i realize people are still reading this, so i should put a disclaimer:
A lot of the information in this post is really really outdated, and in retrospect, a lot of it was pretty inaccurate. If you're confused about the mess in general, i think the way i explain things might help clear up some of the economics, but just take everything with a grain of salt.
Ok, I started writing this in my blog but I had such a negative reception because of my ahem *indignant* tone and I figured this was important enough that if that's what was costing me readers, I should post it again a little toned down. Frankly though, I am pissed about what's happening. It's something I feel passionate about. I think educating people is one way to keep shit like this from happening again, so here goes:
Unrelated: anyone hear about this? LOL, from 9/25
“I didn’t know I was going to be the referee for an internal G.O.P. ideological civil war,” Mr. Frank said, according to The A.P.Thursday, in the Roosevelt Room after the session, the Treasury secretary, Henry M. Paulson Jr., literally bent down on one knee as he pleaded with Nancy Pelosi, the House Speaker, not to “blow it up” by withdrawing her party’s support for the package over what Ms. Pelosi derided as a Republican betrayal.
“I didn’t know you were Catholic,” Ms. Pelosi said, a wry reference to Mr. Paulson’s kneeling, according to someone who observed the exchange. She went on: “It’s not me blowing this up, it’s the Republicans.”
After some reflection, I think it's fair to criticize my credentials, and that it probably sounds arrogant to say I'm qualified just because "I read a lot." So let me qualify that statement more.
1.) I have taken Macroecon, and most of my understanding is "grounds up" learning. That means I picked it up in bits and pieces through my reading, and used my macroecon text to weave it all together. That leaves holes in my knowledge in places that aren't covered as often in my reading. Obviously in the discussion of the fed is one example.
2.) I'm on the debate team at my school (I'm a decent debater I might add) and about 2-3 hours of my day consists of reading from the Economist, NYT, and a selection of 20-30 think tanks from every side of the spectrum. I've been doing this for a few months, and while admittedly there are still holes in my knowledge, my understanding of world events is pretty comprehensive.
3.) It's frustrating being accused of ignorance by people who have neither made the effort to show how I am factually incorrect. You may disagree with me ideologically, but except for the parts that's clearly MY OPINION, you never tell me where I'm wrong. I make a good-faith effort to keep the facts straight and to clearly distinguish my ideology. I'd appreciate that anybody posting in response make a similar good-faith effort to approach my work with respect.
The News 10/1
Revised bailout with concessions to House Republicans passed in Senate with a very good margin. Bill will likely be at Bush's desk by next week. Bailout, here we come!
The News Yesterday The Bailout was rejected in a not-even-close vote in the House, and the stock markets plummetted. The DOW dropped, 800 points (9%), an all-time record, although proportionately less than the 20% it fell on Black Tuesday and 14% on 9/17, because of 9/11.
The Fed's Role (the following is from cAtAcLySmIc)
Not sure if it was covered (too lazy to read through all these pages), but, for anymore that cares, you are missing two huge components of what happened. HnR)hT covered one of them, in that Congress pressured banks to lend to minorities (most of them couldn't pay their mortgages).
The second is a little more complex:
Amid the dot com bust and 9/11, Greenspan cut the target federal funds rate to 1% to keep the economy going. As a result the rates on the treasury bills fall drastically. Institutional investors, more so pension funds, want low risk investments that yield ok returns. Treasury bills are the "safest" investment, but the yields had fallen so low, it just wasn't what they wanted.
These pension funds are calling the banks asking how to find an investment that gives a better return. This 1% rate is exactly what banks wanted. It let the banks borrow money cheaply, and let them leverage to ridiculous amounts. They used their leverage to buy a lot mortgages from mortgage lenders. They packaged up all the mortgages into CDOs, cut them up by risk rating, and sold them off to the institutional investors. Pension funds obviously wanted the safest mortgages, and they got them. Investors who want more risk, more return, like hedge funds, took the risky mortgages. These safe mortgages were like the new treasury bills to pension funds, and they wanted more and more and more.
The banks want more and more and more money so they told the mortgage lenders to sell them more and more and more, and the mortgage lenders told their mortgage brokers to get more and more and more. The problem is that all the people who qualified for the loans already had them. But, the greedy institutional investors, banks, and mortgage lenders wanted more money, so this made the mortgage lenders lower the standards for giving out loans... Uh oh. The banks didn't care because what happens if the person defaults? Well, the bank gets the house, and house prices have been rising and rising; so they would just sell the house and make a profit.
As a result, more and more people started defaulting. This caused more supply of houses, which caused the housing prices to decrease. The "safe" mortgages the pension funds wanted were not so safe. Institutional investors stopped buying CDOs from the banks, and banks stopped buying from the mortgage lenders. Suddenly, they were all holding a bunch of useless securities, and the problem was that because the banks had bundled everything together, no one knew which piece they had; thus, writedowns were the big thing last year.
Deregulation
NOTE: This part is controversial, to be fair. Before you start spouting my left wing propoganda to your friends, read some of the other views on the causes of the current crisis in the thread below. Ignore the idiot posters, but definitely read what jgad has to say, and onemephisto.
WHAT IS DEREGULATION YOU ASK? In short, it's a fetish. Mostly Republicans have it, but Democrats too, under different circumstances. Technically, it's the belief that rules and regulations are bad for economic growth, and that the less regulation the better. This is true, as we'll see, to an extent. Anyway, sometimes the stars are in the right alignment, and Democrats and Republicans will come together in an all-night long orgy of deregulation. This happened in 1999, with the Financial Services Modernization Act, also called the Gramm-Leach-Bliley Act after the people involved in the menage-a-trois that started it all. What this did was fuck you over. What it really did was repeal large portions of the Glass-Steagall act, which if you remember from history, was passed in 1933 to keep the Great Depression from happening again by regulating banking.
Regulations are not necessarily a bad thing. All economies need regulation. In an ideal world, when every investor has very good information about which companies will succeed and which will fail like ... like THE ECONOMY IS FAILING LOLOLOL ... we wouldn't need regulation, because the free market would regulate itself: bad investments won't find investors. But in reality, nobody has perfect information. A good analogy is if you're looking on Craigslist for a female companion, and they turn out to be a guy. You got bad information buddy. You got ripped off. As a result, you just wasted time and resources, and you hurt the economy because you could've used those resources for something productive, like posting on TL.
Regulation can also be a bad thing. More rules means more red tape, means higher costs to make any business transaction. The higher these costs, the less efficiently the economy operates. The key is finding the right balance: how much regulation and in what areas will give us the fastest growth and the most stability.
The FSMA (and many other bills which tbh, I don't know enough about) took it too far. It deregulated areas it shouldn't have. Most importantly, it led to the housing bubble.
The Housing Bubble: Subprime Mortgages and Stuff
First of all, you need to understand supply and demand to really understand the rest of this. Basically, the more there is of something and the easier and cheaper it is to produce, the less something will cost. The more people want something (demand), the higher something will cost. These two forces interact to create an "equilibrium price", which is the price at which a perfectly competitive market will sell that good for.
Houses are really expensive. It would take years, even decades, for most people to save up the money they need to buy a home. For that reason, banks offer a little service they like to call "mortgages". In a mortgage, the bank lends you the money you need to buy a home, on the condition that you will pay it back PLUS a premium of x%. Mortgages are a product, just like a car is a product. In exchange for letting you buy a home sooner, you pay the bank a premium. Ideally, banks would only lend money to people they were sure could pay them back: people who had a clean criminal record, good credit, and a solid income.
Unfortunately, because of deregulation, this didn't always happen. Banks and less reputable financial organizations began lending to the "sub-prime" market. These were people whose credit history meant they had a good chance of defaulting on their loan. One reason banks made these loans was because they figured that housing prices would keep rising forever. If these guys couldn't pay back their loan, we'll just repossess the house and sell it at a profit to someone who can!!!1111 (LOL HOW WRONG THEY WERE).
correction for below paragraph: I said earlier that the banks packaged them into Collateralized Debt Obligations. Wrong. Actually, the secondary mortgage market -- Mae/Mac did this.
After selling a bunch of these mortgages, banks would sell them in the secondary mortgage market to investors. You're probably thinking, "how do you sell debt???" It's simple, just remember that loans are a product. In exchange for paying for the total sum of the loan, the investor gets a portion of the premium the borrowers pay the bank. Because of rising housing costs, these mortgage backed securities were considered good investments, and were quite popular, to the point that they were acquired in the trillions of dollars by investors here and overseas.
The Housing Bubble Deflates
So long as investors kept buying mortgage backed securities, banks continued to make subprime loans. Essentially, they were speculating: gambling that because housing prices would keep rising, they would eventually make a killing. Unfortunately, speculation has the added effect of artificially inflating demand, raising prices. Thus the financial system created a self-fulfilling prophecy: By betting on increased housing prices, they made housing prices increase, creating the housing bubble.
Of course, this couldn't go on forever. Eventually, the rise in housing costs outpaced what consumers were willing to pay. This began in July 19, 2007, when the DOW hit an all-time record high. A month later, the DOW had fallen by 7%. Among the worst hit were mortgage lenders. When stocks become a bear market (it increases in volatility, and is tending toward falling), what naturally happens is that investors put their money on "safer" investments, commodities in particular. Billions were withdrawn from the mortgage industry and as a result, and banks responded by tightening their credit belts and raising interest rates.
