week of the year. for kids starting out in banking it's all about delayed gratification.
On October 26 2012 14:20 contraSol wrote: 3) Most importantly: Uncertainty. Bankers are good at dealing with risk. We have some pretty crazy excel models, and our companies drop Brinks trucks on risk management software. Uncertainty is a different animal. In every analysis for every company I touch, I have to consider the possibility of Europe imploding. Of the U.S. Congress writing 2700 more pages of reactionary regulation, or even worse, doing absolutely nothing in the face economic relapse. You know what's worse than regulation stifling industry? The THREAT of regulation stifling industry. Uncertainty has always been there, but in this environment, it's palpable, and it's choking the markets.
Interesting, I never really did consider the uncertainty due to potential regulation or the crisis in the EU as factors. What if the government actually did work and outlined a long term plan? That should ease tensions a little, right?
That would usher in a new golden age. Sadly, I think the best we can hope for is a series of steps, clearly outlined one at a time, pointing to a vague goal describable in soundbyte form. Then again, maybe I'll be less cynical after election season.
In the course of a conversation with a friend, I did my best to understand Quantitative Easing through an Austrian perspective. This was the fruit of that labor and I did my best to convey what I learned using a simple vocabulary. So for whatever it's worth, here you go:
It's true that without "money" the economy would stagnate (bartering is relatively inefficient). But just what" money" is and how it's "value" is determined is, in essence, the entire point at stake because in the case of QE, you have an institution creating, out of thin air, something that is supposed to have value. Unfortunately it can't do this. Yes, it can create the money. But no, it can't create actual values. To understand why it can't do this, you've got to recognize that the only reason markets exist is because things that have value are not free. Anything that's free is not on the market (who would buy something that's free?) Anything that's not free cannot be be magically created, for example, by punching numbers into a computer at the fed. Elaborating on this fact is the bulk or my reply below.
I'm going to start the bulk of my reply by focusing on your conclusion proper. First, if you want me to accept as true your claim that growth in the money supply is necessary for economic growth then you need to explain why that's true (You don't provide an argument, you just state your conclusion). You'll also need to explain why the fed doesn't "print" a trillion-trillion dollars right now to "grow" the economy at a great rate. Finally, in order to differentiate a policy difference between printing 600 billion and a trillion-trillion dollars, you'll need to at least lay out the justification behind the basic methodology used to formulate the "correct" amount of dollars to fabricate.
It seems to me that my task is much easier because my view of what causes growth in an economy is simpler: economic growth is nothing but the result of more profit for the same or less effort. Period (e.g., a hoe, a plow, a tractor in relationship to growing food). My view recognizes that -demand- is, of course, the driver of an economy (because without demand there's no point to any kind of effort), but that supply is the primary indicator of what level of demand (read, consumption) can be satisfied. In my view, any market distortion that leads individuals (and institutions) to believe they can consume more than they -actually- can is problematic. And that's precisely what QE does. How so?
First I'm going to give you a very basic explanation of how QE distorts the market and then I'll give illustrate this with a concrete example.
QE reduces the rate of interest. The problem is that the rate of interest, before government intervention, reflects something real: consumer time preference. If the participants of a market are more eager to save than to consume, then there will be a surge in the amount of savings available. This surge will mean that the rate of interest at which those savings can be loaned out will go down. On the other hand, if the participants of a market of more eager to consume than save, then there will be less savings available for loans and investments and, thus, the interest rate on these loans and investments will be high. The problem is that the fed QE'ing does not fundamentally change the time-preference of the market participants. Thus, surface level change in the interest rate (due to the increase in the money supply) doesn't actually reflect the preferences of the consumers. The result of the incongruity between the rate of interest and the -actual- time preference of market participants is a destructive, inefficient boom-and-bust. This boom-and-bust occurs because investors are relying on the new interest rate for information about consumer preferences when, in fact, they are not getting information about consumer preferences but, instead, are only getting information about immediate changes in the money supply. In short, QE is economically destructive.
To concretely illustrate this process, I'll use your example of the factory. You agreed with me that banks get the money first. The "expectation" is that the banks will invest the new money into new productive enterprises. And this, I believe, is where you should already be suspecting something fishy. Why?
Remember, the fed did not create any new -actual- value. They typed a number into a computer and -bingo- that number became dollars. Obviously you'll agree that the fed could not design a factory in a drawing program on a computer (you know, the kind of program with a "pencil" and a "spray paint" can), print it out and then hope for the factory to magically appear. So how is it that the fed typing in a number and then sending some of those numbers over a wire is going to create a real-life factory?
Well, in essence, QE allows those who first touch the money to be able to build the factory at a reduced price because they've access to the money first (before market prices are able to rise in response to the increased money supply). It's this reduced price, and only this reduced price, that makes the construction of the factory (or whatever venture) economically viable. It has to be this way because if the factory was economically viable -before- the QE, then why did the QE need to happen in order to cause the factory to be built?
Now, critical to your position is the view that once the factory is completed, then it will begin producing goods and, thus, grow the economy. This conclusion is the problem because it focus is too narrow and, as a result, omits the destructive effects caused by the construction of this factory.
The -reason- the factory wasn't profitable before QE was because of the aggregate demand of the consumers in relationship to their income. That is, they may have wanted, say, a newer and bigger flat-screen, but they couldn't -afford- it or weren't willing to choose the flat-screen over -other- values they wanted (house, car, cell phone, shoes, whatever). What the QE has done, though, is make flat-screens cheaper (I'll just stick with the idea that it's a flat-screen factory but it applies to whatever factory you like) because it reduced the price of the factory (via the power of newly created money -before- the market reflects the increase in the money supply via increased prices). At this new, cheaper price, more consumers are likely to choose flat-screens than otherwise would have.
But what else results because of these new, cheap flat-screen tvs? Well, relative to the decrease in the price of flat-screens, other goods are now that much more expensive. Why? Well, if the flat-screen factory was to be built then the materials and the labor had to be bid for on the market. And this means every other are of the market had to pay relatively more for that material and labor. Which means that the prices of goods -other- than flat-screens will go up. So QE has resulted in more flat-screens being produced but, at the same time, less monitors, calculators or whatever else the market would have used those materials and labor for.
Even if this were the end of the consequences of QE, it should be enough to advise against it. That is, why not let consumers dictate what the market produces and not give any institutions an unfair access to newly crated money. Unfortunately, the consequences don't stop here.
Now that more people are buying flat-screens (because of their reduced price) instead of, say, cell phones, a cell-phone factory is no longer profitable (because people are spending their money on flat-screens instead of cell phones). So now the cell-phone factory has to shut down. All the workers get laid off and they must be retrained to build flat-screens.
Further, other individuals and businesses may see the new flat-screen factory churning out tvs and selling them for a profit (a profit made possible by the discounted rate of the capital goods used to create those flat screens). They assume that price//demand relationship for flat screens exists in relationship to the real preferences of consumers (not the discounted-price//demand relationship that -actually- allowed the "profitable" construction of the flat-screen factory), and thus they conclude that they too will be able to profit of the construction of a flat-screen factory. So there is a rush to build flat-screen factories (with a correlating rise in the wages of those that build and work at the factories and the materials used in the production, which means a correlating rise in the price of all those other goods, which means a relative amount of factory closings because of the increased cost of production of, say again, cell phones). Now other investors are seeing the "value" of flat-screen factories as rising. So perhaps they put their money into that area of the market as well. And so on. This is the formation of a bubble.
It's only until the prices in the market reflect the newly created money from the QE does the -real- demand for flat screens become apparent. And it's when this real demand becomes apparent (via decreased demand for flat-screens caused by less willingness to buy flat-screens because of the increased prices [and thus less money to spend on flat screens] of a wide variety of other goods on the market) that the uselessness (read, inefficiency) of the newly constructed flat-screen factories becomes apparent. This is the bust.
And in my understanding, this is precisely what happened in the housing market in the early 2000s. And -this- is why QE (and other interest rate manipulation) is destructive.
On October 26 2012 15:32 lOvOlUNiMEDiA wrote: In the course of a conversation with a friend, I did my best to understand Quantitative Easing through an Austrian perspective. This was the fruit of that labor and I did my best to convey what I learned using a simple vocabulary. So for whatever it's worth, here you go:
(1)It's true that without "money" the economy would stagnate (bartering is relatively inefficient). But just what" money" is and how it's "value" is determined is, in essence, the entire point at stake because in the case of QE, you have an institution creating, out of thin air, something that is supposed to have value. Unfortunately it can't do this. Yes, it can create the money. But no, it can't create actual values. To understand why it can't do this, you've got to recognize that the only reason markets exist is because things that have value are not free. Anything that's free is not on the market (who would buy something that's free?) Anything that's not free cannot be be magically created, for example, by punching numbers into a computer at the fed. Elaborating on this fact is the bulk or my reply below.
I'm going to start the bulk of my reply by focusing on your conclusion proper. First, if you want me to accept as true your claim that growth in the money supply is necessary for economic growth then you need to explain why that's true (You don't provide an argument, you just state your conclusion). (2) You'll also need to explain why the fed doesn't "print" a trillion-trillion dollars right now to "grow" the economy at a great rate. Finally, (3) in order to differentiate a policy difference between printing 600 billion and a trillion-trillion dollars, you'll need to at least lay out the justification behind the basic methodology used to formulate the "correct" amount of dollars to fabricate.
It seems to me that my task is much easier because my view of what causes growth in an economy is simpler: economic growth is nothing but the result of more profit for the same or less effort. Period (e.g., a hoe, a plow, a tractor in relationship to growing food). My view recognizes that -demand- is, of course, the driver of an economy (because without demand there's no point to any kind of effort), but that supply is the primary indicator of what level of demand (read, consumption) can be satisfied. In my view, any market distortion that leads individuals (and institutions) to believe they can consume more than they -actually- can is problematic. And that's precisely what QE does. How so?
First I'm going to give you a very basic explanation of how QE distorts the market and then I'll give illustrate this with a concrete example.
(4) QE reduces the rate of interest.(5)The problem is that the rate of interest, before government intervention, reflects something real: consumer time preference. If the participants of a market are more eager to save than to consume, then there will be a surge in the amount of savings available. This surge will mean that the rate of interest at which those savings can be loaned out will go down. On the other hand, if the participants of a market of more eager to consume than save, then there will be less savings available for loans and investments and, thus, the interest rate on these loans and investments will be high. The problem is that the fed QE'ing does not fundamentally change the time-preference of the market participants. Thus, surface level change in the interest rate (due to the increase in the money supply) doesn't actually reflect the preferences of the consumers. The result of the incongruity between the rate of interest and the -actual- time preference of market participants is a destructive, inefficient boom-and-bust. This boom-and-bust occurs because investors are relying on the new interest rate for information about consumer preferences when, in fact, they are not getting information about consumer preferences but, instead, are only getting information about immediate changes in the money supply. In short, QE is economically destructive.
To concretely illustrate this process, I'll use your example of the factory. You agreed with me that banks get the money first. The "expectation" is that the banks will invest the new money into new productive enterprises. And this, I believe, is where you should already be suspecting something fishy. Why?
Remember, the fed did not create any new -actual- value. They typed a number into a computer and -bingo- that number became dollars. Obviously you'll agree that the fed could not design a factory in a drawing program on a computer (you know, the kind of program with a "pencil" and a "spray paint" can), print it out and then hope for the factory to magically appear. So how is it that the fed typing in a number and then sending some of those numbers over a wire is going to create a real-life factory?
Well, in essence, QE allows those who first touch the money to be able to build the factory at a reduced price because they've access to the money first (before market prices are able to rise in response to the increased money supply). It's this reduced price, and only this reduced price, that makes the construction of the factory (or whatever venture) economically viable. It has to be this way because if the factory was economically viable -before- the QE, then why did the QE need to happen in order to cause the factory to be built?
Now, critical to your position is the view that once the factory is completed, then it will begin producing goods and, thus, grow the economy. This conclusion is the problem because it focus is too narrow and, as a result, omits the destructive effects caused by the construction of this factory.
The -reason- the factory wasn't profitable before QE was because of the aggregate demand of the consumers in relationship to their income. That is, they may have wanted, say, a newer and bigger flat-screen, but they couldn't -afford- it or weren't willing to choose the flat-screen over -other- values they wanted (house, car, cell phone, shoes, whatever). What the QE has done, though, is make flat-screens cheaper (I'll just stick with the idea that it's a flat-screen factory but it applies to whatever factory you like) because it reduced the price of the factory (via the power of newly created money -before- the market reflects the increase in the money supply via increased prices). At this new, cheaper price, more consumers are likely to choose flat-screens than otherwise would have.
But what else results because of these new, cheap flat-screen tvs? Well, relative to the decrease in the price of flat-screens, other goods are now that much more expensive. Why? Well, if the flat-screen factory was to be built then the materials and the labor had to be bid for on the market. And this means every other are of the market had to pay relatively more for that material and labor. Which means that the prices of goods -other- than flat-screens will go up. So QE has resulted in more flat-screens being produced but, at the same time, less monitors, calculators or whatever else the market would have used those materials and labor for.
Even if this were the end of the consequences of QE, it should be enough to advise against it. That is, why not let consumers dictate what the market produces and not give any institutions an unfair access to newly crated money. Unfortunately, the consequences don't stop here.
Now that more people are buying flat-screens (because of their reduced price) instead of, say, cell phones, a cell-phone factory is no longer profitable (because people are spending their money on flat-screens instead of cell phones). So now the cell-phone factory has to shut down. All the workers get laid off and they must be retrained to build flat-screens.
Further, other individuals and businesses may see the new flat-screen factory churning out tvs and selling them for a profit (a profit made possible by the discounted rate of the capital goods used to create those flat screens). They assume that price//demand relationship for flat screens exists in relationship to the real preferences of consumers (not the discounted-price//demand relationship that -actually- allowed the "profitable" construction of the flat-screen factory), and thus they conclude that they too will be able to profit of the construction of a flat-screen factory. So there is a rush to build flat-screen factories (with a correlating rise in the wages of those that build and work at the factories and the materials used in the production, which means a correlating rise in the price of all those other goods, which means a relative amount of factory closings because of the increased cost of production of, say again, cell phones). Now other investors are seeing the "value" of flat-screen factories as rising. So perhaps they put their money into that area of the market as well. And so on. This is the formation of a bubble.
It's only until the prices in the market reflect the newly created money from the QE does the -real- demand for flat screens become apparent. And it's when this real demand becomes apparent (via decreased demand for flat-screens caused by less willingness to buy flat-screens because of the increased prices [and thus less money to spend on flat screens] of a wide variety of other goods on the market) that the uselessness (read, inefficiency) of the newly constructed flat-screen factories becomes apparent. This is the bust.
And in my understanding, this is precisely what happened in the housing market in the early 2000s. And -this- is why QE (and other interest rate manipulation) is destructive.
This is what comes from a lot of reading and no direct experience. I'll try to go in order of my emphasises, since I'm too lazy to spoiler everything one at a time:
(1) This may have been true when money was pegged to gold, and it really forms the basis to our current system, but since money is just special paper (and increasingly just 0s and 1s in an electronic account), it's based on purely on the confidence that a dollar today will be able to buy you something tomorrow. Who promises that? The governments of the country/monetary union that prints the paper, and by proxy, their central bank. So, yes, central banks can successfully create something that is traded for value.
(2) Because this would destroy the confidence explained in (1).
(3) Ph.Ds at top schools are expensive, and years of experience as an economist are hard to come by. Still, I don't think they can even give you an exact answer.
(4) No. QE is used by the Fed to stimulate economic activity when their primary tool to stimulate economic activity, actually decreasing the fed funds interest rate, can no longer be used because of the zero lower bound. Whether or not the ZLB is imaginary is up for debate, but that's a different topic.
(5) No. It reflects how often the lender expects not to be paid back, the lender's cost of funds, and what the lender's competition is doing.
The rest follows the faulty assumptions outlined above, so I won't go into it. For some reason, I feel the need to dispel this stuff... maybe it's because people start conversations in bars about LIBOL (sic) and how the Fed is "giving" away money. Or how QE is designed to raise interest rates and the life-long economists making these decisions somehow are less qualified than a guy who talked to an Austrian and read a few articles off of Google Scholar. My apologies MEDiA, nothing personal.
If the banks realy have that manny reserves, then why did they need to be bailed out with tarp and other programs? My guess is the reserves are all loans from the fed wich at one point have to be paid back. Think the banks needed the extra funds to restore the faith in the system. At the same time this is a transfer of monney to the banks. The interest they get on the "reserves" (wich are not theirs) is probably higher then the interest they have to pay to the fed. In the end when the monney has to be paid back the banks have made a small profit on it because of this difference in interest.
Also:you say the banks dont lend out this monney BUT: If they dont lend out this monney, then who is paying them the interest you say they collect on it? It has to be lend out in some way, maybe a deposit back at the fed lol.
Dont realy have enough information to further comment on this, not realy sure what the definition of these reserves and required reserves is here.
On October 27 2012 00:05 contraSol wrote: (1) This may have been true when money was pegged to gold, and it really forms the basis to our current system, but since money is just special paper (and increasingly just 0s and 1s in an electronic account), it's based on purely on the confidence that a dollar today will be able to buy you something tomorrow. Who promises that? The governments of the country/monetary union that prints the paper, and by proxy, their central bank. So, yes, central banks can successfully create something that is traded for value.
Right, isn't that the point though? The Government creates fictitious capital by printing money. That fictitious capital gets traded as an exchange value. But it has yet to be realized as a value, that is, it has yet to produce something that would fulfill the expectations of future value created by a larger money supply. The government can create exchange values by printing money, but not values...
The whole financial and monetary system is flawed. I thas been prooven that this system ith interrest can not work and that the finacial markes have to crash every century or half a century. There is this example when you put a dollar or a peny, I dont quite remember it in the bank when jesus christ died this deposit would be worth gold in the size of planet earth multiple times. Also a financial system that has nothing todo with the real market and industry is also doomed to fail and is not needed. Making money by doing literally nothing ? If it was energy it would violate several axioms. Our today system is flawed and needs to be replaced with a fundamentally new system.
And why do banks stack up reserves ? Because the crisis escalated when people wanted to withdraw huge amount of money that the banks didn't have. Banks only have a small percentage of own capital, and when large amounts of money are withdrawn the bubbles begin to burst because there is no money.
On October 27 2012 00:05 contraSol wrote: (1) This may have been true when money was pegged to gold, and it really forms the basis to our current system, but since money is just special paper (and increasingly just 0s and 1s in an electronic account), it's based on purely on the confidence that a dollar today will be able to buy you something tomorrow. Who promises that? The governments of the country/monetary union that prints the paper, and by proxy, their central bank. So, yes, central banks can successfully create something that is traded for value.
Right, isn't that the point though? The Government creates fictitious capital by printing money. That fictitious capital gets traded as an exchange value. But it has yet to be realized as a value, that is, it has yet to produce something that would fulfill the expectations of future value created by a larger money supply. The government can create exchange values by printing money, but not values...
It can create exchange values, which are used by the private sector to create real value in terms of goods and services. Whether or not this is "fair" or optimal is a tangent to this discussion that I don't want to go down.
Saying that "the Fed doesn't create value by injecting liquidity into the economy" is accurate but myopic. The Fed injects liquidity so that the market can create that value.
The system is not flawed, the system is essential. The execution is flawed though, i have to agree with that.
Fractional reserve banking has its origins in the 17th century in europe, and look where we are right now! A huge part of this enormous growth can be atributed to fractional reserve banking. Fractional reserve banking (and the inflation it inevitably brings) is essential to prevent monney and people from becoming "lazy" It is the mechanism that is most suited to extract the absolute max out of all the combined resources on earth (human resources included)
Well:that could verry well be, i did end my post with the statement that i didnt had enough information to realy comment. However i love to learn, so if you can explain to me what these reserves are, i would be realy happy. The openings post is hardly sufficient for this.
It seems highly unlikely to me that this is the banks own monney, the banks didnt report huge profits, definatly not close to the amount with wich the reserves have risen. So where does the monney come from then if it are not loans from the fed? Did credit outstanding contract with the same amount as the reserves has risen? that would make sense but i doubt thats the case here. am serious btw, i realy would like it if you could explain it a bit further, as i already admitted that i dont realy know what these reserves are and where they come from.
Found your verry decent explanation at the previous page. contraSol United States. October 26 2012 14:20. Posts 176 then my question is: How is what i say different from what you say? (you say it a bit better but i think we basicly say the same here)
@below It also represents how much profit the lender believes he can make. In other words, the lender will always charge as much interest as possible (to maximize profit).
Comptition will (at least should) keep the interest rates the bank charges at the "right" value. They cant overcharge because then someone else will take the loan. As far as i know banks only look at the risk they wont get the monney back, and not at how much the lender think he can make (though this is off course somewhat related to the change to get the monney back)
The other point. This extra monney does in the end create something, it creates activity. It creates new opportunities and it forces people to take action, because standing still is the same as walking backward. People always want to make profit, and the extra monney creates an environment in wich this is possible, it makes it possible for people to start up businesses. Off course this has to be managed well, we want to make sure that the business wich are started up and get financed are actually contributing to society as a whole, and not a huge dump Monetary expansion is particulary effecitive when a new technology arives, like in the 90,s with the internet. It is not so much effective when there is no new technology to devellop, and the risk then is that manny "worthless" businesses get started.
It will be near impossible to work with an economy based on the currency getting more and more buying power with the day (wich it will if no monney gets added, since the amount of goods is always rising) Manny corporations would have to do business with a loss,(prices are always falling) and make a profit from their left over monney apreciating more in value, then the loss they made on their enterprise. Still : doing nothing would be even better!
I don't think you address some critical points from my post, so will you clarify a few things?
1. In your [5] you define interest rates based on confidence of repayment. Interest rates do not only reflect confidence that the loan will be repayed. It also represents how much profit the lender believes he can make. In other words, the lender will always charge as much interest as possible (to maximize profit). The only thing that drives down the rate of interest is the threat of the borrower going somewhere else. My discussion of interest captures this feature because it shows how in a market where participants are more eager to save then to consume, then the rate of interest will go down because an increase in savings means (usually) an increase in loanable capital.
2. Please explain why the example I use of the flat screen factory is wrong.
As far as your discussion of whether or not the fed can create something "real", I cover this in detail in my original post. I am -not- arguing that the creation of money has no effect on the market. Of course it does. If the fed printed a trillion trillion dollars today it would have an effect on the market. My point is that it wouldn't change the underlying, foundational features of the economy (features like consumer time preference).
Whatever light you can shed on my points would be appreciated.
On October 27 2012 00:05 contraSol wrote: (1) This may have been true when money was pegged to gold, and it really forms the basis to our current system, but since money is just special paper (and increasingly just 0s and 1s in an electronic account), it's based on purely on the confidence that a dollar today will be able to buy you something tomorrow. Who promises that? The governments of the country/monetary union that prints the paper, and by proxy, their central bank. So, yes, central banks can successfully create something that is traded for value.
Right, isn't that the point though? The Government creates fictitious capital by printing money. That fictitious capital gets traded as an exchange value. But it has yet to be realized as a value, that is, it has yet to produce something that would fulfill the expectations of future value created by a larger money supply. The government can create exchange values by printing money, but not values...
It can create exchange values, which are used by the private sector to create real value in terms of goods and services. Whether or not this is "fair" or optimal is a tangent to this discussion that I don't want to go down.
Saying that "the Fed doesn't create value by injecting liquidity into the economy" is accurate but myopic. The Fed injects liquidity so that the market can create that value.
Yes, but what if there's a deeper problem than a lack of liquidity? I never really hear people addressing that. Everybody seems to figure that if you just get the imaginary stuff working right the real stuff will work right a fortiori, and I tend to think it's the other way around.
On October 27 2012 00:05 contraSol wrote: (1) This may have been true when money was pegged to gold, and it really forms the basis to our current system, but since money is just special paper (and increasingly just 0s and 1s in an electronic account), it's based on purely on the confidence that a dollar today will be able to buy you something tomorrow. Who promises that? The governments of the country/monetary union that prints the paper, and by proxy, their central bank. So, yes, central banks can successfully create something that is traded for value.
Right, isn't that the point though? The Government creates fictitious capital by printing money. That fictitious capital gets traded as an exchange value. But it has yet to be realized as a value, that is, it has yet to produce something that would fulfill the expectations of future value created by a larger money supply. The government can create exchange values by printing money, but not values...
It can create exchange values, which are used by the private sector to create real value in terms of goods and services. Whether or not this is "fair" or optimal is a tangent to this discussion that I don't want to go down.
Saying that "the Fed doesn't create value by injecting liquidity into the economy" is accurate but myopic. The Fed injects liquidity so that the market can create that value.
Yes, but what if there's a deeper problem than a lack of liquidity? I never really hear people addressing that. Everybody seems to figure that if you just get the imaginary stuff working right the real stuff will work right a fortiori, and I tend to think it's the other way around.
A lack of money can be a problem. By making more money you take that problem off the table and hope that no other problems remain.
If more problems remain then you fall into a liquidity trap where more money does fuck all. Then the central bank does different stuff (QE, operation twist, etc.) to try to solve some of those issues (again, hopefully).
Ok. So in the financial community, what do people think about the idea that there is a problem besides something that can be fixed by straight-up monetary policy and, if so, what do they generally think that problem might be?
Because QE is just what you do when you can't lower the interest rate any more, right? I only kind of understand what that is.
On October 26 2012 12:58 RenSC2 wrote: I don't work at any of the big banks. I would guess they are having a hard time finding good loans to place all their excess reserves into. That may be part of the reason why they got so aggressively into sub-prime lending in the first place. They kept holding onto more and more money for their clients, but couldn't find enough qualified borrowers to profit from. So they started adding in sub-prime borrowers. Now, they've gotten burned (and maybe regulated) into not lending out to sub-prime borrowers, but they still have a crap ton of people wanting the big banks to hold onto their money.
The banks have nowhere profitable to put that money, so the banks are just holding onto their reserves.
The tightened up their requirements to get a loan by an insane margin. It's actually impossible for pretty much anyone to get a loan other than a rich person.
@MEDiA: (1) You're distilling something complex into a solution that's a function of a single variable. In the micro terms, each loan is priced based on i) the Borrower's creditworthiness, ii) the market rate for the loan facility, and iii) the bank's cost of funds (which are increased when deposits (savings) increase). Yes, higher savings rates affect (ii), but there are other factors at play, even within that particular point. Yes, point (ii) is what drives down market rates.
(2) I never said that your flat screen example was wrong, though it makes quite a few (unstated) assumptions and seems contrived to demonize consumer culture. It seems to imply that QE benefits one industry at the expense of others, which is unfounded to my knowledge.
The use of consumer time preference in this example ignores the causal effects of the macro environment. Consumers tend to be more eager to [save/consume] as a result of their aggregate circumstances, fears, hopes, and desires. Your example seems to assume that consumers have a static time preference, or at the very least that the consumer time preference before QE was desirable. Is that really the case? QE is designed to change that time preference, however indirectly, by changing the market circumstance to which consumers are a party.
Also, the "trillion trillion" example is silly. Obviously, that would destroy confidence in the monetary system.
On October 27 2012 03:09 sam!zdat wrote: Ok. So in the financial community, what do people think about the idea that there is a problem besides something that can be fixed by straight-up monetary policy and, if so, what do they generally think that problem might be?
Because QE is just what you do when you can't lower the interest rate any more, right? I only kind of understand what that is.
Monetary policy is only part of the equation. We need improvements in fiscal policy that realign government spending and slowly and sustainably close deficits. We need logical structural reform of the financial sector with clear, coherent regulation.
Basically, QE is what the Fed does in the short term (when they won't, not can't lower rates anymore) in hopes that elected government will solve all of the structural problems for the long term. Monetary policy is more of a bandage than a real solution.
On October 27 2012 00:05 contraSol wrote: (1) This may have been true when money was pegged to gold, and it really forms the basis to our current system, but since money is just special paper (and increasingly just 0s and 1s in an electronic account), it's based on purely on the confidence that a dollar today will be able to buy you something tomorrow. Who promises that? The governments of the country/monetary union that prints the paper, and by proxy, their central bank. So, yes, central banks can successfully create something that is traded for value.
Right, isn't that the point though? The Government creates fictitious capital by printing money. That fictitious capital gets traded as an exchange value. But it has yet to be realized as a value, that is, it has yet to produce something that would fulfill the expectations of future value created by a larger money supply. The government can create exchange values by printing money, but not values...
It can create exchange values, which are used by the private sector to create real value in terms of goods and services. Whether or not this is "fair" or optimal is a tangent to this discussion that I don't want to go down.
Saying that "the Fed doesn't create value by injecting liquidity into the economy" is accurate but myopic. The Fed injects liquidity so that the market can create that value.
Yes, but what if there's a deeper problem than a lack of liquidity? I never really hear people addressing that. Everybody seems to figure that if you just get the imaginary stuff working right the real stuff will work right a fortiori, and I tend to think it's the other way around.
As I said in the post above, there are deeper structural problems. QE, interest rate manipulation, operation twist,etc. are the band aids that the fed is using to stop the hemorrhaging so that we're not all standing in soup lines before those problems are solved.
On October 27 2012 03:56 lumir wrote: Please WAKE UP! I used to come here all the time and I KNOW good people are here! Please watch this to understand the ENTIRE WORLD has been deceived. The system is corrupt!
You are asking the wrong question. The increased reserves held by banks aren't a symptom of something, they are a policy.