The people on the front lines of this crisis were the subprime lenders. Most of them had signed up for Adjustable Rate Mortgages -- meaning that their interest rates were subject to change -- hoping that the inflating housing market would mean that the interest rates would gradually decline in respect to real wages. Because sub-prime mortgage lenders had been hit so hard in the stock market, they needed to raise capital, fast. So they increased interest rates. The reasoning was that even if these people couldn't pay back their loans, the banks would foreclose on them and they could sell the houses again for money. The problem with this logic was supply and demand: Because millions of homes were being foreclosed across the country at THE SAME TIME, supply went up. Because banks were tightening their credit and it was becoming harder to get a mortgage, demand was down. These two factors combined to create rapid deflation in the housing market that is still continuing today.
After a while, as banks hemorrhaged more and more money, it became not just the subprime borrowers who got fucked over, but prime borrowers as well. This happened because banks had to really tighten up credit everywhere to keep themselves afloat. Rising interest rates, combined with declining wages and increased unemployment sent even qualified homeowners into foreclosure, dropping housing prices further. This is an important theme that will appear again and again here: as one sector of the economy blows up, the rest must make up for it.
While we normally think of inflation as an indicator of an economy gone sour, in this case deflation is much worse. The more housing prices fall, the less money banks can get back from their bad loans, and the more investors lose on their mortgage backed securities.
The Next Domino: Wall Street
Until now, I haven't really talked much about what's happening right now with wall street. But this is crucial to understanding the bailout. Everything in the economy relates with what's happening now, including your wages and how long you'll be holding on to your job. People tend to think of wall street as the place rich people go to make more money, but that's just not true. When you deposit money into a bank or certificate of deposit or savings account or mutual fund or hedge fund or whatever, that money doesn't just sit there and magically grow. It's invested. Without investment, if everybody just hoarded the money they had, the economy would cease to grow. Without investment and easy access to credit, you can't start a new business, buy a new tractor for your farm, or buy a new home. Credit and investment is everything.
Bear Stearns was among the first big names to go. Bear Stearns was an investment bank, meaning you didn't just go to a bear stearns office and start a checking account. People put large sums of money into Bear Stearns through equity (shares of stock) or their "wealth management" division that got invested into things like other investment companies, oil, and SUB-PRIME MORTGAGES. Obviously, it's the last that did Bear Sterns in. What was so shocking is how fast it happened. One day Bears was trading at $130 a share, the next they were down to $10 or $20. The reason for the rapid decline was the fact that the executives over at Bear Stearns finally decided to admit just how much money they lost in the two hedge funds they had that specialized in sub-prime mortgages. BOOM! And the floor fell out right under those poor investment bankers. The only way they could even sell their company off was if the fed promised JPMorgan Chase it would cover any losses they suffered from buying out Stearns.
Which brings me to federal bailouts. I don't have the energy to cover every bailout (although I will do more work on Mae and Mac later), but in general, here's the reasoning behind them: When an investor loses lots of money in whatever, that makes them much less likely to invest again in the same sector because 1) they have less money to invest 2) they don't want to take the risk. When someone loses a few billion in mortgage backed securities, they are less likely to invest in mortgages again. The federal reserve feels it has to bail out or at least guarantee the solvency of these companies because if they were to go bankrupt, the consequent losses would have such a powerful damping effect on investment it would exacerbate the housing and credit crisis. I will openly admit that my knowledge of investment banking is limited. I think Last Romantic who is majoring in this shit (POOR GUY) knows more than I do, and if he reads this he can fill you all in more. But here's a quick review of what's going on:
Fannie Mae and Freddie Mac:
onemephisto posted an excellent review of the history of these mortgage giants, and how they contributed to the housing bubble very significantly: + Show Spoiler +
On October 01 2008 05:53 ahrara_ wrote:I'm pretty sure I covered this under Fannie Mae/Freddie Mac, although not with detail. I would argue that deregulation contributed, but that deregulation of mae/mac contributed more. My background knowledge on the two companies is poor, so if you can fill me in that'd be cool. I could add it it to the post under a spoiler, just make sure it's well written.
Well, how I understand it:
Fannie Mae and Freddie Mac were originally both created by the government as government agencies, but were later partially privatized, resulting in them being called Government Sponsored Enterprises, or GSEs. Their purpose was to use their large supply of capital to buy mortgages off of the market, repackage them into securities and other derivatives, and then sell them to other firms.
However, even though they are partially privatized, they still retain a lot of government control and influence. They're regulated by Department of Housing and Urban Development (I think this started in the early 90s) and are chartered by Congress. Since HUD has become their regulator, they have had yearly goals; they're supposed to buy a certain amount of "affordable" loans (read: low-down-payment loans to low-income families). Of course, this sounds good, as everyone wants low-income families to have housing right? However, the fact is that many people simply can't afford housing, and the government mandate for Fannie and Freddie to buy these bad loans has made them viable for banks to offer (especially considering how large Fannie and Freddie are, they buy something like 40% of mortgages created each year). And to encourage even more of these subprime loans, Congress also passed a law giving tax credits to Fannie and Freddie when they bought subprime securities, further increasing the demand for them.
So these government mandates and incentives greatly increased the amount of bad loans the Fannie and Freddie bought. What allowed other banks and investment firms to buy these repackaged securities from F&F was the implicit government guarantee behind them, basically, since the government had so much stake in F&F, people assumed that the government wouldn't let them fail or let their liabilities disappear (which was obviously true), creating a moral hazard situation where people disregard risk because there is no downside to failing.
So government regulation and interference with Fannie Mae and Freddie Mac contributed to the creation of the bubble, and the implicit government guarantee behind the securities allowed it to spread.
Of course, this isn't the only reason, but there are also many other government regulations that have helped create this crisis. The Community Reinvestment Act, which was substantially strengthened in 1995, mandated that banks make a certain amount of loans to low-income families, again creating a misallocation of resources into the housing market. There was also a recent act that reduced the capital gains taxes that people had to pay on homes substantially, but I can't find a source atm.
I'm not clearing investors of all blame, sure, they acted greedy, ignored risks, and took advantage of new derivatives and the market situation. But I'm saying that fundamentally, the problem was with too much government regulation and interference, not too little. More government regulation probably could've delayed this problem, but it would've only been a short-term fix to the underlying problems introduced by the government itself.
tl;dr, Government mandates for affordable housing loans to low-interest families and it's control over the Government Sponsored Enterprises of Fannie Mae and Freddie Mac created the underlying driving force for the creation and subsequent popping of this bubble.
This bailout was absolutely crucial. I told you earlier that Mortgaged Backed Securities were sold by the people who did the lending in the first place, right? Before that happens, the individual debts are sold in the "Secondary Mortgage Market" to Mae/Mac, these two semi-governmental entities created during the Great Depression to make it easier for people to get homes. These two companies serve as "lubricants" of the housing market. They help money flow to where housing demand is highest. For example, if I am a banker and where I live all of a sudden has a huge increase in demand for homes, but I only have a little bit of capital to lend, I can look to Mae/Mac to fully exploit this demand and meet the needs of the market. These guys together were responsible for 70% of American mortgages. SEVENTY FUCKING PERCENT HOLY SHIT.
But Because of Democrat idiocy (SORRY BUT OUR PARTY ISN'T PERFECT, DURRR), these two lenders are practically unregulated. The idea was that this would help them make it easier for people to get a home. What it actually did was to enhance the "moral hazard" situation for home lenders. Because they knew they could just sell off sub-prime mortgages to Mae/Mac, they made more subprime loans, but wiped their hands clean of the risk when they sold it. This is what economists call Moral Hazard: when somebody does something risky but the consequences of that risk is felt by someone else. It encourages unwise behavior like subprime lending. If I press a button that maybe kills YOU, I am more likely to press the button than if it maybe killed ME.
Here's the thing. When Mae/Mac sell those Collateralized Debt Obligations/Mortgage Backed Securities, they guarantee to the investor that they will pay them the full value of the investment even if the homeowner defaults on the mortgage. Uh oh. Moral Hazard anybody? Anyway, if these two companies failed, there would be TRILLIONS of dollars of losses globally. I'll go more into why that's bad specifically for the housing crisis later (although it should be obvious it's a bad thing in general).
Lehman Brothers
Allowed to go bankrupt because fed felt they did not have assets into crucial enough areas of the economy. The reason Bear Stearns was "guaranteed" was because it collapsed so quickly, and for classification reasons was outside of the fed's oversight jurisdiction, so it wasn't possible if Stearns was important to the market.
American International Group
AIG is unique because it is an insurance company that has its fingers everywhere, in every sector of the economy. It specialized in "credit default swaps" which I'm not going to even pretend to understand completely, but basically they guaranteed through insurance a lot of bad debt investments, similar to Fannie Mae and Freddie Mac. It absolutely COULD. NOT. fail. Without going into detail, it was still a profitable organization, but because of procedural issues, it needed more capital. So the fed lent it $85 billion it could use to fulfill those procedural obligations and keep working. As punishment, it took over 80% of the company's equity, or stock.
More from cataclysmic:
Another issue I want to address, and again, sorry if it has already been addressed, is AIG:
So, credit default swaps. Basically, you're a bank or someone and you loan out money. Because you want to make sure that principal loan is 100% guaranteed to get back to you, you engage in a credit default swap with a third party. The terms of this swap are, you pay some type of fee to the third party, and they will payback your principal if the loan were to default. When times were good, obviously these CDS insurance companies were not required to carry the amount of capital equaling how much they are insuring. However, once the loans started defaulting, lenders are running to the insurance companies holding their hands out. The problem is that these companies don't have all the capital to pay all the lenders their principal. You see companies like Ambac and MBIA suffering greatly.