Banks are able to create a certain amount of money designated for lending depending on a fractional reserve rate that gets handed over to the central bank (officially as security) when the money is created. What we are seeing now is more or less an artificial deflation. Now banks stopped lending money, so the fractional reserve remains in their accounts.
I have a german "explanation" from the Bundesbank, which is written in a pretty obfuscated way, but still enough to see that this explanation fits in there. There is a youtube vid about its president, Jens Weidmann speaking deliberately about the money out of thin air.
Excuse me if I'm too lazy to translate that passage.
The questions should be: Where did all the bailout money go if it hasn't been spent for the national economies? Why are banks withholding loans? Are they expecting a burst and hoarding safeties? Is an artificial crisis needed to push a political agenda? If banks are so important for the national economy, and they've been saved with tax money, then why are we now in a debt crisis? Why did we (they) choose a debt crisis instead of a bank crisis? Why trade the crisis of a few for the crisis of many? I don't know how it is in the US, but southern europe is suffering a lot.
On October 27 2012 04:15 sam!zdat wrote: Rockefeller was a baptist...
edit: look at you, antisemite, thinking all bankers are jewish.. jeez man :O Some Jews are very nice people and are not bankers at all!
If you are ignorant of the long and rich history of antisemitism under the banner of "Rothschild bankers control all the money" then you should address that.
On October 27 2012 03:09 sam!zdat wrote: Ok. So in the financial community, what do people think about the idea that there is a problem besides something that can be fixed by straight-up monetary policy and, if so, what do they generally think that problem might be?
Because QE is just what you do when you can't lower the interest rate any more, right? I only kind of understand what that is.
One of the hardest hit sectors of the economy is the housing sector. Normally in a recovery new home construction takes off as interest rates fall and mortgage payments become affordable. That's not happening this time, in part, because we built too many houses during the boom and so there is no great need to build new ones.
Eventually as the population increases and old homes fall apart the problem will resolve itself. Lower interest rates will help the turnaround happen quicker. But low interest rates, by themselves don't correct the underlying problem and so do not, by themselves, fix anything.
The only other option to waiting for the problem to resolve itself is for a different part of the economy to make up the difference. Consumers can go crazy buying Apple products, cars and Chinese food (or whatever) or the government can spend a bunch of money or we improve our trade balance. The problem with consumers or the government spending more is if the spending is sustainable / worthwhile or not. If no then over the long run you don't end up fixing / improving anything.
On October 27 2012 04:15 sam!zdat wrote: Rockefeller was a baptist...
edit: look at you, antisemite, thinking all bankers are jewish.. jeez man :O Some Jews are very nice people and are not bankers at all!
If you are ignorant of the long and rich history of antisemitism under the banner of "Rothschild bankers control all the money" then you should address that.
let's not start this. You're the one brought up anti-semitism without any real reason, the financial class does in fact control a large amount of the world's wealth, yes the Rothschilds are some of them, and yes it's possible to be concerned about this without being an anti-semite.
The market clearing rate of interest is currently deep in the negative. However, you cannot force banks to lend on negative interest rates, and so money piles up.
Why is the market clearing rate of interest currently negative? A much more difficult question, but it's mostly the effect of the depression. Most significantly it is due to lack of demand in the economy caused by shrinking/flat national income. Which in turn was caused by a deep negative economic shock that was the October 2008 implosion. Made worse by the fact that recoveries following financial crises are never fast or easy.
Monetary policy has little traction under these circumstances (the interest rate won't go below zero!). If you wanted to do something, it would have to be fiscal policy. Potentially, raising the rate of inflation in the economy could produce positive effects, but it would be through a different mechanism: Under higher rate of inflation, the aggregate levels of debt owed by the nation's consumers would lose value, and allow for consumers to buy more stuff.
On October 27 2012 03:09 sam!zdat wrote: Ok. So in the financial community, what do people think about the idea that there is a problem besides something that can be fixed by straight-up monetary policy and, if so, what do they generally think that problem might be?
Because QE is just what you do when you can't lower the interest rate any more, right? I only kind of understand what that is.
One of the hardest hit sectors of the economy is the housing sector. Normally in a recovery new home construction takes off as interest rates fall and mortgage payments become affordable. That's not happening this time, in part, because we built too many houses during the boom and so there is no great need to build new ones.
Eventually as the population increases and old homes fall apart the problem will resolve itself. Lower interest rates will help the turnaround happen quicker. But low interest rates, by themselves don't correct the underlying problem and so do not, by themselves, fix anything.
The only other option to waiting for the problem to resolve itself is for a different part of the economy to make up the difference. Consumers can go crazy buying Apple products, cars and Chinese food (or whatever) or the government can spend a bunch of money or we improve our trade balance. The problem with consumers or the government spending more is if the spending is sustainable / worthwhile or not. If no then over the long run you don't end up fixing / improving anything.
so does this mean that the real problem with the economy is "nothing particularly useful to do"?
On October 27 2012 04:15 sam!zdat wrote: Rockefeller was a baptist...
edit: look at you, antisemite, thinking all bankers are jewish.. jeez man :O Some Jews are very nice people and are not bankers at all!
If you are ignorant of the long and rich history of antisemitism under the banner of "Rothschild bankers control all the money" then you should address that.
let's not start this. You're the one brought up anti-semitism without any real reason, the financial class does in fact control a large amount of the world's wealth, yes the Rothschilds are some of them, and yes it's possible to be concerned about this without being an anti-semite.
This. The amount of wealth accumulation by the financial class, and the stranglehold they have on virtually every part of of the world, is sickening. It has nothing to do with nationality, religious beliefs, etc.
On October 27 2012 04:40 Kontys wrote: and allow for consumers to buy more stuff.
why do all the analyses end here? Is this the point?
The thing is, it's not about "buying more stuff". It's about bringing the economy back to it's normal operating level. We are currently operating well below the potential level of output / consumption, which in turn means a lot of people will be out of work, and much other general misery.
The economy is like a giant machine which has overheated, and is slowly getting going again. Strong consumer demand is what will get it going properly, because then businesses will be able to invest, knowing that they will have the sales to make money and not go bust.
(One of the major discoveries of the 20th century in macro economics was that a negative shock leads to a deadly spiral of bad things leading to more bad things leading to more bad things.. leading to the Great Depression. We've avoided this by recapitalising the financial sector and cutting the spiral shirt there)
It's not so much about living standards as it is about the economy being able to offer the average guy the means by which to lead a decent life. It's about jobs, really.
Yes, I think that's the problem. Our entire economic thinking is based on the idea that the potential for consumption is without limit of any kind, and our economic policies are based on stimulating that consumption without any consideration of what consumption is and is not a good idea in the first place. It's all just sort of lumped together into this amorphous pile of GDP, and making that number bigger is a "good" thing.
Which is to say, I don't think the "normal operating level" is in fact a "normal operating level," I think it's a historically situated state of affairs which is coming to an end and we are willfully oblivious to this...
edit: just look at how the economy wants to make things that fall apart quickly and have to be replaced, as opposed to making things that last for a long time and therefore preclude future demand... that's not rational at all.
On October 27 2012 03:09 sam!zdat wrote: Ok. So in the financial community, what do people think about the idea that there is a problem besides something that can be fixed by straight-up monetary policy and, if so, what do they generally think that problem might be?
Because QE is just what you do when you can't lower the interest rate any more, right? I only kind of understand what that is.
One of the hardest hit sectors of the economy is the housing sector. Normally in a recovery new home construction takes off as interest rates fall and mortgage payments become affordable. That's not happening this time, in part, because we built too many houses during the boom and so there is no great need to build new ones.
Eventually as the population increases and old homes fall apart the problem will resolve itself. Lower interest rates will help the turnaround happen quicker. But low interest rates, by themselves don't correct the underlying problem and so do not, by themselves, fix anything.
The only other option to waiting for the problem to resolve itself is for a different part of the economy to make up the difference. Consumers can go crazy buying Apple products, cars and Chinese food (or whatever) or the government can spend a bunch of money or we improve our trade balance. The problem with consumers or the government spending more is if the spending is sustainable / worthwhile or not. If no then over the long run you don't end up fixing / improving anything.
so does this mean that the real problem with the economy is "nothing particularly useful to do"?
That's not exactly how it works.. to go back to what I wrote a moment ago, the problem with recessions/depressions is falling aggregate demand due to negative shock(s). This afflicts the entire economy, not just housing, even though housing is a prominent example (especially in this crisis!).
When consumers do not have money in their pockets, businesses cut down prices and cut down wages, but on the society level of things, this further depresses aggregate demand. Soon no-one has enough money to use on anything. The spiral spirals down and we have a depression, a state of reality where the society's economic activity falls simply due to the imperfections of the money system of exchange.
Reserve requirements are a small percentage of the actual amounts deposited.
If people get super scared and there is a massive run on a bank, but the bank doesn't have the reserves, then it can cause a panic and eventually put the bank out of business.
So to combat that chance (which was relatively high at that time) they held massive reserves because they were scared--of aforementioned 'run' among other factors--and didn't know what would happen. Ie, Better to be safe than sorry.
On October 27 2012 03:09 sam!zdat wrote: Ok. So in the financial community, what do people think about the idea that there is a problem besides something that can be fixed by straight-up monetary policy and, if so, what do they generally think that problem might be?
Because QE is just what you do when you can't lower the interest rate any more, right? I only kind of understand what that is.
One of the hardest hit sectors of the economy is the housing sector. Normally in a recovery new home construction takes off as interest rates fall and mortgage payments become affordable. That's not happening this time, in part, because we built too many houses during the boom and so there is no great need to build new ones.
Eventually as the population increases and old homes fall apart the problem will resolve itself. Lower interest rates will help the turnaround happen quicker. But low interest rates, by themselves don't correct the underlying problem and so do not, by themselves, fix anything.
The only other option to waiting for the problem to resolve itself is for a different part of the economy to make up the difference. Consumers can go crazy buying Apple products, cars and Chinese food (or whatever) or the government can spend a bunch of money or we improve our trade balance. The problem with consumers or the government spending more is if the spending is sustainable / worthwhile or not. If no then over the long run you don't end up fixing / improving anything.
so does this mean that the real problem with the economy is "nothing particularly useful to do"?
More or less. I think economists would say nothing to produce at current prices. So, you either buy stuff directly as the government or make it artificially cheaper through a tax cut or interest rate cut.
@Kontys: Yeah, I understand all this actually. I understand what a crisis of effective demand is.
But what I don't believe is that the entire problem is "fictional," in the sense that if only the way the money worked worked better, then everything would be great. Everybody seems to assume this and I think it's a bad assumption. I don't think the entire thing can be written off as some sort of negative feedback cycle in financial system.
edit: I just feel like people who talk about economics and finance and stuff forget that there is a real world out there and that the graphs about interest rates and stuff is just a little back of the envelope model, basically, compared to the real thing. And then you get stuff like the negative feedback cycle explanation, which essentially tells me "there's a financial crisis because there's a financial crisis" and this one remains unconvinced
On October 27 2012 04:15 sam!zdat wrote: Rockefeller was a baptist...
edit: look at you, antisemite, thinking all bankers are jewish.. jeez man :O Some Jews are very nice people and are not bankers at all!
If you are ignorant of the long and rich history of antisemitism under the banner of "Rothschild bankers control all the money" then you should address that.
let's not start this. You're the one brought up anti-semitism without any real reason, the financial class does in fact control a large amount of the world's wealth, yes the Rothschilds are some of them, and yes it's possible to be concerned about this without being an anti-semite.
Oh okay. Lets not start this, but go ahead and continue to inserting an antisemitic trope in here anyway. The Rothschild family today has less assets than George Soros or John Paulson. They have one bank, and that bank is primarily an M&A shop that generates respectable but not particular large returns.They have literally no impact on the way any of the major banks run.
Neither the Rothschild nor the Rockefellers have anything to do with the current financial crisis, and to bring them into a discussion out of the blue cannot be understood outside of the context of conspiracy theory laden with antisemitism.
On October 27 2012 04:57 sam!zdat wrote: Yes, I think that's the problem. Our entire economic thinking is based on the idea that the potential for consumption is without limit of any kind, and our economic policies are based on stimulating that consumption without any consideration of what consumption is and is not a good idea in the first place. It's all just sort of lumped together into this amorphous pile of GDP, and making that number bigger is a "good" thing.
Which is to say, I don't think the "normal operating level" is in fact a "normal operating level," I think it's a historically situated state of affairs which is coming to an end and we are willfully oblivious to this...
edit: just look at how the economy wants to make things that fall apart quickly and have to be replaced, as opposed to making things that last for a long time and therefore preclude future demand... that's not rational at all.
Well.. the operating level is defined by technological achievement and worker productivity. In terms of recessions and depressions, philosophical musings about what human activity should be directed at are futile. It's about how money works as a system. Or.. how it breaks down.
What liberal economies are directed at are the satisfaction of individual needs. We have had other, rather un-succesful projects in human history...
Making things that intentionally break are to my understanding something of a curiosity. It's actually a pretty funny phenomenon. For me, I don't think much of it. If I was a businessman-engineer I'd probably appreciate it, if there were few constraints on what I'm allowed to manufacture and sell. As is, there are millions of arbitrary constraints there, because ruthless businessmen have profiteered on human suffering since the dawn of time.
"rothschild/rockefeller" in the context is just a symbol for "robber baron" or similar, get off your high horse. Poster was not advancing conspiracy theory or engaging in anti-semitic discourse. Got no interest in the current fortunes of the Rothschild family, besides the fact that I'm acquainted with one and I hope that he's not hurting for anything...
Money does not exist it is just a program running in the heads of people. And the way Money is being distributed is utter nonsense, the meaning of money and the reasons why it was introduced are no longer the reasons why it is being used to day and for what reasons. People are programmed in a way that they can not see reality. Is money here to exchange goods and services ? How is the relation between money and a certain service ? Is hard exhausting work rewarded ? Is complicated work rewarded, where you have to think allot until you cant and just blank out on the evening ? How is it possible that someone earns 1000 times or more then someone else ? Is he doing work that is 1000 x times more exhausting or complicated ? This aint humanly possible. And because of these malfunctions in the system that work/service is in no relation to the money being earned this system can not endure long term without being destroyed over and over again.
On October 27 2012 04:57 sam!zdat wrote: Yes, I think that's the problem. Our entire economic thinking is based on the idea that the potential for consumption is without limit of any kind, and our economic policies are based on stimulating that consumption without any consideration of what consumption is and is not a good idea in the first place. It's all just sort of lumped together into this amorphous pile of GDP, and making that number bigger is a "good" thing.
Which is to say, I don't think the "normal operating level" is in fact a "normal operating level," I think it's a historically situated state of affairs which is coming to an end and we are willfully oblivious to this...
edit: just look at how the economy wants to make things that fall apart quickly and have to be replaced, as opposed to making things that last for a long time and therefore preclude future demand... that's not rational at all.
Well.. the operating level is defined by technological achievement and worker productivity. In terms of recessions and depressions, philosophical musings about what human activity should be directed at are futile. It's about how money works as a system. Or.. how it breaks down.
No, that's when you need philosophy the most...
What liberal economies are directed at are the satisfaction of individual needs. We have had other, rather un-succesful projects in human history...
Yes, yes, I'm a Marxist, get your straw men off your chest and then we can have an interesting discussion howabout? I've got no sympathy with your postmodernism, so if you just want to thrust it at me and have me buckle under in philosophical despair that's not going to work.
Making things that intentionally break are to my understanding something of a curiosity. It's actually a pretty funny phenomenon.
No, it's a major problem and the only reason that capitalism has sustained itself for as long as it has (among other mechanisms of devaluation, like wars and other kinds of potlatch)
ruthless businessmen have profiteered on human suffering since the dawn of time.
On October 27 2012 05:21 Holy_AT wrote: Money does not exist it is just a program running in the heads of people. And the way Money is being distributed is utter nonsense, the meaning of money and the reasons why it was introduced are no longer the reasons why it is being used to day and for what reasons. People are programmed in a way that they can not see reality. Is money here to exchange goods and services ? How is the relation between money and a certain service ? Is hard exhausting work rewarded ? Is complicated work rewarded, where you have to think allot until you cant and just blank out on the evening ? How is it possible that someone earns 1000 times or more then someone else ? Is he doing work that is 1000 x times more exhausting or complicated ? This aint humanly possible. And because of these malfunctions in the system that work/service is in no relation to the money being earned this system can not endure long term without being destroyed over and over again.
Well with technology you can easily be 1000X more productive.
Ex. Compare an actor live on stage to an actor in a movie. The actor in the movie can be far more productive because technology will enable one performance to be repeated multiple times at little added cost.
On October 27 2012 05:21 Holy_AT wrote: Money does not exist it is just a program running in the heads of people. And the way Money is being distributed is utter nonsense, the meaning of money and the reasons why it was introduced are no longer the reasons why it is being used to day and for what reasons. People are programmed in a way that they can not see reality. Is money here to exchange goods and services ? How is the relation between money and a certain service ? Is hard exhausting work rewarded ? Is complicated work rewarded, where you have to think allot until you cant and just blank out on the evening ? How is it possible that someone earns 1000 times or more then someone else ? Is he doing work that is 1000 x times more exhausting or complicated ? This aint humanly possible. And because of these malfunctions in the system that work/service is in no relation to the money being earned this system can not endure long term without being destroyed over and over again.
Well with technology you can easily be 1000X more productive.
Ex. Compare an actor live on stage to an actor in a movie. The actor in the movie can be far more productive because technology will enable one performance to be repeated multiple times at little added cost.
But see that analogy is terrible because you are talking about art! An actor on a stage is different than an actor in a movie. It's totally disingenuous to think about it as "production" which can be compared in this way.
On October 27 2012 05:11 sam!zdat wrote: @Kontys: Yeah, I understand all this actually. I understand what a crisis of effective demand is.
But what I don't believe is that the entire problem is "fictional," in the sense that if only the way the money worked worked better, then everything would be great. Everybody seems to assume this and I think it's a bad assumption. I don't think the entire thing can be written off as some sort of negative feedback cycle in financial system.
edit: I just feel like people who talk about economics and finance and stuff forget that there is a real world out there and that the graphs about interest rates and stuff is just a little back of the envelope model, basically, compared to the real thing. And then you get stuff like the negative feedback cycle explanation, which essentially tells me "there's a financial crisis because there's a financial crisis" and this one remains unconvinced
The crisis in the end i think is the result of a huge re-alocation of purchase power on a global scale (towards asia/china) combined with limited resources.(this purchase power comes from asias economic growth and succes) Monetary expansion is done in cooperation with other major powers.(to prevent currency crisis) Asia was (and is) running faster, they made more of their monetary expansion in relation to the seize of it then we did of ours.
On October 27 2012 05:11 sam!zdat wrote: @Kontys: Yeah, I understand all this actually. I understand what a crisis of effective demand is.
But what I don't believe is that the entire problem is "fictional," in the sense that if only the way the money worked worked better, then everything would be great. Everybody seems to assume this and I think it's a bad assumption. I don't think the entire thing can be written off as some sort of negative feedback cycle in financial system.
edit: I just feel like people who talk about economics and finance and stuff forget that there is a real world out there and that the graphs about interest rates and stuff is just a little back of the envelope model, basically, compared to the real thing. And then you get stuff like the negative feedback cycle explanation, which essentially tells me "there's a financial crisis because there's a financial crisis" and this one remains unconvinced
What would you direct human activity toward if you got to decide? How could you be certain that this direction is what's best, or what others want?
On the other hand, you mention this, and it intrigues me, so I'll take a few more minutes try and explain "there's a financial crisis because.."
Wall street cooked it up. The details are many and terrifying, but if I had to point to the most crucial, I'd pick a practice called shadow banking. Major banks used to own "small" special purpose investment vehicles in their balance sheets, hedge funds and such, that would profiteer on the different rates charged of long and short term loans. They would take out a multitude of short term loans themselves, and loan out these funds long, for a higher interest than they were paying for the short term loans of course. This meant that they would continuously need more short term loans to keep paying the older short term loans back. When their solvency (their ability to service their debts) came under scrutiny, they went bust almost immediately, simply because their business-model entirely relied on constant un-diminishing stream of cheap short term money. Well, this would have been okay, I guess, if the practice wasn't so widespread and so succesful, that about half of all the world's banking assets were in these "shadow banks". And well.. you can imagine the impact on the real economy when half of the world's banking sector goes asses overnight. The shadow banks weren't even the only problem.
(I wrote some essays on the matter a year and half ago.. I'm not sure if I got it all right on shadow banks, but you get the idea: There was a financial crisis because the financial system came to be in terrible condition after years of short term profiteering by greedy people who either didn't know or didn't care what they were doing. My money, if it matters, is on the "didn't care", because they were swimming in gold)
On October 27 2012 05:21 Holy_AT wrote: Money does not exist it is just a program running in the heads of people. And the way Money is being distributed is utter nonsense, the meaning of money and the reasons why it was introduced are no longer the reasons why it is being used to day and for what reasons. People are programmed in a way that they can not see reality. Is money here to exchange goods and services ? How is the relation between money and a certain service ? Is hard exhausting work rewarded ? Is complicated work rewarded, where you have to think allot until you cant and just blank out on the evening ? How is it possible that someone earns 1000 times or more then someone else ? Is he doing work that is 1000 x times more exhausting or complicated ? This aint humanly possible. And because of these malfunctions in the system that work/service is in no relation to the money being earned this system can not endure long term without being destroyed over and over again.
Labor is just another economic resource. Supply and demand.
Yes, digging ditches may be "hard", but anyone, short of the disabled, can learn how to dig a ditch. It takes about 15 minutes of training. So while the work may be HARD, it's not skilled, and I can pull almost anyone off the street and make them a ditch digger. That doesn't mean it's not good honest work, but that does mean that ditch diggers aren't going to get paid huge salaries.
Now take what I do for a living, software engineering. Much more specialized skill. I cannot pull your average Joe off the street and turn them in to a top level programmer, I just can't. Hell, a huge chunk of people who actually graduate college with computer science degrees aren't even fully capable of performing in the modern software workforce. What does this mean in the end? My job skills are in much higher demand than a ditch digger, and the supply to fill those jobs is much much smaller. Thus I make a huge amount more than a ditch digger does, even though my work is not "harder", at least not in the physical sense.
Essentially, I can do his job, but he can't do mine. This means that I am naturally going to be "worth" more. And I hate to use that term, because a ditch digger isn't some subhuman that isn't worth anything...but in the supply and demand workforce, I am simply worth more money.
This starts to break down a bit at the very top level, where you have executives making 20 and 30 million a year, but that's an entirely different problem that completely breaks the basic S&D of labor.
On October 27 2012 05:11 sam!zdat wrote: @Kontys: Yeah, I understand all this actually. I understand what a crisis of effective demand is.
But what I don't believe is that the entire problem is "fictional," in the sense that if only the way the money worked worked better, then everything would be great. Everybody seems to assume this and I think it's a bad assumption. I don't think the entire thing can be written off as some sort of negative feedback cycle in financial system.
edit: I just feel like people who talk about economics and finance and stuff forget that there is a real world out there and that the graphs about interest rates and stuff is just a little back of the envelope model, basically, compared to the real thing. And then you get stuff like the negative feedback cycle explanation, which essentially tells me "there's a financial crisis because there's a financial crisis" and this one remains unconvinced
What would you direct human activity toward if you got to decide? How could you be certain that this direction is what's best, or what others want?
Yeah, it's a hard problem, isn't it? Why don't we spend some time talking about that, hmmm?
Wall street cooked it up. The details are many and terrifying, but if I had to point to the most crucial, I'd pick a practice called shadow banking.
Yeah I read the book by Posner and he explained all about the shadow banks.
On October 27 2012 05:21 Holy_AT wrote: Money does not exist it is just a program running in the heads of people. And the way Money is being distributed is utter nonsense, the meaning of money and the reasons why it was introduced are no longer the reasons why it is being used to day and for what reasons. People are programmed in a way that they can not see reality. Is money here to exchange goods and services ? How is the relation between money and a certain service ? Is hard exhausting work rewarded ? Is complicated work rewarded, where you have to think allot until you cant and just blank out on the evening ? How is it possible that someone earns 1000 times or more then someone else ? Is he doing work that is 1000 x times more exhausting or complicated ? This aint humanly possible. And because of these malfunctions in the system that work/service is in no relation to the money being earned this system can not endure long term without being destroyed over and over again.
Labor is just another economic resource. Supply and demand.
Can you justify this claim?
also, can you elaborate on the logical structure of the fragment "supply and demand" and how it fits into your claim?
On October 27 2012 04:57 sam!zdat wrote: Yes, I think that's the problem. Our entire economic thinking is based on the idea that the potential for consumption is without limit of any kind, and our economic policies are based on stimulating that consumption without any consideration of what consumption is and is not a good idea in the first place. It's all just sort of lumped together into this amorphous pile of GDP, and making that number bigger is a "good" thing.
Which is to say, I don't think the "normal operating level" is in fact a "normal operating level," I think it's a historically situated state of affairs which is coming to an end and we are willfully oblivious to this...
edit: just look at how the economy wants to make things that fall apart quickly and have to be replaced, as opposed to making things that last for a long time and therefore preclude future demand... that's not rational at all.
Well.. the operating level is defined by technological achievement and worker productivity. In terms of recessions and depressions, philosophical musings about what human activity should be directed at are futile. It's about how money works as a system. Or.. how it breaks down.
No, that's when you need philosophy the most...
Is philosophy going to feed clothe and house millions of jobless people? Political scientists call pushing your own agenda on the back of difficult short term circumstances "shock doctrine". I am very sad to see it having been used mostly for the purposes of conservatives and libertarians during the last few years.
If you do have vision of how the world "could" work, say, without money, or somehow otherwise, I'd be interested to hear about it.
On October 27 2012 04:57 sam!zdat wrote: Yes, I think that's the problem. Our entire economic thinking is based on the idea that the potential for consumption is without limit of any kind, and our economic policies are based on stimulating that consumption without any consideration of what consumption is and is not a good idea in the first place. It's all just sort of lumped together into this amorphous pile of GDP, and making that number bigger is a "good" thing.
Which is to say, I don't think the "normal operating level" is in fact a "normal operating level," I think it's a historically situated state of affairs which is coming to an end and we are willfully oblivious to this...
edit: just look at how the economy wants to make things that fall apart quickly and have to be replaced, as opposed to making things that last for a long time and therefore preclude future demand... that's not rational at all.
Well.. the operating level is defined by technological achievement and worker productivity. In terms of recessions and depressions, philosophical musings about what human activity should be directed at are futile. It's about how money works as a system. Or.. how it breaks down.
No, that's when you need philosophy the most...
Is philosophy going to feed clothe and house millions of jobless people?
Don't be facile...
Political scientists call pushing your own agenda on the back of difficult short term circumstances "shock doctrine". I am very sad to see it having been used mostly for the purposes of conservatives and libertarians during the last few years.
You mean like what the IMF does?
My point is that I don't believe the circumstances are short term.
If you do have vision of how the world "could" work, say, without money, or somehow otherwise, I'd be interested to hear about it.
What do you mean, "without money"? What makes you think I object to money?
On October 27 2012 05:21 Holy_AT wrote: Money does not exist it is just a program running in the heads of people. And the way Money is being distributed is utter nonsense, the meaning of money and the reasons why it was introduced are no longer the reasons why it is being used to day and for what reasons. People are programmed in a way that they can not see reality. Is money here to exchange goods and services ? How is the relation between money and a certain service ? Is hard exhausting work rewarded ? Is complicated work rewarded, where you have to think allot until you cant and just blank out on the evening ? How is it possible that someone earns 1000 times or more then someone else ? Is he doing work that is 1000 x times more exhausting or complicated ? This aint humanly possible. And because of these malfunctions in the system that work/service is in no relation to the money being earned this system can not endure long term without being destroyed over and over again.
Labor is just another economic resource. Supply and demand.
Can you justify this claim?
also, can you elaborate on the logical structure of the fragment "supply and demand" and how it fits into your claim?
Ask an economist? They'll tell you that labor is a supply and demand resource.
Let me reverse your question: Why do you think a ditch digger should make as much money as I do? What skill does he bring to the work force that I don't? What skills do I bring to the work force that he doesn't? Do you feel people should be justly compensated for the unique abilities they bring?
thing is ... banks i guess always had those summs of reserves, but they lend it to each other on a daily basis. Gave more interest. Since Lehmann happened, they don't trust each other anymore and lend it save to the central bank. This gets em less to zero interest (ecb lowered it to zero some month ago, iirc) but is save.
Tells you something how much trust the prophets of money have in each other.
On October 27 2012 05:21 Holy_AT wrote: Money does not exist it is just a program running in the heads of people. And the way Money is being distributed is utter nonsense, the meaning of money and the reasons why it was introduced are no longer the reasons why it is being used to day and for what reasons. People are programmed in a way that they can not see reality. Is money here to exchange goods and services ? How is the relation between money and a certain service ? Is hard exhausting work rewarded ? Is complicated work rewarded, where you have to think allot until you cant and just blank out on the evening ? How is it possible that someone earns 1000 times or more then someone else ? Is he doing work that is 1000 x times more exhausting or complicated ? This aint humanly possible. And because of these malfunctions in the system that work/service is in no relation to the money being earned this system can not endure long term without being destroyed over and over again.
Labor is just another economic resource. Supply and demand.
Can you justify this claim?
also, can you elaborate on the logical structure of the fragment "supply and demand" and how it fits into your claim?