AIG is another one of these. I don't know how educated any of you are on why the government bailed out AIG. Well, AIG is, or was, the largest insurance company out there. Obviously people want to do business with such a credible company. Most of these credit default swaps were between AIG and some lender. If AIG were to go under, none of those lenders would receive the principals that were defaulted on. This would mean that there would be more gigantic writedowns all over the world. There was major, and I mean, major systemic risk involved if AIG were to fail.
A nasty situation
Ok, before we go on the last leg of this GINORMOUS post (nobody is reading this whole thing anyway, I know), let's look at just what the situation was like before the $700 billion bailout was announced.
1.) The housing market continues to deflate. As of early September, banks had totaled some $500 billion in writedowns, and that number is growing. Write-downs are only "recognized" reductions in value. The real losses will number in the trillions.
2.) As for wall street, the problem is getting worse. Every time the fed has bailed out a company, the markets rallied, only to fall again the next day as more bad news was reported, and it became clear that the market was not done collapsing in on itself. Part of it has to do with the fact that we're in a bear market -- again, a market where the mood is generally pessimistic, and people are much more willing to sell. Part of it has to do with uncertainty that the next company will get bailed out. Finally, people are actually DISCOURAGED from investing in the companies who need it the most because in every bailout, the fed has wiped out shareholders (they acquired a large portion of the company's equity).
3.) Money is going into safer, but less profitable investments. This is evidenced by the fact that the U.S. Treasury Bill, considered one of the safest possible investments, has lowered its yield to something like .16% from 1.6% earlier this month. The yield drops as more people invest in bills. Just look at what happens to the 1 month bill after 9/12: http://www.ustreas.gov/offices/domestic-finance/debt-management/interest-rate/yield.shtml (note: it rose above 1% today, not sure why :\).
I told you earlier that consumer credit was tight because of the sub-prime market collapse. Now, the credit problem has spread to wall street. Interbank lending interest rates are at about 2% higher than normal. Depending on inflation, that's a 200%-1000% interest in the premium banks pay to borrow money from each other. Inter-bank lending serves to "lubricate" the financial system, just like Fannie Mae and Freddie Mac. Interbank lending directly affects consumer lending. A bank could WANT to give you a loan for a car can't but it might not have enough capital, so it borrows some from another bank. But if that interbank loan is really expensive, your loan will also be more expensive. Over in London, it's up to 7% for overnight loans: http://www.cbc.ca/money/story/2008/09/30/libor-record.html
BAILOUT my ass
After the failure of AIG, the Fed realized that it couldn't go on giving these Ad Hoc bailouts. It had to once and for all fix the housing problem. When you want to fix anything, the best solution is to attack the root cause.
Essentially, the problem is one of liquidity, or liquid capital. Liquidity describes how easily an asset can be transferred into a different kind of asset, and at what cost. Cash is the most liquid asset possible: Anyone will accept cash for anything, except under excess inflation. A car, on the other hand, is less liquid. You have to go through a lot more trouble to trade a car for something else of equal value, and you will always sell for less than its real value. Before the housing crisis, mortgage backed securities retained some degree of liquidity. After the crisis, they became practically illiquid: Because of the risk associated with them and all the negative headlines, nobody would buy them at a reasonable cost. Essentially, these securities still have SOME worth, but because nobody will buy them for a reasonable price, banks may as well have a black hole where these securities are. It is because they lost so much money on these securities that is fueling the credit crisis.
To fix a liquidity problem, you have to create a market for the illiquid assets. You have to help these companies convert mortgage backed securities into capital they can use to help the economy get back on its feet. Treasury Secretary Henry Paulson teamed up with Fed Chairman Ben Bernanke to write up a plan that would allocate $700 billion to create a market for these securities. Meaning, the government would offer to buy up these securities: they would take them off the hands of investment banks and replace them with cash. Then, the government would either hold on to these securities until they mature (when they "put out" in other words) or sell them to someone else. A similar system was set up in the 80's during the Savings and Loan crisis, but not at this scale.
How this will fix the problem should be obvious. By injecting liquidity into the system, banks will be again willing to lend, and credit will be looser. It will become easier to buy a home, but not so easy the bubble will begin to inflate again. Demand for housing goes up, and prices stabilize. The losses will still be there, but at least the problem won't get any worse.
There's some kinda irrelevant and esoteric information about how the fed will determine prices for these securities. If you're really interested, it's in spoilers. But it wasn't fitting into the narrative as a whole so I cut it... + Show Spoiler +
You may have heard the term "reverse auction" thrown about. Basically, that's the method the fed plans to use to determine how much they want to buy up these securities for. Why can't they just pay the market "equilibrium" price, you say? Because there IS no market. Moreover, each mortgage backed security is different from the next: it's impossible to tell exactly how much is worth. It's like trying to buy off a whole bunch of different paintings. Each one is different. You can only guess how much it's "worth". Like art, the fed plans to determine the price through auction, except that because there's only one buyer, it works in reverse: First the fed will announce the kind of security it plans to buy, then the sellers will bid for the lowest price. The fed will also be hiring help people who can "appraise" the value of each security. This doesn't play a significant role in the story... but I figured it's worth discussing and has to do with the arguments for or against why a bailout is good or bad.
So there's a few things about the bailout that are under debate... but it's hard to talking about that without inserting:
My Goddamn Opinion
At this point, there's not much more to tell you that you don't already know. So I reserve my right to soapbox for a few minutes.
1.) The Bailout is not as expensive as $700 billion.
As I said earlier, while most of these securities are losing money as a whole, they still retain SOME value. Not everyone is going to default on their loans. The fed can either hold these mortgages until they mature or sell them off, if the market has recovered. They could end up earning back between $500 billion to nearly breaking even.
2.) It's not a bailout.
The worst thing Bernanke did in selling the bailout was to call it a bailout. Nobody is coming in and arbitrarily injecting capital into companies that don't deserve it. They are doing it in exchange for these securities. What we're doing is trading much needed liquidity into companies that don't have it.
3.) Don't handicap the bailout.
All this talk about limiting executive pay, creating incentives to negotiate, etc. etc. are valuable policies (to an extent). Geez Congress, maybe you should've instituted them BEFORE THE FUCKING CRISIS YOU TARDS. The economic crisis is not happening soon, it is not happening next year, it is happening NOW and you shitholes need to something about it and not, as my esteemed congressman Pete Stark said this morning, "hold a month of hearings". No I'm not kidding, the fucktard actually said that. Then he blamed tax policies for the crisis. Palin is more fucking informed.
Second, it's important to keep in mind that the bailout is voluntary. If companies don't want to sell their mortgage backed securities because the government requires that they have to give up equity or their severance packages, then they won't sell them, handicapping the bailout.
4.) Not bailing out is much worse.
OK, here is the important part. The argument by free-market fundamentalists is two fold. First, they say that the market is undergoing a "correction". Second, they tell you that bailouts create a moral hazard.
First, it's true that the housing market is undergoing a correction. However, you have to keep in mind that most homes are bought through mortgages. A lot of banks are unwilling to lend even to qualified buyers, so the price of housing might even be BENEATH the ideal equilibrium price. So long as credit remains tight, housing prices will continue to fall, banks will keep bleeding money, and the economy goes down a vicious spiral into stagnation and recession.
Second, this is an inappropriate use of the concept. Bankers have already suffered plenty from the housing crisis. They know better than to let this happen again. Moreover, the costs of NOT bailing out are much higher than the cost of creating this minimal moral hazard.
Conclusion: Why you care and don't even know it
I'm really running out of steam... I don't feel like I could do a good job if I wrote this right now. I'll save the conclusion for another day, if I get around to it. But the gist is there. As more questions come up I'll try to fill them in here i guess.
Inside joke for debaters I hope the Bailout/Nuke War disad I ran all weekend were as flaky as judges kept telling me they were.
The FSMA (and many other bills which tbh, I don't know enough about) took it too far. It deregulated areas it shouldn't have. Most importantly, it led to the housing bubble.
What about those who say this was purposely induced by a few bankers who predicted it would lead to recession and then force a few strategic changes that would benefit them as an excuse to save the economy. At the end of the day, they're many billions richer than before the deregulation.
The FSMA (and many other bills which tbh, I don't know enough about) took it too far. It deregulated areas it shouldn't have. Most importantly, it led to the housing bubble.
What about those who say this was purposely induced by a few bankers who predicted it would lead to recession and then force a few strategic changes that would benefit them as an excuse to save the economy. At the end of the day, they're many billions richer than before the deregulation.
How in the world are investment bankers richer than before the crisis? On what insane dream world ground do you make that argument?
The FSMA (and many other bills which tbh, I don't know enough about) took it too far. It deregulated areas it shouldn't have. Most importantly, it led to the housing bubble.
What about those who say this was purposely induced by a few bankers who predicted it would lead to recession and then force a few strategic changes that would benefit them as an excuse to save the economy. At the end of the day, they're many billions richer than before the deregulation.
How in the world are investment bankers richer than before the crisis? On what insane dream world ground do you make that argument?
I mean not today, but the crisis forces government to take emergency desperate actions to save banks. And I don't mean any bank. Only the big international ones, which would use this as an excuse to crush smaller ones. Aren't international banks such as JPMorgan still growing? I mean, they're in a better position now that Bear Stearns broke, right?