Ask an economist? They'll tell you that labor is a supply and demand resource.
Yes, I disagree with them. I'm wondering about your take on the matter.
(well, I don't disagree that we TREAT it as such, my objection is normative.)
Let me reverse your question: Why do you think a ditch digger should make as much money as I do? What skill does he bring to the work force that I don't? What skills do I bring to the work force that he doesn't? Do you feel people should be justly compensated for the unique abilities they bring?
Yeah, of course. Only a total fool would disagree with this.
The supply is either constrained or not, and there is either demand or there is not. The ratio of those two things will determine fair market value.
Now, if you want to discuss whether workers are currently getting paid fair market value, that's definitely a discussion we can have, and one we would probably agree on (in most cases, they aren't). There is certainly an issue with the current pay structures, but that has way more to do with the decision makers skewing things toward themselves, than some break down in the basic idea of supply and demand.
Current pay structures are FAR too top heavy, that's not in doubt...but I don't think the basic idea of S&D and incentive pay is a bad thing.
On October 27 2012 05:11 sam!zdat wrote: @Kontys: Yeah, I understand all this actually. I understand what a crisis of effective demand is.
But what I don't believe is that the entire problem is "fictional," in the sense that if only the way the money worked worked better, then everything would be great. Everybody seems to assume this and I think it's a bad assumption. I don't think the entire thing can be written off as some sort of negative feedback cycle in financial system.
edit: I just feel like people who talk about economics and finance and stuff forget that there is a real world out there and that the graphs about interest rates and stuff is just a little back of the envelope model, basically, compared to the real thing. And then you get stuff like the negative feedback cycle explanation, which essentially tells me "there's a financial crisis because there's a financial crisis" and this one remains unconvinced
What would you direct human activity toward if you got to decide? How could you be certain that this direction is what's best, or what others want?
Yeah, it's a hard problem, isn't it? Why don't we spend some time talking about that, hmmm?
Wall street cooked it up. The details are many and terrifying, but if I had to point to the most crucial, I'd pick a practice called shadow banking.
Yeah I read the book by Posner and he explained all about the shadow banks.
I am fairly confident we shouldn't just dismiss free market economy because of it's apparent faults. It has great strengths too. There have been times in American history too, when it has worked for "everyone". And there have been times when it has only worked for the few entitled rich people. What it really boils down to, I observe, is how political power is distributed in society. The ones who can rig the rules of the free market are going to benefit, others will suffer.
I am quite pleased with how social democracy works here in Finland, and I am assured it works fine in other nordic countries as well. The thing to do right, is for the state to exploit the business' greed, not deny them their ambitions.
America was also a fine, just society to live in for many decades following the 2nd world war, but the Reagan revolution unfortunately disembowelled the worker union movement, which not only became unable to fight for worker rights, but also lost it's political power, unable to any longer be a major funder for parties and candidates in the political process. 12 years of republican rule came to an end under only after the election of the decidedly "business-friendly" President Clinton.
On October 27 2012 05:21 Holy_AT wrote: Money does not exist it is just a program running in the heads of people. And the way Money is being distributed is utter nonsense, the meaning of money and the reasons why it was introduced are no longer the reasons why it is being used to day and for what reasons. People are programmed in a way that they can not see reality. Is money here to exchange goods and services ? How is the relation between money and a certain service ? Is hard exhausting work rewarded ? Is complicated work rewarded, where you have to think allot until you cant and just blank out on the evening ? How is it possible that someone earns 1000 times or more then someone else ? Is he doing work that is 1000 x times more exhausting or complicated ? This aint humanly possible. And because of these malfunctions in the system that work/service is in no relation to the money being earned this system can not endure long term without being destroyed over and over again.
Well with technology you can easily be 1000X more productive.
Ex. Compare an actor live on stage to an actor in a movie. The actor in the movie can be far more productive because technology will enable one performance to be repeated multiple times at little added cost.
Yes but does the person using this technologie is 1000x times more exhausted or has to solve 1000x times more complicated things then the person who does not use the technologie ? So why should he be payed more ?
People should get payed for the physical and mental energy they invest (yes mental energy and complexity is difficult to estimate)
On October 27 2012 05:11 sam!zdat wrote: @Kontys: Yeah, I understand all this actually. I understand what a crisis of effective demand is.
But what I don't believe is that the entire problem is "fictional," in the sense that if only the way the money worked worked better, then everything would be great. Everybody seems to assume this and I think it's a bad assumption. I don't think the entire thing can be written off as some sort of negative feedback cycle in financial system.
edit: I just feel like people who talk about economics and finance and stuff forget that there is a real world out there and that the graphs about interest rates and stuff is just a little back of the envelope model, basically, compared to the real thing. And then you get stuff like the negative feedback cycle explanation, which essentially tells me "there's a financial crisis because there's a financial crisis" and this one remains unconvinced
What would you direct human activity toward if you got to decide? How could you be certain that this direction is what's best, or what others want?
Yeah, it's a hard problem, isn't it? Why don't we spend some time talking about that, hmmm?
Wall street cooked it up. The details are many and terrifying, but if I had to point to the most crucial, I'd pick a practice called shadow banking.
Yeah I read the book by Posner and he explained all about the shadow banks.
I am fairly confident we shouldn't just dismiss free market economy because of it's apparent faults. It has great strengths too.
Yeah. Me and Marx both agree with you. (one difference possible is that I don't think the faults are merely "apparent.")
There have been times in American history too, when it has worked for "everyone". And there have been times when it has only worked for the few entitled rich people. What it really boils down to, I observe, is how political power is distributed in society. The ones who can rig the rules of the free market are going to benefit, others will suffer.
Yes, good, how does this occur?
I am quite pleased with how social democracy works here in Finland, and I am assured it works fine in other nordic countries as well. The thing to do right, is for the state to exploit the business' greed, not deny them their ambitions.
Interesting, well, I'll have to take a look at how they do things in Finland. Do you have any thoughts about why things have worked well there (assuming they have) and about the overall sustainability of the system? I certainly agree with your proposition about greed and ambition.
America was also a fine, just society to live in for many decades following the 2nd world war, but the Reagan revolution unfortunately disembowelled the worker union movement, which not only became unable to fight for worker rights, but also lost it's political power, unable to any longer be a major funder for parties and candidates in the political process. 12 years of republican rule came to an end under only after the election of the decidedly "business-friendly" President Clinton.
It's not clear that organized labor is coming back. I'm not sure that a return to social democracy is possible in America.
On October 27 2012 05:56 Brainling wrote: Then that is supply and demand sam.
No. That is differential pay.
No. Differential pay is the theory that dictates geographical pay differences, it's actual name is "compensation differentials". It has to do with the fact that in certain areas, you are more likely to die, get sick, miss work, be unemployed or just generally have a lower cost of living.
This has nothing to do with why a burger flipper gets paid less than I do.
On October 27 2012 05:56 Brainling wrote: Then that is supply and demand sam.
No. That is differential pay.
No. Differential pay is the theory that dictates geographical pay differences, it's actual name is "compensation differentials". It has to do with the fact that in certain areas, you are more likely to die, get sick, miss work, be unemployed or just generally have a lower cost of living.
This has nothing to do with why a burger flipper gets paid less than I do.
sorry, I didn't know there was a thing called "differential pay." I just used "pay" to mean "people getting paid" and "differential" to mean the adjective of "different."
Differential pay can be created by S&D, but it is not equivalent to it, which was what you said.
Yeah, there is actually a thing called differental pay, or compensation differentials, hehe
At any rate, S&D is at the core of why people make different amounts.
Of course, it's not perfect. There are still gender and race biases involved in many areas, there is still basic cognitive bias (I am going to pay my buddy more than some other guy), and there is still basic greed (thus why we have such a top heavy pay structure).
So in a sense, we're saying the same thing. At a very basic, naive level, it's all S&D. Obviously in the real world of grays, that's not the case, there is way more to it.
If you ever really want to read about the shady side of pay fraud, read about why it was made taboo to talk about your pay with your co workers
On October 27 2012 05:21 Holy_AT wrote: Money does not exist it is just a program running in the heads of people. And the way Money is being distributed is utter nonsense, the meaning of money and the reasons why it was introduced are no longer the reasons why it is being used to day and for what reasons. People are programmed in a way that they can not see reality. Is money here to exchange goods and services ? How is the relation between money and a certain service ? Is hard exhausting work rewarded ? Is complicated work rewarded, where you have to think allot until you cant and just blank out on the evening ? How is it possible that someone earns 1000 times or more then someone else ? Is he doing work that is 1000 x times more exhausting or complicated ? This aint humanly possible. And because of these malfunctions in the system that work/service is in no relation to the money being earned this system can not endure long term without being destroyed over and over again.
Well with technology you can easily be 1000X more productive.
Ex. Compare an actor live on stage to an actor in a movie. The actor in the movie can be far more productive because technology will enable one performance to be repeated multiple times at little added cost.
But see that analogy is terrible because you are talking about art! An actor on a stage is different than an actor in a movie. It's totally disingenuous to think about it as "production" which can be compared in this way.
Fair enough. It's just an example, don't be too hard on it
On October 27 2012 05:21 Holy_AT wrote: Money does not exist it is just a program running in the heads of people. And the way Money is being distributed is utter nonsense, the meaning of money and the reasons why it was introduced are no longer the reasons why it is being used to day and for what reasons. People are programmed in a way that they can not see reality. Is money here to exchange goods and services ? How is the relation between money and a certain service ? Is hard exhausting work rewarded ? Is complicated work rewarded, where you have to think allot until you cant and just blank out on the evening ? How is it possible that someone earns 1000 times or more then someone else ? Is he doing work that is 1000 x times more exhausting or complicated ? This aint humanly possible. And because of these malfunctions in the system that work/service is in no relation to the money being earned this system can not endure long term without being destroyed over and over again.
Labor is just another economic resource. Supply and demand.
Can you justify this claim?
also, can you elaborate on the logical structure of the fragment "supply and demand" and how it fits into your claim?
Ask an economist? They'll tell you that labor is a supply and demand resource.
Let me reverse your question: Why do you think a ditch digger should make as much money as I do? What skill does he bring to the work force that I don't? What skills do I bring to the work force that he doesn't? Do you feel people should be justly compensated for the unique abilities they bring?
I would like to say that the software engineer should earn somewhere between two and ten times what the ditch digger earns, depending on the ability and experience of the software engineer. However, this only works well if the ditch digger is able to live cheaply. In many western countries the cost of living for a ditch digger has increased faster than the cost of living for a software engineer, which is why one person earning ten times that of another is a problem.
To put it another way: Do you spend more than 20% of your net income on basic living expenses? What happens when a person takes home less than 20% of what you do? They have to reduce their living expenses. How many houses are there that are worth only 20% of what your house is? Could someone cook a meal for only 20% of the cost of your meal?
If think that the skills of the software engineer should make him worth more. But what has actually happened is the lack of skills of the ditch digger has made him worth less.
For reference, I currently make 6x what a ditch digger has to make at minimum, in Washington state, where I live.
Minimum wage is 8.75/hr I make 53/hr.
In the eyes of the economy, I am currently worth almost exactly 6x what a basic ditch digger is (and that's assuming they don't make more than minimum wage). So that's well within your range of error.
Now, is minimum wage too low? Abso-fucking-lutely. It's an unlivable wage, and that should never be the case. I would much rather see that ditch digger make 15-20 an hour, and keep my ratio to his pay at ~600%. He would make more money, and a livable wage, and I would make more money, and yahoo.
Of course, you have to deal with pay grade inflation...but one problem at a time.
On October 27 2012 04:57 sam!zdat wrote: Yes, I think that's the problem. Our entire economic thinking is based on the idea that the potential for consumption is without limit of any kind, and our economic policies are based on stimulating that consumption without any consideration of what consumption is and is not a good idea in the first place. It's all just sort of lumped together into this amorphous pile of GDP, and making that number bigger is a "good" thing.
Which is to say, I don't think the "normal operating level" is in fact a "normal operating level," I think it's a historically situated state of affairs which is coming to an end and we are willfully oblivious to this...
edit: just look at how the economy wants to make things that fall apart quickly and have to be replaced, as opposed to making things that last for a long time and therefore preclude future demand... that's not rational at all.
Well.. the operating level is defined by technological achievement and worker productivity. In terms of recessions and depressions, philosophical musings about what human activity should be directed at are futile. It's about how money works as a system. Or.. how it breaks down.
No, that's when you need philosophy the most...
Is philosophy going to feed clothe and house millions of jobless people?
Political scientists call pushing your own agenda on the back of difficult short term circumstances "shock doctrine". I am very sad to see it having been used mostly for the purposes of conservatives and libertarians during the last few years.
You mean like what the IMF does?
My point is that I don't believe the circumstances are short term.
I meant the British government gleefully boosting social immobility, American republicans trying to defund practically every social program, and the failed doctrine of austerity in Europe. You raise a fair point in "what the IMF does". Well, that's just how things are, I guess..? The rich developed countries don't want to actively engage in developing the developing world. At least not if it means potentially having to shoulder financial losses. Is it right? Who knows.. these rich governments have expensive social programs to run in Europe. And the US has expensive tax cuts to fund.. you know, because you are never rich enough to not spend on candidates endorsing them.
The circumstances, as in elevated unemployment, and low income growth are short term most definitely. Unemployment is short term, simply because the economy doesn't just throw away factors of production. Low income growth because there is nothing to suggest worker productivity would depreciate in the short term: Income growth will pick up once the growth gets going again.
On October 27 2012 05:21 Holy_AT wrote: Money does not exist it is just a program running in the heads of people. And the way Money is being distributed is utter nonsense, the meaning of money and the reasons why it was introduced are no longer the reasons why it is being used to day and for what reasons. People are programmed in a way that they can not see reality. Is money here to exchange goods and services ? How is the relation between money and a certain service ? Is hard exhausting work rewarded ? Is complicated work rewarded, where you have to think allot until you cant and just blank out on the evening ? How is it possible that someone earns 1000 times or more then someone else ? Is he doing work that is 1000 x times more exhausting or complicated ? This aint humanly possible. And because of these malfunctions in the system that work/service is in no relation to the money being earned this system can not endure long term without being destroyed over and over again.
Well with technology you can easily be 1000X more productive.
Ex. Compare an actor live on stage to an actor in a movie. The actor in the movie can be far more productive because technology will enable one performance to be repeated multiple times at little added cost.
But see that analogy is terrible because you are talking about art! An actor on a stage is different than an actor in a movie. It's totally disingenuous to think about it as "production" which can be compared in this way.
Fair enough. It's just an example, don't be too hard on it
Haha sorry Jonny I keep criticizing your examples :D
But there's a philosophical strategy here, which is that I feel like people always talk about economics in abstract terms, and then they give examples that are just examples and so we shouldn't criticize them, but all the examples seem to leave themselves open to criticism...
I just want people to think about the real world and give compelling examples
On October 27 2012 05:56 Brainling wrote: Then that is supply and demand sam.
The supply is either constrained or not, and there is either demand or there is not. The ratio of those two things will determine fair market value.
Now, if you want to discuss whether workers are currently getting paid fair market value, that's definitely a discussion we can have, and one we would probably agree on (in most cases, they aren't). There is certainly an issue with the current pay structures, but that has way more to do with the decision makers skewing things toward themselves, than some break down in the basic idea of supply and demand.
Current pay structures are FAR too top heavy, that's not in doubt...but I don't think the basic idea of S&D and incentive pay is a bad thing.
problem arises when you have too much power, influence or are today "too big too fail" you are able to figt against such nasty things as competition. The most know form to do that are kartells or monopolies.
Money monopoly is the biggest today and is at the heart of our economy. And its a kartell between goverments and the private sector and as such pretty durable.
its a complexe and not easy to grasp thing, when you never thought about what money is and where it comes from today. Banking History from 1776 to 1913 tells you a lot.
On October 27 2012 05:56 Brainling wrote: Then that is supply and demand sam.
The supply is either constrained or not, and there is either demand or there is not. The ratio of those two things will determine fair market value.
Now, if you want to discuss whether workers are currently getting paid fair market value, that's definitely a discussion we can have, and one we would probably agree on (in most cases, they aren't). There is certainly an issue with the current pay structures, but that has way more to do with the decision makers skewing things toward themselves, than some break down in the basic idea of supply and demand.
Current pay structures are FAR too top heavy, that's not in doubt...but I don't think the basic idea of S&D and incentive pay is a bad thing.
problem arises when you have too much power, influence or are today "too big too fail" you are able to figt against such nasty things as competition. The most know form to do that are kartells or monopolies.
Money monopoly is the biggest today and is at the heart of our economy. And its a kartell between goverments and the private sector and as such pretty durable.
I agree with this. It's an unfortunate, but natural, side effect of an unfettered free market. It doesn't take long for the government and private sector to realize they can be richer together than apart, and this usually comes in the form of special interest and the private sector pushing cushy laws, especially in the tax and employment areas.
On October 27 2012 05:21 Holy_AT wrote: Money does not exist it is just a program running in the heads of people. And the way Money is being distributed is utter nonsense, the meaning of money and the reasons why it was introduced are no longer the reasons why it is being used to day and for what reasons. People are programmed in a way that they can not see reality. Is money here to exchange goods and services ? How is the relation between money and a certain service ? Is hard exhausting work rewarded ? Is complicated work rewarded, where you have to think allot until you cant and just blank out on the evening ? How is it possible that someone earns 1000 times or more then someone else ? Is he doing work that is 1000 x times more exhausting or complicated ? This aint humanly possible. And because of these malfunctions in the system that work/service is in no relation to the money being earned this system can not endure long term without being destroyed over and over again.
Well with technology you can easily be 1000X more productive.
Ex. Compare an actor live on stage to an actor in a movie. The actor in the movie can be far more productive because technology will enable one performance to be repeated multiple times at little added cost.
Yes but does the person using this technologie is 1000x times more exhausted or has to solve 1000x times more complicated things then the person who does not use the technologie ? So why should he be payed more ?
People should get payed for the physical and mental energy they invest (yes mental energy and complexity is difficult to estimate)
They get paid more not because they do 1000X more work but because they produce 1000X more product. As in their wage is not dependent upon their inputs (work, effort) but their outputs (putting asses in the theater).
On October 27 2012 04:57 sam!zdat wrote: Yes, I think that's the problem. Our entire economic thinking is based on the idea that the potential for consumption is without limit of any kind, and our economic policies are based on stimulating that consumption without any consideration of what consumption is and is not a good idea in the first place. It's all just sort of lumped together into this amorphous pile of GDP, and making that number bigger is a "good" thing.
Which is to say, I don't think the "normal operating level" is in fact a "normal operating level," I think it's a historically situated state of affairs which is coming to an end and we are willfully oblivious to this...
edit: just look at how the economy wants to make things that fall apart quickly and have to be replaced, as opposed to making things that last for a long time and therefore preclude future demand... that's not rational at all.
Well.. the operating level is defined by technological achievement and worker productivity. In terms of recessions and depressions, philosophical musings about what human activity should be directed at are futile. It's about how money works as a system. Or.. how it breaks down.
No, that's when you need philosophy the most...
Is philosophy going to feed clothe and house millions of jobless people?
Don't be facile...
Political scientists call pushing your own agenda on the back of difficult short term circumstances "shock doctrine". I am very sad to see it having been used mostly for the purposes of conservatives and libertarians during the last few years.
You mean like what the IMF does?
My point is that I don't believe the circumstances are short term.
The circumstances, as in elevated unemployment, and low income growth are short term most definitely. Unemployment is short term, simply because the economy doesn't just throw away factors of production. Low income growth because there is nothing to suggest worker productivity would depreciate in the short term: Income growth will pick up once the growth gets going again.
But I wanna know what sectors are the future... What kind of jobs are people going to be doing in the future? You talk about this "growth" thing, again, as this undifferentiated GDP tumor, but I want to know what it actually looks like for the people doing things and living lives...
As we continue to move from labor-intensive to capital-intensive things (I know there is a countercycle because of globalization), are there infinite new horizons that open up? Or is there actually a limit to what things are worth doing?
edit: the problem with capital is that it is coercive... it forces people to live in a world of neverending crisis and reorganization and you can't have a nice, calm community, pass down a metier to your children... fuck, these days you can't even pass down a metier to yourself twenty years in the future. I get the "creative destruction" thing but people focus too much on the first word and not enough on the second.
I should imagine the banks are simply waiting for the markets to bottom out so they can spend those reserves in such a way as to make the most money possible. This kind of opportunity doesn't come along very often. Normally, competition between lenders keeps the money flowing.
On October 27 2012 04:57 sam!zdat wrote: Yes, I think that's the problem. Our entire economic thinking is based on the idea that the potential for consumption is without limit of any kind, and our economic policies are based on stimulating that consumption without any consideration of what consumption is and is not a good idea in the first place. It's all just sort of lumped together into this amorphous pile of GDP, and making that number bigger is a "good" thing.
Which is to say, I don't think the "normal operating level" is in fact a "normal operating level," I think it's a historically situated state of affairs which is coming to an end and we are willfully oblivious to this...
edit: just look at how the economy wants to make things that fall apart quickly and have to be replaced, as opposed to making things that last for a long time and therefore preclude future demand... that's not rational at all.
Well.. the operating level is defined by technological achievement and worker productivity. In terms of recessions and depressions, philosophical musings about what human activity should be directed at are futile. It's about how money works as a system. Or.. how it breaks down.
No, that's when you need philosophy the most...
Is philosophy going to feed clothe and house millions of jobless people?
Don't be facile...
Political scientists call pushing your own agenda on the back of difficult short term circumstances "shock doctrine". I am very sad to see it having been used mostly for the purposes of conservatives and libertarians during the last few years.
You mean like what the IMF does?
My point is that I don't believe the circumstances are short term.
The circumstances, as in elevated unemployment, and low income growth are short term most definitely. Unemployment is short term, simply because the economy doesn't just throw away factors of production. Low income growth because there is nothing to suggest worker productivity would depreciate in the short term: Income growth will pick up once the growth gets going again.
But I wanna know what sectors are the future... What kind of jobs are people going to be doing in the future? You talk about this "growth" thing, again, as this undifferentiated DGP tumor, but I want to know what it actually looks like for the people doing things and living lives...
As we continue to move from labor-intensive to capital-intensive things (I know there is a countercycle because of globalization), are there infinite new horizons that open up? Or is there actually a limit to what things are worth doing?
There are basically infinite new horizons, that's not really the issue. The issue is: Do you have a work force with the skills to work in those horizon fields? It's not a matter of "do we have a place to go", it's a matter of "do we have a plan to get there".
If you're in an industry like mine, you feel pretty good about this. Computer use is more ubiquitous now than ever, and that won't abate probably ever. But what if you're a highly skilled welder? What do we do with that person? As a society, do we have a responsibility to make sure that person is given new educational and advancement opportunities in to the capital-rich work force? I personally say yes, we do.
On October 27 2012 04:57 sam!zdat wrote: Yes, I think that's the problem. Our entire economic thinking is based on the idea that the potential for consumption is without limit of any kind, and our economic policies are based on stimulating that consumption without any consideration of what consumption is and is not a good idea in the first place. It's all just sort of lumped together into this amorphous pile of GDP, and making that number bigger is a "good" thing.
Which is to say, I don't think the "normal operating level" is in fact a "normal operating level," I think it's a historically situated state of affairs which is coming to an end and we are willfully oblivious to this...
edit: just look at how the economy wants to make things that fall apart quickly and have to be replaced, as opposed to making things that last for a long time and therefore preclude future demand... that's not rational at all.
Well.. the operating level is defined by technological achievement and worker productivity. In terms of recessions and depressions, philosophical musings about what human activity should be directed at are futile. It's about how money works as a system. Or.. how it breaks down.
No, that's when you need philosophy the most...
Is philosophy going to feed clothe and house millions of jobless people?
Don't be facile...
Political scientists call pushing your own agenda on the back of difficult short term circumstances "shock doctrine". I am very sad to see it having been used mostly for the purposes of conservatives and libertarians during the last few years.
You mean like what the IMF does?
My point is that I don't believe the circumstances are short term.
The circumstances, as in elevated unemployment, and low income growth are short term most definitely. Unemployment is short term, simply because the economy doesn't just throw away factors of production. Low income growth because there is nothing to suggest worker productivity would depreciate in the short term: Income growth will pick up once the growth gets going again.
But I wanna know what sectors are the future... What kind of jobs are people going to be doing in the future? You talk about this "growth" thing, again, as this undifferentiated DGP tumor, but I want to know what it actually looks like for the people doing things and living lives...
As we continue to move from labor-intensive to capital-intensive things (I know there is a countercycle because of globalization), are there infinite new horizons that open up? Or is there actually a limit to what things are worth doing?
There are basically infinite new horizons, that's not really the issue.
No, but this is what I don't believe, can you convince me?
The issue is: Do you have a work force with the skills to work in those horizon fields? It's not a matter of "do we have a place to go", it's a matter of "do we have a plan to get there".
There's a third question, which is "is it worth going?"
(edit: also, "which of the places that we could go do we want to go?", perhaps a corollary of above)
If you're in an industry like mine, you feel pretty good about this. Computer use is more ubiquitous now than ever, and that won't abate probably ever.
If I were you, I would be worried. You program things, right? What happens when billions of Indian kids and Chinese kids learn to program? you think the internet is a big place now... My coder friends say most of programming now is not engine things inside the program, it's interface things that hook up to the real world, and that there's a real inefficiency because of parallel development due to proprietary software. How many coders can the world support?
But what if you're a highly skilled welder? What do we do with that person? As a society, do we have a responsibility to make sure that person is given new educational and advancement opportunities in to the capital-rich work force? I personally say yes, we do.
Yeah, deskilling is a major problem, that's why you can't pass down metier.
On October 27 2012 05:21 Holy_AT wrote: Money does not exist it is just a program running in the heads of people. And the way Money is being distributed is utter nonsense, the meaning of money and the reasons why it was introduced are no longer the reasons why it is being used to day and for what reasons. People are programmed in a way that they can not see reality. Is money here to exchange goods and services ? How is the relation between money and a certain service ? Is hard exhausting work rewarded ? Is complicated work rewarded, where you have to think allot until you cant and just blank out on the evening ? How is it possible that someone earns 1000 times or more then someone else ? Is he doing work that is 1000 x times more exhausting or complicated ? This aint humanly possible. And because of these malfunctions in the system that work/service is in no relation to the money being earned this system can not endure long term without being destroyed over and over again.
Well with technology you can easily be 1000X more productive.
Ex. Compare an actor live on stage to an actor in a movie. The actor in the movie can be far more productive because technology will enable one performance to be repeated multiple times at little added cost.
But see that analogy is terrible because you are talking about art! An actor on a stage is different than an actor in a movie. It's totally disingenuous to think about it as "production" which can be compared in this way.
Fair enough. It's just an example, don't be too hard on it
Haha sorry Jonny I keep criticizing your examples :D
But there's a philosophical strategy here, which is that I feel like people always talk about economics in abstract terms, and then they give examples that are just examples and so we shouldn't criticize them, but all the examples seem to leave themselves open to criticism...
I just want people to think about the real world and give compelling examples
I know, its hard because real life examples are complicated. Like the stage / movie actor comparison, you can explain it with "supply and demand" but then breaking down why supply and demand lead to that wage difference is complicated. Technology plays a factor, as does the public's preferences for leisure activities, as does the actor's opportunity costs (what else they could be doing for a living) etc, etc.
On October 27 2012 05:21 Holy_AT wrote: Money does not exist it is just a program running in the heads of people. And the way Money is being distributed is utter nonsense, the meaning of money and the reasons why it was introduced are no longer the reasons why it is being used to day and for what reasons. People are programmed in a way that they can not see reality. Is money here to exchange goods and services ? How is the relation between money and a certain service ? Is hard exhausting work rewarded ? Is complicated work rewarded, where you have to think allot until you cant and just blank out on the evening ? How is it possible that someone earns 1000 times or more then someone else ? Is he doing work that is 1000 x times more exhausting or complicated ? This aint humanly possible. And because of these malfunctions in the system that work/service is in no relation to the money being earned this system can not endure long term without being destroyed over and over again.
Well with technology you can easily be 1000X more productive.
Ex. Compare an actor live on stage to an actor in a movie. The actor in the movie can be far more productive because technology will enable one performance to be repeated multiple times at little added cost.
But see that analogy is terrible because you are talking about art! An actor on a stage is different than an actor in a movie. It's totally disingenuous to think about it as "production" which can be compared in this way.
Fair enough. It's just an example, don't be too hard on it
Haha sorry Jonny I keep criticizing your examples :D
But there's a philosophical strategy here, which is that I feel like people always talk about economics in abstract terms, and then they give examples that are just examples and so we shouldn't criticize them, but all the examples seem to leave themselves open to criticism...
I just want people to think about the real world and give compelling examples
I know, its hard because real life examples are complicated. Like the stage / movie actor comparison, you can explain it with "supply and demand" but then breaking down why supply and demand lead to that wage difference is complicated. Technology plays a factor, as does the public's preferences for leisure activities, as does the actor's opportunity costs (what else they could be doing for a living) etc, etc.
Exactly... that's why I don't listen when economists tell me they know everything and I should shut up and let them run the moneez
On October 26 2012 12:33 TheRabidDeer wrote: Picture taken from my economics text
I was wondering if somebody could educate me on this. Up until the huge collapse, banks kept the bare minimum required by the government stored up in their vaults. And this makes sense, why keep money in your vaults when you can invest it to make more money? I mean, banks have over a trillion dollars waiting to be spent (and using the money multiplier that is significantly more than that which could be on the market for basic economic growth).