I don't know much myself, might be talking crap. Just repeating what I hear from people who knows 100 times more than me. I just wanted to understand better the very root of the problem. Something this big done on purpose by intelligent people sounds more likely than an *wooops* accident done by stupid people.
The FSMA (and many other bills which tbh, I don't know enough about) took it too far. It deregulated areas it shouldn't have. Most importantly, it led to the housing bubble.
What about those who say this was purposely induced by a few bankers who predicted it would lead to recession and then force a few strategic changes that would benefit them as an excuse to save the economy. At the end of the day, they're many billions richer than before the deregulation.
How in the world are investment bankers richer than before the crisis? On what insane dream world ground do you make that argument?
I mean not today, but the crisis forces government to take emergency desperate actions to save banks. And I don't mean any bank. Only the big international ones, which would use this as an excuse to crush smaller ones. Aren't international banks such as JPMorgan still growing? I mean, they're in a better position now that Bear Stearns broke, right?
I don't know much myself, might be talking crap. Just repeating what I hear from people who knows 100 times more than me. I just wanted to understand better the very root of the problem. Something this big done on purpose by intelligent people sounds more likely than an *wooops* accident done by stupid people.
Simple, VIB, look at jobs. Investment Banker or Bank isn't just talking about a single entity, but the jobs and all associated with it. Lehman's bankruptcy meant a loss of...what was it, 24k jobs across the world? That it was brought out afterwards just means that a faction of the jobs were saved, but really, a part of the merger process always involves a trimming down of the workforce. So Chase and Citigroup might be in a better position now (and Goldman now that they can go asset hunting, lol), but the overall amount of jobs still suffers.
Something big done on purpose isn't done by smart people, it is invariably done by a lot of stupider people with less foresight. Buffett is smart, he exited Bank derivative business back in 2005. Goldman had a ton of smart people, they bet against the Real Estate market from going up forever and even made money off that. No, the smart are few and far in between, and they are profiting before it even got to the stage that involves bank failures. Why? Because bank failures effect them negatively even when it means a gov't supported buyout of a larget amount of assets.
ahrara, you mean for this to replace the TARP thread? I don't see the point of me responding to both threads of similar content. :p
About deregulation, I am going have to use a gun-people argument. Guns don't kill people, people kill people, deregulation gave these folks the guns to wield around, their idiotic decisions led to this mess. Is deregulation bad?
Really, two sides of the same argument. On our level this kinds of bickering is fine, but when Democrats start talking about that on the floor of the house, what the heck do they expect to happen.
Ideally, banks would only lend money to people they were sure could pay them back: people who had a clean criminal record, good credit, and a solid income.
Unfortunately, because of deregulation, this didn't always happen.
Yes, because banks just love to lose money when mortages default. In fact, banks were *pressured* by the government to lend to mainly minorities who can't pay back their loans. Both parties supported this. The idea was to "help" blacks (and hispanics) catch up in home ownership with whites. Banks have been getting accused of racism for not lending enough to minorities, who were disproportionately liable to default even for the same income level. Banks aren't free of blame; they went along with this because of greed, and because they assumed the taxpayer would bail them out if something goes wrong. But it's not as simple as "lack of government regulation caused the crisis".
ahrara, you mean for this to replace the TARP thread? I don't see the point of me responding to both threads of similar content.
No. If I'd posted this in TARP, like nobody would've read it. Here, at least it'll have some notice. You can have a parallel discussion here if you want, but the point was I wanted people to be educated about a very complex topic before jumping in and discussing it. I think this thread will create more quality discussion.
Sorry I can't respond to specific arguments atm although HnR)HT brought up a good point. Maybe later today.
I am still reading (and will continue to read), so please keep updating. I recently started studying political science so this is of HUGE interest to me!
Guns don't kill people, people kill people, deregulation gave these folks the guns to wield around, their idiotic decisions led to this mess. Is deregulation bad?
Ok, I'll make an exception for this argument. Yes the bankers are responsible. What you're basically saying is "bankers are greedy! It's their fault" which is true, except it accomplishes NOTHING. We can't enact policy that fixes greed. Everybody is greedy. We CAN enact policy to keep that greed in check. Thus, the government is the only one who had the power to fix this, short of God. It's pointless to blame human nature.
Guns don't kill people, people kill people, deregulation gave these folks the guns to wield around, their idiotic decisions led to this mess. Is deregulation bad?
Ok, I'll make an exception for this argument. Yes the bankers are responsible. What you're basically saying is "bankers are greedy! It's their fault" which is true, except it accomplishes NOTHING. We can't enact policy that fixes greed. Everybody is greedy. We CAN enact policy to keep that greed in check. Thus, the government is the only one who had the power to fix this, short of God. It's pointless to blame human nature.
I was going to respond separately to what HnR)hT wrote because I felt that falls closer to the effects of Fannie and Freddie, but the issues are intermingled so that's that.
I didn't say that we should fix greed, I am just proposing what I've been since the start of threads about the economic problem emerged - that companies will fix themselves now. I am counting precisely on greed for the issues to be resolved, because no one wants to be another Lehman or Merrill. Yes, regulation is another way to go about it, but to me that's closer to adding fences about your barn after the horse ran off (Someone who knows Chinese proverbs translate properly please, I can't find any better way to describe it). You are hindering the ability for companies that survived to act on top of them having an internal measure against such recklessness.
The FSMA (and many other bills which tbh, I don't know enough about) took it too far. It deregulated areas it shouldn't have. Most importantly, it led to the housing bubble.
What about those who say this was purposely induced by a few bankers who predicted it would lead to recession and then force a few strategic changes that would benefit them as an excuse to save the economy. At the end of the day, they're many billions richer than before the deregulation.
How in the world are investment bankers richer than before the crisis? On what insane dream world ground do you make that argument?
I mean not today, but the crisis forces government to take emergency desperate actions to save banks. And I don't mean any bank. Only the big international ones, which would use this as an excuse to crush smaller ones. Aren't international banks such as JPMorgan still growing? I mean, they're in a better position now that Bear Stearns broke, right?
I don't know much myself, might be talking crap. Just repeating what I hear from people who knows 100 times more than me. I just wanted to understand better the very root of the problem. Something this big done on purpose by intelligent people sounds more likely than an *wooops* accident done by stupid people.
Simple, VIB, look at jobs. Investment Banker or Bank isn't just talking about a single entity, but the jobs and all associated with it. Lehman's bankruptcy meant a loss of...what was it, 24k jobs across the world? That it was brought out afterwards just means that a faction of the jobs were saved, but really, a part of the merger process always involves a trimming down of the workforce. So Chase and Citigroup might be in a better position now (and Goldman now that they can go asset hunting, lol), but the overall amount of jobs still suffers.
Something big done on purpose isn't done by smart people, it is invariably done by a lot of stupider people with less foresight. Buffett is smart, he exited Bank derivative business back in 2005. Goldman had a ton of smart people, they bet against the Real Estate market from going up forever and even made money off that. No, the smart are few and far in between, and they are profiting before it even got to the stage that involves bank failures. Why? Because bank failures effect them negatively even when it means a gov't supported buyout of a larget amount of assets.
Not sure I understand what you mean. How does "bank failures effect them negatively"? Only because others are losing their jobs? Wouldn't the line of thought here be "if it makes me $20 billion myself how do I care if 20k others lose their jobs"?
Very much appreciate the post, my economic knowledge is usually reserved to "oh shit that was bad" or "very very good calll"
But with the background history you provided alot of this is now in context, ie, i didnt realize this started because of some politicians in 1999, but linking to the failing housing market isnt so hard to trace back.
The housing bubble was not caused by deregulation so much as it was caused by a government fetish with low income families owning homes. When the government is passing mandates, putting pressure on banks, and giving tax credits to Fannie May/Freddie Max (which they pretty much controlled both before and after the bailout), all in the name of giving houses to people that can't afford them, it shouldn't surprise you that people are going to flock to housing.
On a fundamental level, a major cause of the bubble was Fannie May/Freddie Mac buying high-risk low-down-payment mortgages from banks at much higher prices than they should've been priced because of government pressure. This nonsense that people are spouting about "investor greed and risk-taking" is nonsense, people don't simply wake up one day and decide to throw risk-management out the window. Banks did this because Fannie May and Freddie Mac, under pressure from the government, bought these loans at much higher prices than they should've been bought at, and other banks bought these repackaged securities because of the implicit government guarantee behind them (which has pretty much been borne out).
Things like the CRA, the monstrosities called Government Sponsored Enterprises that are Fannie May and Freddie Mac, the sudden massive reduction of the capital gains tax on housing, and just general government mandates to get homes to low-income households who can't afford homes for a reason caused this bubble.
On October 01 2008 05:39 BloodyC0bbler wrote: Very much appreciate the post, my economic knowledge is usually reserved to "oh shit that was bad" or "very very good calll"
But with the background history you provided alot of this is now in context, ie, i didnt realize this started because of some politicians in 1999, but linking to the failing housing market isnt so hard to trace back.
Still, much thanks.
I should probably put a stronger disclaimer about my background knowledge here...
deregulation in general had a lot to do with it, it wasn't just one act, some of it was just financial *innovation* that regulation couldn't have accounted for, some of it started happening more recently, etc. etc.
what I'm trying to say is just don't cite me on your essays, although if you need primary sources I can try to find them.