So, why arent they spending? Why is the government STILL printing money if there is still all of this unused money? Will interest rates automatically rise if printing stops? Why are the banks collecting interest on this money too?
Normally, if banks have more money, they will start loaning more to make even more money. However, in the current liquidity trap we are in, interest rates are very low. This makes lending out unattractive. Furthermore, banks have a pile of debt they want to get rid of. The result is the graph.
On October 27 2012 05:58 Kontys wrote: I am fairly confident we shouldn't just dismiss free market economy because of it's apparent faults. It has great strengths too.
I am fairly confident we shouldn't just dismiss controlled market economy because of it's apparent faults. It has great strengths too.
I think i like the way you think.Capitalism has its victims too.They just are not lined up in concentration camps or stall queues. It is all "quantitative easing" and "recapitalisation" and "structural optimization" , but not those people that are fired and have nothing to eat.Or are mutilated by some machine .Or how Earth is going to hell becouse of...you know.
On October 27 2012 06:17 Kontys wrote: The circumstances, as in elevated unemployment, and low income growth are short term most definitely. Unemployment is short term, simply because the economy doesn't just throw away factors of production. Low income growth because there is nothing to suggest worker productivity would depreciate in the short term: Income growth will pick up once the growth gets going again.
This.Can you explain how exactly It is going to pick up?I do not understand how this cycle : low demand - less jobs - lower demand - even less jobs- is going to get going again.Becosue to me,this way is dead end.
On October 27 2012 05:11 sam!zdat wrote: @Kontys: Yeah, I understand all this actually. I understand what a crisis of effective demand is.
But what I don't believe is that the entire problem is "fictional," in the sense that if only the way the money worked worked better, then everything would be great. Everybody seems to assume this and I think it's a bad assumption. I don't think the entire thing can be written off as some sort of negative feedback cycle in financial system.
edit: I just feel like people who talk about economics and finance and stuff forget that there is a real world out there and that the graphs about interest rates and stuff is just a little back of the envelope model, basically, compared to the real thing. And then you get stuff like the negative feedback cycle explanation, which essentially tells me "there's a financial crisis because there's a financial crisis" and this one remains unconvinced
What would you direct human activity toward if you got to decide? How could you be certain that this direction is what's best, or what others want?
Yeah, it's a hard problem, isn't it? Why don't we spend some time talking about that, hmmm?
Wall street cooked it up. The details are many and terrifying, but if I had to point to the most crucial, I'd pick a practice called shadow banking.
Yeah I read the book by Posner and he explained all about the shadow banks.
I am fairly confident we shouldn't just dismiss free market economy because of it's apparent faults. It has great strengths too.
Yeah. Me and Marx both agree with you. (one difference possible is that I don't think the faults are merely "apparent.")
There have been times in American history too, when it has worked for "everyone". And there have been times when it has only worked for the few entitled rich people. What it really boils down to, I observe, is how political power is distributed in society. The ones who can rig the rules of the free market are going to benefit, others will suffer.
I am quite pleased with how social democracy works here in Finland, and I am assured it works fine in other nordic countries as well. The thing to do right, is for the state to exploit the business' greed, not deny them their ambitions.
Interesting, well, I'll have to take a look at how they do things in Finland. Do you have any thoughts about why things have worked well there (assuming they have) and about the overall sustainability of the system? I certainly agree with your proposition about greed and ambition.
America was also a fine, just society to live in for many decades following the 2nd world war, but the Reagan revolution unfortunately disembowelled the worker union movement, which not only became unable to fight for worker rights, but also lost it's political power, unable to any longer be a major funder for parties and candidates in the political process. 12 years of republican rule came to an end under only after the election of the decidedly "business-friendly" President Clinton.
It's not clear that organized labor is coming back. I'm not sure that a return to social democracy is possible in America.
I recall Dr Paul Krugman (a man well worth your time) suggesting that organized labour would come back even without any changes to law, if the political establishment favored it.
Finland and the Nordics have a large public sector funded by steep progressive taxation. Free healthcare, education, higher education, mothers'/children's services and a strong social safety net. Strong social mobility, to the extent that we have been described "classless". All the Nordic countries are also small, which helps. Combined population a 1/10th of the US. A perhaps negative effect of the power of the state is that business is somewhat over-regulated, which is not nice.
Quantitative Easing policies have failed- all that money that's supposed to go to consumers to borrow at low interest rates are instead given to banks to make them richer.
On October 27 2012 05:11 sam!zdat wrote: @Kontys: Yeah, I understand all this actually. I understand what a crisis of effective demand is.
But what I don't believe is that the entire problem is "fictional," in the sense that if only the way the money worked worked better, then everything would be great. Everybody seems to assume this and I think it's a bad assumption. I don't think the entire thing can be written off as some sort of negative feedback cycle in financial system.
edit: I just feel like people who talk about economics and finance and stuff forget that there is a real world out there and that the graphs about interest rates and stuff is just a little back of the envelope model, basically, compared to the real thing. And then you get stuff like the negative feedback cycle explanation, which essentially tells me "there's a financial crisis because there's a financial crisis" and this one remains unconvinced
What would you direct human activity toward if you got to decide? How could you be certain that this direction is what's best, or what others want?
Yeah, it's a hard problem, isn't it? Why don't we spend some time talking about that, hmmm?
Wall street cooked it up. The details are many and terrifying, but if I had to point to the most crucial, I'd pick a practice called shadow banking.
Yeah I read the book by Posner and he explained all about the shadow banks.
I am fairly confident we shouldn't just dismiss free market economy because of it's apparent faults. It has great strengths too.
Yeah. Me and Marx both agree with you. (one difference possible is that I don't think the faults are merely "apparent.")
There have been times in American history too, when it has worked for "everyone". And there have been times when it has only worked for the few entitled rich people. What it really boils down to, I observe, is how political power is distributed in society. The ones who can rig the rules of the free market are going to benefit, others will suffer.
Yes, good, how does this occur?
I am quite pleased with how social democracy works here in Finland, and I am assured it works fine in other nordic countries as well. The thing to do right, is for the state to exploit the business' greed, not deny them their ambitions.
Interesting, well, I'll have to take a look at how they do things in Finland. Do you have any thoughts about why things have worked well there (assuming they have) and about the overall sustainability of the system? I certainly agree with your proposition about greed and ambition.
America was also a fine, just society to live in for many decades following the 2nd world war, but the Reagan revolution unfortunately disembowelled the worker union movement, which not only became unable to fight for worker rights, but also lost it's political power, unable to any longer be a major funder for parties and candidates in the political process. 12 years of republican rule came to an end under only after the election of the decidedly "business-friendly" President Clinton.
It's not clear that organized labor is coming back. I'm not sure that a return to social democracy is possible in America.
I recall Dr Paul Krugman (a man well worth your time) suggesting that organized labour would come back even without any changes to law, if the political establishment favored it.
that seems totally circular...
Finland and the Nordics have a large public sector funded by steep progressive taxation. Free healthcare, education, higher education, mothers'/children's services and a strong social safety net. Strong social mobility, to the extent that we have been described "classless". All the Nordic countries are also small, which helps. Combined population a 1/10th of the US. A perhaps negative effect of the power of the state is that business is somewhat over-regulated, which is not nice.
Sure, I wish I could live in a country like that, it sounds really nice. I'm not sure that large social democratic states are the end of history, but it's probably the most strategic move for the moment. but the problem is no way we accomplish that in the US as it's currently organized...
I'm not sure how to convince you other than to say look at the pace technology moves. As the world digitizes more and more, and science crawls on, there will be horizons that open up that we can't even imagine yet. Maybe in 2050 we start needing "fusion engineers", because we've perfected fusion and now we need people to run the reactors. Maybe in 2030, we need "moon miners", trained engineers who can go mine the moon of minerals. There are nearly infinite possibilities of where we may need skilled workers in the future, and some we can't even imagine yet (no one could imagined we would need computer programmers 75 years ago, not even von Neumann himself, who said in 1948 that we had reached the logical limit of what the digital circuit could do for us....and he was a pretty smart dude).
As far as the comments about what I do for a living, I don't think you really appreciate how difficult being a senior software engineer is. It's not something some random Chinese or Indian kid (or any nationality really) is just going to pop up one day and challenge my seniority. They'll need the same schooling and years of experience it took me to get there. Hopefully, I'll be the one teaching them how to get there, so I can retire when they are ready I actually have a plan for where to take my career if my job ever stops dropping in demand, just like everyone else should.
On October 26 2012 12:33 TheRabidDeer wrote: Picture taken from my economics text
I was wondering if somebody could educate me on this. Up until the huge collapse, banks kept the bare minimum required by the government stored up in their vaults. And this makes sense, why keep money in your vaults when you can invest it to make more money? I mean, banks have over a trillion dollars waiting to be spent (and using the money multiplier that is significantly more than that which could be on the market for basic economic growth).
So, why arent they spending? Why is the government STILL printing money if there is still all of this unused money? Will interest rates automatically rise if printing stops? Why are the banks collecting interest on this money too?
Normally, if banks have more money, they will start loaning more to make even more money. However, in the current liquidity trap we are in, interest rates are very low. This makes lending out unattractive. Furthermore, banks have a pile of debt they want to get rid of. The result is the graph.
Throw away your preconceptions. The Federal Reserve is currently paying banks to hold on their money-- Interest on Excess Reserves. This makes is profitable for banks to sit on their money rather than lend it. This is a contractionary monetary policy, and is bad for the economy, but is being done to provide safe assets for banks.
On October 27 2012 06:43 Brainling wrote: I'm not sure how to convince you other than to say look at the pace technology moves. As the world digitizes more and more, and science crawls on, there will be horizons that open up that we can't even imagine yet. Maybe in 2050 we start needing "fusion engineers", because we've perfected fusion and now we need people to run the reactors. Maybe in 2030, we need "moon miners", trained engineers who can go mine the moon of minerals. There are nearly infinite possibilities of where we may need skilled workers in the future, and some we can't even imagine yet (no one could imagined we would need computer programmers 75 years ago, not even von Neumann himself, who said in 1948 that we had reached the logical limit of what the digital circuit could do for us....and he was a pretty smart dude).
But maybe none of them create jobs...
We've only had information technology for half a century or so, very hard to make any extrapolation about future trends based on this. I think there's no compelling reason to be an optimist and think that there will always magically be something new.
As far as the comments about what I do for a living, I don't think you really appreciate how difficult being a senior software engineer is. It's not something some random Chinese or Indian kid (or any nationality really) is just going to pop up one day and challenge my seniority. They'll need the same schooling and years of experience it took me to get there. Hopefully, I'll be the one teaching them how to get there, so I can retire when they are ready I actually have a plan for where to take my career if my job ever stops dropping in demand, just like everyone else should.
Not trying to belittle your work, I wouldn't be able to do it. but educational paradigms are changing dramatically right now and all my friends in that industry basically learned how to program themselves when they were kids and built careers on that. Tech jobs are still built on pre-tech educational infrastructure, and that is all changing as I say right now
On October 27 2012 06:43 Brainling wrote: As far as the comments about what I do for a living, I don't think you really appreciate how difficult being a senior software engineer is. It's not something some random Chinese or Indian kid (or any nationality really) is just going to pop up one day and challenge my seniority. They'll need the same schooling and years of experience it took me to get there. Hopefully, I'll be the one teaching them how to get there, so I can retire when they are ready I actually have a plan for where to take my career if my job ever stops dropping in demand, just like everyone else should.
course not,becosue these random "chinese and indian kids" are slaving in factory.
we're still spending because we need to pump money into the economy so that there are jobs and because of the recession people are saving more, spending less, meaning even less customer demand for products. theres a lot of stuff dealing with aggregate demand, etc, but that's the VERYYYYY GENERALLLLLLLL reason, and thinking. it's all theorycrafting and depending on which side you speak to, they will give different ideas based on this theory.
On October 27 2012 06:47 sam!zdat wrote: Not trying to belittle your work, I wouldn't be able to do it. but educational paradigms are changing dramatically right now and all my friends in that industry basically learned how to program themselves when they were kids and built careers on that. Tech jobs are still built on pre-tech educational infrastructure, and that is all changing as I say right now
The current educational structure for computer science is fuck all horrendous, of that there is no doubt. As I've said previously, current CS programs don't even prepare people for the work force correctly. This is why you see so many "self taught" programmers, because they tend to be the ones with actual experience writing software. Unbeknownst to most people, software is an experience discipline as much or more than a knowledge discipline.
I am actually involved in helping a local school beef up their CS curriculum, because it's so horrendous. I hope to parlay that in to eventually teaching that curriculum, as I would love to wind down my career preparing the next generation of programmers.
I appreciate a good economics discussion, but ironically the answer to the question is in the picture, and is not that complicated. Reserves spiked because the Fed started paying interest on reserves, as an incentive to not over leverage, and increase reserves to bring some stability to the banking sector. In an uncertain economic climate these returns were low, but they were risk free so banks took it.
On October 27 2012 07:03 TeCh)PsylO wrote: I appreciate a good economics discussion, but ironically the answer to the question is in the picture, and is not that complicated. Reserves spiked because the Fed started paying interest on reserves, as an incentive to not over leverage, and increase reserves to bring some stability to the banking sector. In an uncertain economic climate these returns were low, but they were risk free so banks took it.
This is 100% correct. It is rather straightforward.
Just FYI, I skipped every post in here because my current state can't take any gold bug/modorn monetary theory/money is a bubble posts (although I do appreciate the MMT posts, I just don't have the energy to argue hehe). Anyway, two explanations I really really like (which go together in diagnosis but diverge in cure). Firstly, the Brad Delong one, IMO the prime monetary historian currently (mainly because he's one of the only, if not the only, economic historian who publishes into the mainstream right now), to be short: Ideal economy: currently produced goods and services = currently offered goods and services, sadly someone invented money. As such, CPGS +money demand = COGS. When peoples AAA rate shit becomes C, they hoard money, so money demand increases and CPGS goes down, the reserves on banks balance sheets dont matter one bit until there are enough AAA assets/money to satisfty peoples increased demand for these (terrible explanation, check http://delong.typepad.com (for the people who prefer circular reasoning, i.e. the ones I referenced in my first few lines, hes quite keynesian + he's in love with larry summers (gasp!) but there is no reason you would not enjoy him as a historian (an example of a good post, i can't find his summaring posts :http://delong.typepad.com/sdj/2011/11/yes-the-us-government-ought-to-own-the-banks-now.html, basically google his blog for Shumpeter, Minsky, Bagehot, ...
Anyway, second good explanation (first one was history, this is the present) is the market monetarist view. Basically, they follow the orthodox monetarist/keynesian view that the current crisis is so deep that it hit the zero lower bound (i.e. due to rent modalities and shit we do not use the concept of negative interest rates) and that regular (i.e. based on keynesian principles ==> "lowering interest rates") is not enough to hit the NAIRU. BUT they completely disagree with both old school monetarists (target the money supply, M1, M2, M3, Friedman hated this when he got older) and keynesians (in some strange universe low interest rates are the cure instead of a symptom) on how to manage monetary policy. Instead the focus (completely accurately) on Nominal GDP. They argue that every serious crisis was caused by central banks allowing NGDP to fall below its normal long term growth (~5% for NA, ~4% for EU, reflecting NA's superior entrepreneurial .. climate). As such, they believe that central banks should target the long term growth rate of NGDP by usin the Chuck Norris method (http://worthwhile.typepad.com/worthwhile_canadian_initi/2011/10/monetary-policy-as-a-threat-strategy.html). Anyway, explaining all this is way beyond my capabilities, just want to say that their view on this and past zero lower bound crises is so completely accurate and their suggestions would be a huge step forward for the world (well, the part that cares about the unemployed atleast) so I'll just link some things, firstly: http://www.themoneyillusion.com/ Scott Sumner's blog, who is up there with Krugman, Mankiw and Summers as one of the monst influental economists of the world solely thanks to his blog (just check out the latest Fed minutes). http://worthwhile.typepad.com/worthwhile_canadian_initi/about-nick-rowe.html for the Canadians, probably the strongest market monetarist from a technical point of view (DSGE shit) together with http://marketmonetarist.com/. And just cuz we like internet phenomena here, http://esoltas.blogspot.be/ this high school student who constantly manages to be spot on.
To finish this completely incoherent post, there is a huge demand shortage in the Western economies, leading to/caused by a huge demand for money (as other safe assets give almost the same return). As we are the zero lower bound currently, extraordinary solutions are necessary to restore full employement (as unemployment is destroying the social fabric of countries like Portugal and Spain and is polarising the US even further), such solutions need to be found in the monetary sphere, either via higher inflation (keynes), or via promising/demanding higher NDGP growth (back to the original NGDP growth path) by the central banks. All this demand for cash and high reserves on banks balance sheets is awesome for conspiracy theorists, randroids and goldbugs but its completley beside the point
Afaik it's just that the banks have to hold in an economic crisis. In Sweden the banks haven't gotten any extra funds, but there are new requirements (such as that the customer has to have 15% of a mortgage to loan the remaining 85% etc), and banks in the EU have to have 15% of their total funds in store for a crisis situation. Afaik it's just so that banks don't have to be bailed out if for instance tonnes of customers lose their jobs and can no longer pay their loans. As of right now, the biggest income for the Swedish banks are from lending, so if that got disrupted without money in store, the banks go bankrupt, which turns society upside down. The government came up with a solution that they guarentee the banks that they will go in with tax money if they go bankrupt. This means that Swedish banks are always safe to lend money to, as it's a no-risk investment, which in turn means that they won't have any problems with cash and no tax money is actually spent.
That's what I've picked up from working at a bank for a couple of years. I'm just a private advisor so take it for what it is.
On October 27 2012 06:43 Brainling wrote: I'm not sure how to convince you other than to say look at the pace technology moves. As the world digitizes more and more, and science crawls on, there will be horizons that open up that we can't even imagine yet. Maybe in 2050 we start needing "fusion engineers", because we've perfected fusion and now we need people to run the reactors. Maybe in 2030, we need "moon miners", trained engineers who can go mine the moon of minerals. There are nearly infinite possibilities of where we may need skilled workers in the future, and some we can't even imagine yet (no one could imagined we would need computer programmers 75 years ago, not even von Neumann himself, who said in 1948 that we had reached the logical limit of what the digital circuit could do for us....and he was a pretty smart dude).
But maybe none of them create jobs...
We've only had information technology for half a century or so, very hard to make any extrapolation about future trends based on this. I think there's no compelling reason to be an optimist and think that there will always magically be something new.
It's called creative destruction, and it has been happening even before the information age. There are enough compelling reasons to be an optimist, like every invention since fire...
On October 27 2012 06:43 Brainling wrote: I'm not sure how to convince you other than to say look at the pace technology moves. As the world digitizes more and more, and science crawls on, there will be horizons that open up that we can't even imagine yet. Maybe in 2050 we start needing "fusion engineers", because we've perfected fusion and now we need people to run the reactors. Maybe in 2030, we need "moon miners", trained engineers who can go mine the moon of minerals. There are nearly infinite possibilities of where we may need skilled workers in the future, and some we can't even imagine yet (no one could imagined we would need computer programmers 75 years ago, not even von Neumann himself, who said in 1948 that we had reached the logical limit of what the digital circuit could do for us....and he was a pretty smart dude).
But maybe none of them create jobs...
We've only had information technology for half a century or so, very hard to make any extrapolation about future trends based on this. I think there's no compelling reason to be an optimist and think that there will always magically be something new.
It's called creative destruction, and it has been happening even before the information age. There are enough compelling reasons to be an optimist, like every invention since fire...
Really? You should re-examine the history of the last two centuries more closely. There are far more reasons to be frightened of this kind of situation than to be optimistic. We do NOT want the kind of "creative destruction" that came out in the late 1910s or the late 1930s.
On October 27 2012 06:43 Brainling wrote: I'm not sure how to convince you other than to say look at the pace technology moves. As the world digitizes more and more, and science crawls on, there will be horizons that open up that we can't even imagine yet. Maybe in 2050 we start needing "fusion engineers", because we've perfected fusion and now we need people to run the reactors. Maybe in 2030, we need "moon miners", trained engineers who can go mine the moon of minerals. There are nearly infinite possibilities of where we may need skilled workers in the future, and some we can't even imagine yet (no one could imagined we would need computer programmers 75 years ago, not even von Neumann himself, who said in 1948 that we had reached the logical limit of what the digital circuit could do for us....and he was a pretty smart dude).
But maybe none of them create jobs...
We've only had information technology for half a century or so, very hard to make any extrapolation about future trends based on this. I think there's no compelling reason to be an optimist and think that there will always magically be something new.
It's called creative destruction, and it has been happening even before the information age. There are enough compelling reasons to be an optimist, like every invention since fire...
Really? You should re-examine the history of the last two centuries more closely. There are far more reasons to be frightened of this kind of situation than to be optimistic. We do NOT want the kind of "creative destruction" that came out in the late 1910s or the late 1930s.
or you can re-examine what I exactly replied to. As far as I know the late 10's and 30's weren't caused by some new invention making other industries obsolete
ContralSol thanks for the great informative posts. But I wish you would have written create money rather than print money. As I don't believe the Fed was/is just printing or coining physical money to buy assets.
Additionally the quantitative easing used by the Fed didn't just consist of buying bank assets with money, they also used treasury securities for purchases.
Also thanks to XoXiDe for linking to the Fed pdf it was also really informative.
I must admit, I'm impressed by the performance of the Fed. They do seem to have prevented a deflationary collapse.
On the other hand offering interest on reserves to banks does seem like giving the banks free money, which comes at the expense of everyone else. So yes a crash was prevented but at the expense of making the entire financial system less efficient, which reduces long term growth.
On October 27 2012 06:43 Brainling wrote: I'm not sure how to convince you other than to say look at the pace technology moves. As the world digitizes more and more, and science crawls on, there will be horizons that open up that we can't even imagine yet. Maybe in 2050 we start needing "fusion engineers", because we've perfected fusion and now we need people to run the reactors. Maybe in 2030, we need "moon miners", trained engineers who can go mine the moon of minerals. There are nearly infinite possibilities of where we may need skilled workers in the future, and some we can't even imagine yet (no one could imagined we would need computer programmers 75 years ago, not even von Neumann himself, who said in 1948 that we had reached the logical limit of what the digital circuit could do for us....and he was a pretty smart dude).
But maybe none of them create jobs...
We've only had information technology for half a century or so, very hard to make any extrapolation about future trends based on this. I think there's no compelling reason to be an optimist and think that there will always magically be something new.
It's called creative destruction, and it has been happening even before the information age. There are enough compelling reasons to be an optimist, like every invention since fire...
Really? You should re-examine the history of the last two centuries more closely. There are far more reasons to be frightened of this kind of situation than to be optimistic. We do NOT want the kind of "creative destruction" that came out in the late 1910s or the late 1930s.
or you can re-examine what I exactly replied to. As far as I know the late 10's and 30's weren't caused by some new invention making other industries obsolete
or you could realize that I already used the words "creative destruction" and that simply throwing out this phrase is not a response to what I'm saying... In fact I am rather explicitly calling the liberal faith in this "phenomenon" into question
On October 27 2012 06:43 Brainling wrote: I'm not sure how to convince you other than to say look at the pace technology moves. As the world digitizes more and more, and science crawls on, there will be horizons that open up that we can't even imagine yet. Maybe in 2050 we start needing "fusion engineers", because we've perfected fusion and now we need people to run the reactors. Maybe in 2030, we need "moon miners", trained engineers who can go mine the moon of minerals. There are nearly infinite possibilities of where we may need skilled workers in the future, and some we can't even imagine yet (no one could imagined we would need computer programmers 75 years ago, not even von Neumann himself, who said in 1948 that we had reached the logical limit of what the digital circuit could do for us....and he was a pretty smart dude).
But maybe none of them create jobs...
We've only had information technology for half a century or so, very hard to make any extrapolation about future trends based on this. I think there's no compelling reason to be an optimist and think that there will always magically be something new.
It's called creative destruction, and it has been happening even before the information age. There are enough compelling reasons to be an optimist, like every invention since fire...
Really? You should re-examine the history of the last two centuries more closely. There are far more reasons to be frightened of this kind of situation than to be optimistic. We do NOT want the kind of "creative destruction" that came out in the late 1910s or the late 1930s.
or you can re-examine what I exactly replied to. As far as I know the late 10's and 30's weren't caused by some new invention making other industries obsolete
or you could realize that I already used the words "creative destruction" and that simply throwing out this phrase is not a response to what I'm saying... In fact I am rather explicitly calling the liberal faith in this "phenomenon" into question
Creative destruction just a name, a result of the observing the real world. Just as tides is a name for something observed in the real world. Why use the word faith and keep "doing" "this"? Are you telling me people will stop having the drive to improve themselves relative to others? Because that is the driving force of innovation imho, and as long as you have innovation (in the economic sense, not marketing) you will have new products and technologies that will make things obsolete. Would you complain when a new technology made all fossil fuel obsolete? In the long run people adapt, but getting there might be painful to some and beneficial for others.
On October 27 2012 07:03 TeCh)PsylO wrote: I appreciate a good economics discussion, but ironically the answer to the question is in the picture, and is not that complicated. Reserves spiked because the Fed started paying interest on reserves, as an incentive to not over leverage, and increase reserves to bring some stability to the banking sector. In an uncertain economic climate these returns were low, but they were risk free so banks took it.
This is 100% correct. It is rather straightforward.
No, it's absolutely not. Run rate inflation is at about 2.00% right now, and the Fed pays 0.25% interest on excess reserves. That means banks earn a real interest rate of -1.75%. In other words, the banks are actually paying interest to leave their money with the Fed.
On October 27 2012 07:03 TeCh)PsylO wrote: I appreciate a good economics discussion, but ironically the answer to the question is in the picture, and is not that complicated. Reserves spiked because the Fed started paying interest on reserves, as an incentive to not over leverage, and increase reserves to bring some stability to the banking sector. In an uncertain economic climate these returns were low, but they were risk free so banks took it.
This is 100% correct. It is rather straightforward.
No, it's absolutely not. Run rate inflation is at about 2.00% right now, and the Fed pays 0.25% interest on excess reserves. That means banks earn a real interest rate of -1.75%. In other words, the banks are actually paying interest to leave their money with the Fed.
Current rate of inflation isn't relevant, it's a matter of opportunity cost. Typically the opportunity cost of an investment with X risk and Y interest is very small, because excess reserves provide no interest. Now, there is an opportunity cost of an investment with X risk and Y interest, and that is the interest on reserves which has a very small risk. Is the real interest rate negative? Sure, but that doesn't mean there isn't an opportunity cost. Any time you increase the interest on excess reserves, even by a small amount, and even by an amount that's still less than the rate of inflation, it increases the incentive to hold excess reserves. basic economics.
On October 27 2012 07:03 TeCh)PsylO wrote: I appreciate a good economics discussion, but ironically the answer to the question is in the picture, and is not that complicated. Reserves spiked because the Fed started paying interest on reserves, as an incentive to not over leverage, and increase reserves to bring some stability to the banking sector. In an uncertain economic climate these returns were low, but they were risk free so banks took it.
This is 100% correct. It is rather straightforward.
No, it's absolutely not. Run rate inflation is at about 2.00% right now, and the Fed pays 0.25% interest on excess reserves. That means banks earn a real interest rate of -1.75%. In other words, the banks are actually paying interest to leave their money with the Fed.
Current rate of inflation isn't relevant, it's a matter of opportunity cost. Typically the opportunity cost of an investment with X risk and Y interest is very small, because excess reserves provide no interest. Now, there is an opportunity cost of an investment with X risk and Y interest, and that is the interest on reserves which has a very small risk. Is the real interest rate negative? Sure, but that doesn't mean there isn't an opportunity cost. Any time you increase the interest on excess reserves, even by a small amount, and even by an amount that's still less than the rate of inflation, it increases the incentive to hold excess reserves. basic economics.
The fed funds rate has been decreasing, not increasing, and is at a record low since its inception in 1954. The graph in question shows reserves increasing from about 2008, which is the approximate time the Fed dropped it 75bps to 25 basis points.
On October 27 2012 04:15 sam!zdat wrote: Rockefeller was a baptist...
edit: look at you, antisemite, thinking all bankers are jewish.. jeez man :O Some Jews are very nice people and are not bankers at all!
If you are ignorant of the long and rich history of antisemitism under the banner of "Rothschild bankers control all the money" then you should address that.
let's not start this. You're the one brought up anti-semitism without any real reason, the financial class does in fact control a large amount of the world's wealth, yes the Rothschilds are some of them, and yes it's possible to be concerned about this without being an anti-semite.
Oh okay. Lets not start this, but go ahead and continue to inserting an antisemitic trope in here anyway. The Rothschild family today has less assets than George Soros or John Paulson. They have one bank, and that bank is primarily an M&A shop that generates respectable but not particular large returns.They have literally no impact on the way any of the major banks run.
Neither the Rothschild nor the Rockefellers have anything to do with the current financial crisis, and to bring them into a discussion out of the blue cannot be understood outside of the context of conspiracy theory laden with antisemitism.
Well then I suggest you go learn about our world's economy. Gonna stop here because mods are gonna ban me again if I say basicly anything that could possibly somehow offense 1 person on this website. Have a good day
EPT![[image loading]](http://i.imgur.com/Lc2XV.jpg)
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