Fuck the false humility -- I know what I'm talking about. I read boatloads everyday, and I did large quantities of research specifically for this post. I think that will become apparent as you read it.
A good analogy is if you're looking on Craigslist for a female companion, and they turn out to be a guy. You got bad information buddy. You got ripped off. As a result, you just wasted time and resources, and you hurt the economy because you could've used those resources for something productive, like posting on TL.
On October 01 2008 05:49 theonemephisto wrote: Too bad you're missing a lot of things...
The housing bubble was not caused by deregulation so much as it was caused by a government fetish with low income families owning homes. When the government is passing mandates, putting pressure on banks, and giving tax credits to Fannie May/Freddie Max (which they pretty much controlled both before and after the bailout), all in the name of giving houses to people that can't afford them, it shouldn't surprise you that people are going to flock to housing.
On a fundamental level, a major cause of the bubble was Fannie May/Freddie Mac buying high-risk low-down-payment mortgages from banks at much higher prices than they should've been priced because of government pressure. This nonsense that people are spouting about "investor greed and risk-taking" is nonsense, people don't simply wake up one day and decide to throw risk-management out the window. Banks did this because Fannie May and Freddie Mac, under pressure from the government, bought these loans at much higher prices than they should've been bought at, and other banks bought these repackaged securities because of the implicit government guarantee behind them (which has pretty much been borne out).
Things like the CRA, the monstrosities called Government Sponsored Enterprises that are Fannie May and Freddie Mac, the sudden massive reduction of the capital gains tax on housing, and just general government mandates to get homes to low-income households who can't afford homes for a reason caused this bubble.
I'm pretty sure I covered this under Fannie Mae/Freddie Mac, although not with detail. I would argue that deregulation contributed, but that deregulation of mae/mac contributed more. My background knowledge on the two companies is poor, so if you can fill me in that'd be cool. I could add it it to the post under a spoiler, just make sure it's well written.
I'm trying to stay politically neutral, but I have my biases.
CTStalker: I was pissed off and wanted to be inappropriate just for the sake of being inappropriate.
On October 01 2008 05:39 BloodyC0bbler wrote: Very much appreciate the post, my economic knowledge is usually reserved to "oh shit that was bad" or "very very good calll"
But with the background history you provided alot of this is now in context, ie, i didnt realize this started because of some politicians in 1999, but linking to the failing housing market isnt so hard to trace back.
Still, much thanks.
I should probably put a stronger disclaimer about my background knowledge here...
deregulation in general had a lot to do with it, it wasn't just one act, some of it was just financial *innovation* that regulation couldn't have accounted for, some of it started happening more recently, etc. etc.
what I'm trying to say is just don't cite me on your essays, although if you need primary sources I can try to find them.
man im a cook, i wont ever be writing an essay on this hahaha. What i should have said was, that meeting allowed for a process to get much worse than it already had, hense one meeting basically spearheaded the process. More causes yes, but that was defffff a big one.
The FSMA (and many other bills which tbh, I don't know enough about) took it too far. It deregulated areas it shouldn't have. Most importantly, it led to the housing bubble.
What about those who say this was purposely induced by a few bankers who predicted it would lead to recession and then force a few strategic changes that would benefit them as an excuse to save the economy. At the end of the day, they're many billions richer than before the deregulation.
How in the world are investment bankers richer than before the crisis? On what insane dream world ground do you make that argument?
I mean not today, but the crisis forces government to take emergency desperate actions to save banks. And I don't mean any bank. Only the big international ones, which would use this as an excuse to crush smaller ones. Aren't international banks such as JPMorgan still growing? I mean, they're in a better position now that Bear Stearns broke, right?
I don't know much myself, might be talking crap. Just repeating what I hear from people who knows 100 times more than me. I just wanted to understand better the very root of the problem. Something this big done on purpose by intelligent people sounds more likely than an *wooops* accident done by stupid people.
Simple, VIB, look at jobs. Investment Banker or Bank isn't just talking about a single entity, but the jobs and all associated with it. Lehman's bankruptcy meant a loss of...what was it, 24k jobs across the world? That it was brought out afterwards just means that a faction of the jobs were saved, but really, a part of the merger process always involves a trimming down of the workforce. So Chase and Citigroup might be in a better position now (and Goldman now that they can go asset hunting, lol), but the overall amount of jobs still suffers.
Something big done on purpose isn't done by smart people, it is invariably done by a lot of stupider people with less foresight. Buffett is smart, he exited Bank derivative business back in 2005. Goldman had a ton of smart people, they bet against the Real Estate market from going up forever and even made money off that. No, the smart are few and far in between, and they are profiting before it even got to the stage that involves bank failures. Why? Because bank failures effect them negatively even when it means a gov't supported buyout of a larget amount of assets.
Not sure I understand what you mean. How does "bank failures effect them negatively"? Only because others are losing their jobs? Wouldn't the line of thought here be "if it makes me $20 billion myself how do I care if 20k others lose their jobs"?
Because the 20k other people losing their jobs will come back to bite you in the ass. It isn't just a clear cut "That's his company, not mine". Rather, everything is interconnected, and the failure of the likes of AIG could easily have caused another round of writing down that eats up more investor confidence. That's how Merrill and Lehman died, and people know that's what would've happened, and even worse, they don't know who it would happen to. The acts by investors and those people with money at stake are highly irrational, taking the bank run of that Hong Kong bank as an example. Some text message warnings of unknown nature at a time like this set off a massive bank run on a large bank, the health of which didn't appear to be as dire as many others. No, if you are smart, you don't want to play Russian roulette at a time like this, you make your sure bets.
As for the Freddie and Fannie situation, from the things that I have read up, it isn't so much government pressure as the executives themselves taking on such risky methods of boosting revenue. At that, they started buying into the subprime securities as a way of generating more revenue, even though by mandate they should not have exposure in such areas.
To make that clear, if there were government pressure for their actions, then I read nothing about that. However, Freddie's venture into the subprime area began after their books were found to be faulty in...2004~5 iirc, with Fannie following suit afterwards, which is then coupled with a huge revenue boost of both companies as the housing boom hits a peak. To me, that seems more of an indication of the companies acting on their own rather than the government, which has nothing to be gained from the way those two companies racked up profits. A trigger might be governmental pressure to allow housing to more, but that should not have generated as huge an impact as that. No, when the two companies are purchasing securities issued by each other, there is definitely something amiss that goes beyond just government pressure.
On October 01 2008 05:49 theonemephisto wrote: Too bad you're missing a lot of things...
The housing bubble was not caused by deregulation so much as it was caused by a government fetish with low income families owning homes. When the government is passing mandates, putting pressure on banks, and giving tax credits to Fannie May/Freddie Max (which they pretty much controlled both before and after the bailout), all in the name of giving houses to people that can't afford them, it shouldn't surprise you that people are going to flock to housing.
On a fundamental level, a major cause of the bubble was Fannie May/Freddie Mac buying high-risk low-down-payment mortgages from banks at much higher prices than they should've been priced because of government pressure. This nonsense that people are spouting about "investor greed and risk-taking" is nonsense, people don't simply wake up one day and decide to throw risk-management out the window. Banks did this because Fannie May and Freddie Mac, under pressure from the government, bought these loans at much higher prices than they should've been bought at, and other banks bought these repackaged securities because of the implicit government guarantee behind them (which has pretty much been borne out).
Things like the CRA, the monstrosities called Government Sponsored Enterprises that are Fannie May and Freddie Mac, the sudden massive reduction of the capital gains tax on housing, and just general government mandates to get homes to low-income households who can't afford homes for a reason caused this bubble.
I'm pretty sure I covered this under Fannie Mae/Freddie Mac, although not with detail. I would argue that deregulation contributed, but that deregulation of mae/mac contributed more. My background knowledge on the two companies is poor, so if you can fill me in that'd be cool. I could add it it to the post under a spoiler, just make sure it's well written.
I'm trying to stay politically neutral, but I have my biases.
CTStalker: I was pissed off and wanted to be inappropriate just for the sake of being inappropriate.
You might be trying to stay politically neutral, but you're only neutral between the Republicans and Democrats. You're very, very firmly on the side of government controlling the lives and actions of everything and everyone.
Mephisto is quite right, and because he's right about that, it invalidates a large part of your argument for more regulation. Fannie and Freddie were greedy, but greed is a necessary, integral part of a free market. Its what keeps things healthy and moving. The problem is when you introduce governmental interference, through regulation, pressure, favors, backings, etc. That interferes with the risk companies normally feel towards making bad investments that normally prevents them from making them, and results in horrible events like these.
So obviously any solution presented should not result in the government being further intertwined in the market, as that will only further distort prices and risk. The proper course of action is to let the market correct itself, survive the downturn for a year, and seek to regulate government (not businesses) more so this doesn't happen again.
Pretty nice read, (yes I read it all) although I already understood the majority of this before you posted. Luckily for me though, my father is in housing and he was like: "Housing bubble crash soon son." so I've been expecting all of this to happen for a few years now.
Ideally, banks would only lend money to people they were sure could pay them back: people who had a clean criminal record, good credit, and a solid income.
Unfortunately, because of deregulation, this didn't always happen.
Yes, because banks just love to lose money when mortages default. In fact, banks were *pressured* by the government to lend to mainly minorities who can't pay back their loans. Both parties supported this. The idea was to "help" blacks (and hispanics) catch up in home ownership with whites. Banks have been getting accused of racism for not lending enough to minorities, who were disproportionately liable to default even for the same income level. Banks aren't free of blame; they went along with this because of greed, and because they assumed the taxpayer would bail them out if something goes wrong. But it's not as simple as "lack of government regulation caused the crisis".
I agree completely. I would go so far as to say that the Federal Reserve itself produces probably the greatest moral hazard of all - it was their ability to generate credit with impunity that lubricated the selling of these mortgage derivatives and cushioned those who stood to profit from risk. The problem isn't that free markets need regulation, it's that they actively *don't* need regulation - to the point that regulation essentially generates what Rothbard would call "violent transactions". The excess of credit and the massive profits created by these securities were motivation enough for firms to threaten or even fire traders who steered clear of these toxic instruments - this because, at the time, those instruments were making the money and if you didn't play the risk game you weren't making money either. So all down the line people are coerced into engaging in transactions they would otherwise not have rationally engaged in. One can speak of asymmetry in information, but this was certainly not the case here - nobody buying or selling mortgage derivatives with billions and trillions on the line is not going to know what was going on. Everyone knew. Everyone knew they were bad. Everyone traded them anyway because that's what everyone else was doing - and they were all doing it because of loose and fundamentally destabilising fiscal policy from the Fed.
On October 01 2008 05:49 theonemephisto wrote: Too bad you're missing a lot of things...
The housing bubble was not caused by deregulation so much as it was caused by a government fetish with low income families owning homes. When the government is passing mandates, putting pressure on banks, and giving tax credits to Fannie May/Freddie Max (which they pretty much controlled both before and after the bailout), all in the name of giving houses to people that can't afford them, it shouldn't surprise you that people are going to flock to housing.
On a fundamental level, a major cause of the bubble was Fannie May/Freddie Mac buying high-risk low-down-payment mortgages from banks at much higher prices than they should've been priced because of government pressure. This nonsense that people are spouting about "investor greed and risk-taking" is nonsense, people don't simply wake up one day and decide to throw risk-management out the window. Banks did this because Fannie May and Freddie Mac, under pressure from the government, bought these loans at much higher prices than they should've been bought at, and other banks bought these repackaged securities because of the implicit government guarantee behind them (which has pretty much been borne out).
Things like the CRA, the monstrosities called Government Sponsored Enterprises that are Fannie May and Freddie Mac, the sudden massive reduction of the capital gains tax on housing, and just general government mandates to get homes to low-income households who can't afford homes for a reason caused this bubble.
I'm pretty sure I covered this under Fannie Mae/Freddie Mac, although not with detail. I would argue that deregulation contributed, but that deregulation of mae/mac contributed more. My background knowledge on the two companies is poor, so if you can fill me in that'd be cool. I could add it it to the post under a spoiler, just make sure it's well written.
I'm trying to stay politically neutral, but I have my biases.
CTStalker: I was pissed off and wanted to be inappropriate just for the sake of being inappropriate.
You might be trying to stay politically neutral, but you're only neutral between the Republicans and Democrats. You're very, very firmly on the side of government controlling the lives and actions of everything and everyone.
Mephisto is quite right, and because he's right about that, it invalidates a large part of your argument for more regulation. Fannie and Freddie were greedy, but greed is a necessary, integral part of a free market. Its what keeps things healthy and moving. The problem is when you introduce governmental interference, through regulation, pressure, favors, backings, etc. That interferes with the risk companies normally feel towards making bad investments that normally prevents them from making them, and results in horrible events like these.
So obviously any solution presented should not result in the government being further intertwined in the market, as that will only further distort prices and risk. The proper course of action is to let the market correct itself, survive the downturn for a year, and seek to regulate government (not businesses) more so this doesn't happen again.
ok, you may be right about this. as far as the background goes and what's actually happening and why, I think I'm still neutral. I'll try to distinguish the facts and my personal advocacies more later on.
On October 01 2008 05:53 ahrara_ wrote:I'm pretty sure I covered this under Fannie Mae/Freddie Mac, although not with detail. I would argue that deregulation contributed, but that deregulation of mae/mac contributed more. My background knowledge on the two companies is poor, so if you can fill me in that'd be cool. I could add it it to the post under a spoiler, just make sure it's well written.
Well, how I understand it:
Fannie Mae and Freddie Mac were originally both created by the government as government agencies, but were later partially privatized, resulting in them being called Government Sponsored Enterprises, or GSEs. Their purpose was to use their large supply of capital to buy mortgages off of the market, repackage them into securities and other derivatives, and then sell them to other firms.
However, even though they are partially privatized, they still retain a lot of government control and influence. They're regulated by Department of Housing and Urban Development (I think this started in the early 90s) and are chartered by Congress. Since HUD has become their regulator, they have had yearly goals; they're supposed to buy a certain amount of "affordable" loans (read: low-down-payment loans to low-income families). Of course, this sounds good, as everyone wants low-income families to have housing right? However, the fact is that many people simply can't afford housing, and the government mandate for Fannie and Freddie to buy these bad loans has made them viable for banks to offer (especially considering how large Fannie and Freddie are, they buy something like 40% of mortgages created each year). And to encourage even more of these subprime loans, Congress also passed a law giving tax credits to Fannie and Freddie when they bought subprime securities, further increasing the demand for them.
So these government mandates and incentives greatly increased the amount of bad loans the Fannie and Freddie bought. What allowed other banks and investment firms to buy these repackaged securities from F&F was the implicit government guarantee behind them, basically, since the government had so much stake in F&F, people assumed that the government wouldn't let them fail or let their liabilities disappear (which was obviously true), creating a moral hazard situation where people disregard risk because there is no downside to failing.
So government regulation and interference with Fannie Mae and Freddie Mac contributed to the creation of the bubble, and the implicit government guarantee behind the securities allowed it to spread.
Of course, this isn't the only reason, but there are also many other government regulations that have helped create this crisis. The Community Reinvestment Act, which was substantially strengthened in 1995, mandated that banks make a certain amount of loans to low-income families, again creating a misallocation of resources into the housing market. There was also a recent act that reduced the capital gains taxes that people had to pay on homes substantially, but I can't find a source atm.
I'm not clearing investors of all blame, sure, they acted greedy, ignored risks, and took advantage of new derivatives and the market situation. But I'm saying that fundamentally, the problem was with too much government regulation and interference, not too little. More government regulation probably could've delayed this problem, but it would've only been a short-term fix to the underlying problems introduced by the government itself.
tl;dr, Government mandates for affordable housing loans to low-interest families and it's control over the Government Sponsored Enterprises of Fannie Mae and Freddie Mac created the underlying driving force for the creation and subsequent popping of this bubble.
on one hand, the market is portrayed as free individuals doing things, on the other, it is seen as a dynamic with behavioralist rules like "people are greedy." this basic reification leads to a lot of fuzzy moral thinking. suppose we have concluded, from empirical research, that people will lie, does it then mean that we should permit such, or even tolerate it? would you put up the excuse, "it is in my nature to steal" after you've been caught lifting a loli's candy, if so, you are a very brave and silly man indeed!
calling an organization a 'government' does not . the basic situation in case of governmetn regulation is still, "guy a tells guy b to do this/not do this." ordinarily, when we are presented with such a situation, we would ask whether guy a's advice or demand is good. that the governmetn is in this case guy a would only be interesting if there are concrete political attributes involved. for instance, if the government is perpetually hostile or corrupt. even so, these normally make the government demands themselves improper. in short, the important thing here is what is being done, not who is ordering whom around. the ideological narrative of a 'private' business world and the 'outsider' public and government is not only paper thin but also a crutch used by people who would not face up to their responsibilities. and no, saying "i am greedy by nature!" is not a good argument to excuse oneself from caring more.
in any case, with the way things are, we would of course prefer no government. but there needs to be a corresponding self policing culture that effect the desired regulatory goals. unless the private people do behave well, "private people going about private business" isn't an effective shield against being told what to do.
I read *most* of it, and some of it is stuff that I already know. Its all history. What everyone wants to know is what's going to happen next, and what can we do?
On October 01 2008 07:20 oneofthem wrote: on one hand, the market is portrayed as free individuals doing things, on the other, it is seen as a dynamic with behavioralist rules like "people are greedy." this basic reification leads to a lot of fuzzy moral thinking. suppose we have concluded, from empirical research, that people will lie, does it then mean that we should permit such, or even tolerate it? would you put up the excuse, "it is in my nature to steal" after you've been caught lifting a loli's candy, if so, you are a very brave and silly man indeed!
calling an organization a 'government' does not . the basic situation in case of governmetn regulation is still, "guy a tells guy b to do this/not do this." ordinarily, when we are presented with such a situation, we would ask whether guy a's advice or demand is good. that the governmetn is in this case guy a would only be interesting if there are concrete political attributes involved. for instance, if the government is perpetually hostile or corrupt. even so, these normally make the government demands themselves improper. in short, the important thing here is what is being done, not who is ordering whom around. the ideological narrative of a 'private' business world and the 'outsider' public and government is not only paper thin but also a crutch used by people who would not face up to their responsibilities. and no, saying "i am greedy by nature!" is not a good argument to excuse oneself from caring more.
in any case, with the way things are, we would of course prefer no government. but there needs to be a corresponding self policing culture that effect the desired regulatory goals. unless the private people do behave well, "private people going about private business" isn't an effective shield against being told what to do.
I think you're misunderstanding what 'greed' is in relation to markets. The 'rule' is more that 'people should act in their self-interest', which is then simplified to 'being greedy.' That self-interest, however, can be many things, including things like helping the poor, supporting charities, etc. When you think about it, merely having priorities or plans in your life would result in you acting in your self-interest, and therefore, you can fairly certainly say that applies to everyone. So it doesn't conflict with free individuals making free choices.
When the government is telling you to do/not to do something, its quite a lot different than some random guy giving you advice. You can't take the fact that its the government out of the equation, because the government is, in many cases, much more powerful and influential than a regular person.
Capitalism and free markets are not excuses for people to be uncaring. Their merely systems that allow large amounts of people to function together and achieve their own self-interests. Like I said, those self-interests can in themselves involve 'caring more'.
Interesting stuff indeed. Hard for me to grasp the whole concept but i get most of it. So what do you guys think will happen as this progresses? It's always better to hear TL.net's point of view than just watching stuff on CNN
On October 01 2008 08:04 MetalMarine wrote: Interesting stuff indeed. Hard for me to grasp the whole concept but i get most of it. So what do you guys think will happen as this progresses? It's always better to hear TL.net's point of view than just watching stuff on CNN
With the rejection of the bill, the market will continue to implode until it reaches a stable low; then it'll start going back up again. Basically, a recession. It's not necessarily a bad thing - a recession every once in awhile keeps everyone honest.
You know, I post on a ton of forums and no matter the theme of the place it's like suddenly the case that the entire world has become interested in economics, especially how it relates to politics. This alone brings joy to my heart - maybe this generation can grow up with better sense in its head than the last one (Sarah Palin's embarrassing demonstrations of oblivious ignorance, for example). Although the phenomenon here is far from unique, here are a bunch of Starcraft fans sitting around and having relevant, intelligent discussions which should, by all rights, be happening in a major public forum right now. Take what you can get, I suppose. For anyone with a bent curiosity, here's a great book by Murray Rothbard - Man, Economy, and State. I highly recommend it to anyone interested in what's going on.
Capitalism and free markets are not excuses for people to be uncaring. Their merely systems that allow large amounts of people to function together and achieve their own self-interests. Like I said, those self-interests can in themselves involve 'caring more'.
Indeed. Free markets simply mean that anyone is free to exchange with anyone else free of coercion or violence. By this token, so long as there are no imposed restrictions, exchanges will only happen when both parties see a benefit. It's this simple fact - that economics is not a zero-sum game - which allows individuals seeking their own goals to necessarily contribute to the common wealth of those they trade with, regardless of whether it is their intention to or not. (It is this phenomenon, that free exchange is always mutually beneficial, which prompted Smith to say that it was as though an "invisible hand" was at work.)
If I have three fish and you have three steaks, we would probably both be happy to exchange one - I would rather have two fish and a steak in place of three fish, you would also rather have two steaks and one fish in place of three steaks. Thus we both walk away with a higher desire fulfilled - we are "wealthier" both than we were before in that we are happier with our situation at present as compared to before the exchange.
Steven Horwitz from St Lawence University does an open letter regarding the financial crisis:
In the last week or two, I have heard frequently from you that the current financial mess has been caused by the failures of free markets and deregulation. I have heard from you that the lust after profits, any profits, that is central to free markets is at the core of our problems. And I have heard from you that only significant government intervention into financial markets can cure these problems, perhaps once and for all. I ask of you for the next few minutes to, in the words of Oliver Cromwell, consider that you may be mistaken. Consider that both the diagnosis and the cure might be equally mistaken.
And then he addresses the issue of greed:
One of the biggest confusions in the current mess is the claim that it is the result of greed. The problem with that explanation is that greed is always a feature of human interaction. It always has been. Why, all of a sudden, has greed produced so much harm? And why only in one sector of the economy? After all, isn’t there plenty of greed elsewhere? Firms are indeed profit seekers. And they will seek after profit where the institutional incentives are such that profit is available. In a free market, firms profit by providing the goods that consumers want at prices they are willing to pay. (My friends, don’t stop reading there even if you disagree - now you know how I feel when you claim this mess is a failure of free markets - at least finish this paragraph.) However, regulations and policies and even the rhetoric of powerful political actors can change the incentives to profit. Regulations can make it harder for firms to minimize their risk by requiring that they make loans to marginal borrowers. Government institutions can encourage banks to take on extra risk by offering an implicit government guarantee if those risks fail. Policies can direct self-interest into activities that only serve corporate profits, not the public.
And then he looks at the facts:
For starters, Fannie Mae and Freddie Mac are “government sponsored enterprises”. Though technically privately owned, they have particular privileges granted by the government, they are overseen by Congress, and, most importantly, they have operated with a clear promise that if they failed, they would be bailed out. Hardly a “free market.” All the players in the mortgage market knew this from early on. In the early 1990s, Congress eased Fannie and Freddie’s lending requirements (to 1/4th the capital required by regular commercial banks) so as to increase their ability to lend to poor areas.
Now think about this as the Government here passes a law requiring affordable housing in certain areas. The best of motives often lead to the worst of results.
At the same time, home prices were rising making those who had taken on large mortgages with small down payments feel as though they could handle them and inspiring a whole variety of new mortagage instruments. What’s interesting is that the rise in prices affected most strongly cities with stricter land-use regulations, which also explains the fact that not every city was affected to the same degree by the rising home values. These regulations prevented certain kinds of land from being used for homes, pushing the rising demand for housing (fueled by the considerations above) into a slowly responding supply of land. The result was rapidly rising prices. In those areas with less stringent land-use regulations, the housing price boom’s effect was much smaller. Again, it was regulation, not free markets, that drove the search for profits and was a key contributor to the rising home prices that fueled the lending spree.
Strict land use policies pushign up house prices.
The final chapter of the story is that in 2004 and 2005, following the accounting scandals at Freddie, both Freddie and Fannie paid penance to Congress by agreeing to expand their lending to low-income customers. Both agreed to acquire greater amounts of subprime and Alt-A loans, sending the green light to banks to originate them. From 2004 to 2006, the percentage of loans in those riskier categories grew from 8% to 20% of all US mortgage originations. And the quality of these loans were dropping too: downpayments were getting progressively smaller and more and more loans carried low starter interest rates that would adjust upward later on. The banks were taking on riskier borrowers, but knew they had a guaranteed buyer for those loans in Fannie and Freddie, back, of course, by us taxpayers. Yes, banks were “greedy” for new customers and riskier loans, but they were responding to incentives created by well-intentioned but misguided government interventions. It is these interventions that are ultimately responsible for the risky loans gone bad that are at the center of the current crisis, not the “free market.“
Sorry I was lazy and see that theonemephisto has already addressed this. But yeah, it really pisses me off everytime I hear Obama saying this is all corporate greed's fault, preying on the ignorance of middle/lower class Americans looking for fat cats to blame and to government as the solution.
On October 01 2008 08:10 jgad wrote: You know, I post on a ton of forums and no matter the theme of the place it's like suddenly the case that the entire world has become interested in economics, especially how it relates to politics. This alone brings joy to my heart - maybe this generation can grow up with better sense in its head than the last one (Sarah Palin's embarrassing demonstrations of oblivious ignorance, for example). Although the phenomenon here is far from unique, here are a bunch of Starcraft fans sitting around and having relevant, intelligent discussions which should, by all rights, be happening in a major public forum right now. Take what you can get, I suppose. For anyone with a bent curiosity, here's a great book by Murray Rothbard - Man, Economy, and State. I highly recommend it to anyone interested in what's going on.
Thanks for the link, I've been interested in reading some of his work
The FSMA (and many other bills which tbh, I don't know enough about) took it too far. It deregulated areas it shouldn't have. Most importantly, it led to the housing bubble.
What about those who say this was purposely induced by a few bankers who predicted it would lead to recession and then force a few strategic changes that would benefit them as an excuse to save the economy. At the end of the day, they're many billions richer than before the deregulation.
How in the world are investment bankers richer than before the crisis? On what insane dream world ground do you make that argument?
Rayzorblade: APPRECIATED as always
Because they let the little guy take the fall? I have no insider information or anything, or even an extensive knowledge of the world of investment banking. But I do know that the big wigs always walk away losing less than everyone else, and if they are smart they will make money off of it too.
Updated. Almost finalized, and I'm sure there are dozens of errors ... but I don't feel like running spellcheck or factchecking. I'll let TL do the work
The FSMA (and many other bills which tbh, I don't know enough about) took it too far. It deregulated areas it shouldn't have. Most importantly, it led to the housing bubble.
What about those who say this was purposely induced by a few bankers who predicted it would lead to recession and then force a few strategic changes that would benefit them as an excuse to save the economy. At the end of the day, they're many billions richer than before the deregulation.
How in the world are investment bankers richer than before the crisis? On what insane dream world ground do you make that argument?
Rayzorblade: APPRECIATED as always
Because they let the little guy take the fall? I have no insider information or anything, or even an extensive knowledge of the world of investment banking. But I do know that the big wigs always walk away losing less than everyone else, and if they are smart they will make money off of it too.
Only the smart ones. Do you know how many banks ceased to exist after the Great Depression?
Steven Horwitz from St Lawence University does an open letter regarding the financial crisis:
In the last week or two, I have heard frequently from you that the current financial mess has been caused by the failures of free markets and deregulation. I have heard from you that the lust after profits, any profits, that is central to free markets is at the core of our problems. And I have heard from you that only significant government intervention into financial markets can cure these problems, perhaps once and for all. I ask of you for the next few minutes to, in the words of Oliver Cromwell, consider that you may be mistaken. Consider that both the diagnosis and the cure might be equally mistaken.
And then he addresses the issue of greed:
One of the biggest confusions in the current mess is the claim that it is the result of greed. The problem with that explanation is that greed is always a feature of human interaction. It always has been. Why, all of a sudden, has greed produced so much harm? And why only in one sector of the economy? After all, isn’t there plenty of greed elsewhere? Firms are indeed profit seekers. And they will seek after profit where the institutional incentives are such that profit is available. In a free market, firms profit by providing the goods that consumers want at prices they are willing to pay. (My friends, don’t stop reading there even if you disagree - now you know how I feel when you claim this mess is a failure of free markets - at least finish this paragraph.) However, regulations and policies and even the rhetoric of powerful political actors can change the incentives to profit. Regulations can make it harder for firms to minimize their risk by requiring that they make loans to marginal borrowers. Government institutions can encourage banks to take on extra risk by offering an implicit government guarantee if those risks fail. Policies can direct self-interest into activities that only serve corporate profits, not the public.
And then he looks at the facts:
For starters, Fannie Mae and Freddie Mac are “government sponsored enterprises”. Though technically privately owned, they have particular privileges granted by the government, they are overseen by Congress, and, most importantly, they have operated with a clear promise that if they failed, they would be bailed out. Hardly a “free market.” All the players in the mortgage market knew this from early on. In the early 1990s, Congress eased Fannie and Freddie’s lending requirements (to 1/4th the capital required by regular commercial banks) so as to increase their ability to lend to poor areas.
Now think about this as the Government here passes a law requiring affordable housing in certain areas. The best of motives often lead to the worst of results.
At the same time, home prices were rising making those who had taken on large mortgages with small down payments feel as though they could handle them and inspiring a whole variety of new mortagage instruments. What’s interesting is that the rise in prices affected most strongly cities with stricter land-use regulations, which also explains the fact that not every city was affected to the same degree by the rising home values. These regulations prevented certain kinds of land from being used for homes, pushing the rising demand for housing (fueled by the considerations above) into a slowly responding supply of land. The result was rapidly rising prices. In those areas with less stringent land-use regulations, the housing price boom’s effect was much smaller. Again, it was regulation, not free markets, that drove the search for profits and was a key contributor to the rising home prices that fueled the lending spree.
Strict land use policies pushign up house prices.
The final chapter of the story is that in 2004 and 2005, following the accounting scandals at Freddie, both Freddie and Fannie paid penance to Congress by agreeing to expand their lending to low-income customers. Both agreed to acquire greater amounts of subprime and Alt-A loans, sending the green light to banks to originate them. From 2004 to 2006, the percentage of loans in those riskier categories grew from 8% to 20% of all US mortgage originations. And the quality of these loans were dropping too: downpayments were getting progressively smaller and more and more loans carried low starter interest rates that would adjust upward later on. The banks were taking on riskier borrowers, but knew they had a guaranteed buyer for those loans in Fannie and Freddie, back, of course, by us taxpayers. Yes, banks were “greedy” for new customers and riskier loans, but they were responding to incentives created by well-intentioned but misguided government interventions. It is these interventions that are ultimately responsible for the risky loans gone bad that are at the center of the current crisis, not the “free market.“
On October 01 2008 08:10 jgad wrote: You know, I post on a ton of forums and no matter the theme of the place it's like suddenly the case that the entire world has become interested in economics, especially how it relates to politics. This alone brings joy to my heart - maybe this generation can grow up with better sense in its head than the last one (Sarah Palin's embarrassing demonstrations of oblivious ignorance, for example). Although the phenomenon here is far from unique, here are a bunch of Starcraft fans sitting around and having relevant, intelligent discussions which should, by all rights, be happening in a major public forum right now. Take what you can get, I suppose. For anyone with a bent curiosity, here's a great book by Murray Rothbard - Man, Economy, and State. I highly recommend it to anyone interested in what's going on.
TL has the ban hammer watching over these threads. Excessive idiots are gone before their chaos spread. In a way, TL is self regulating itself. TL economics <3
Great post. I don't know enough about this to hold a position about the bail out, but if the basic problem is houses foreclosing, how does this bill stop that? It stops the pain felt with the mortgage companies and gives them the liquidity to confidently continue to issue credit, but I don't see how it is going to stop foreclosures from taking place.
Foreclosures are also a consequence of tighter credit. Foreclosures can be prevented if homeowners can refinance their homes for a cheaper loan, which isn't happening in the status quo. Tight credit also causes increased interest rates as banks try to grab more capital -- they're going to get more money otu of the house from either squeezing the owner for every last penny or forcing his foreclosure and selling the house (albeit at a lower price).
Nice post, ahrara_. Thanks for taking the time to write it all; it explains a lot about the current financial problems we face.
I am, however, going to respectfully disagree that deregulation is what led to the problems. But I don't know what led to the problem loan writing.
I think we both agree that subprime and backloaded loans with ridiculous terms are the core of the problem. But deregulation did not lead to these offers. You could argue that relaxed state ursury laws set the stage for these offers by allowing banks to set high interest rates, but the Supreme Court effectively limited the scope of the laws in MARQUETTE NAT. BANK v. FIRST OF OMAHA CORP., 439 U.S. 299 (1978). (The Court decided that state ursury laws do not apply to nationally chatered banks.)
For the layperson: State ursury laws limit the amount of interest you can lawfully charge. If you loan someone money, you cannot charge an interest rate above the rate set by state law. These laws are intended to prevent lenders from ripping people off. The unintended consequence is that risky people will not be able to take loans because lenders are unable to set a rate high enough to cover the potential risk of default.
The above Supreme Court case decided that national banks were not subject to state ursury laws. This gave rise to credit cards which had rates well above most state ursury laws.
So to tie this to subprime lending: Banks exposure to state ursury laws were now limited so in theory they could write a home loan to a subprime candidate with a very high interest rate. But rarely did banks write the loans.
What changed? Why did the banks suddenly all decide to start taking on these risky loans? It wasn't deregulation - the Supreme Court gave the green light to writing these loans a while ago.
I really don't know what caused skilled, seasoned loan officers to start writing loans to everything that moved. Greed is the easy answer but I am sure they've always been greedy.
On October 01 2008 04:08 ahrara_ wrote: BAILOUT my ass
After the failure of AIG, the Fed realized that it couldn't go on giving these Ad Hoc bailouts. It had to once and for all fix the housing problem. When you want to fix anything, the best solution is to attack the root cause.
Essentially, the problem is one of liquidity, or liquid capital. Liquidity describes how easily an asset can be transferred into a different kind of asset, and at what cost. Cash is the most liquid asset possible: Anyone will accept cash for anything, except under excess inflation. A car, on the other hand, is less liquid. You have to go through a lot more trouble to trade a car for something else of equal value, and you will always sell for less than its real value. Before the housing crisis, mortgage backed securities retained some degree of liquidity. After the crisis, they became practically illiquid: Because of the risk associated with them and all the negative headlines, nobody would buy them at a reasonable cost. Essentially, these securities still have SOME worth, but because nobody will buy them for a reasonable price, banks may as well have a black hole where these securities are. It is because they lost so much money on these securities that is fueling the credit crisis.
To fix a liquidity problem, you have to create a market for the illiquid assets. You have to help these companies convert mortgage backed securities into capital they can use to help the economy get back on its feet. Treasury Secretary Henry Paulson teamed up with Fed Chairman Ben Bernanke to write up a plan that would allocate $700 billion to create a market for these securities. Meaning, the government would offer to buy up these securities: they would take them off the hands of investment banks and replace them with cash. Then, the government would either hold on to these securities until they mature (when they "put out" in other words) or sell them to someone else. A similar system was set up in the 80's during the Savings and Loan crisis, but not at this scale.
How this will fix the problem should be obvious. By injecting liquidity into the system, banks will be again willing to lend, and credit will be looser. It will become easier to buy a home, but not so easy the bubble will begin to inflate again. Demand for housing goes up, and prices stabilize. The losses will still be there, but at least the problem won't get any worse.
There's some kinda irrelevant and esoteric information about how the fed will determine prices for these securities. If you're really interested, it's in spoilers. But it wasn't fitting into the narrative as a whole so I cut it... + Show Spoiler +
You may have heard the term "reverse auction" thrown about. Basically, that's the method the fed plans to use to determine how much they want to buy up these securities for. Why can't they just pay the market "equilibrium" price, you say? Because there IS no market. Moreover, each mortgage backed security is different from the next: it's impossible to tell exactly how much is worth. It's like trying to buy off a whole bunch of different paintings. Each one is different. You can only guess how much it's "worth". Like art, the fed plans to determine the price through auction, except that because there's only one buyer, it works in reverse: First the fed will announce the kind of security it plans to buy, then the sellers will bid for the lowest price. The fed will also be hiring help people who can "appraise" the value of each security. This doesn't play a significant role in the story... but I figured it's worth discussing and has to do with the arguments for or against why a bailout is good or bad.
The fix you mention is a little less than obvious. It may seem intuitive, but all you're doing is propping up a problematic system that is then destined to fail *again* at a later date. The problem could also get worse *now*, and this bailout is not a sure thing.
You also forgot to mention that the bailout bill contained text that: A) allowed banks to hold 0% reserves (that is, loan out money regardless of how much money they actually hold, resulting in infinite inflation) if the fed said so. B) would allow further money infusions without congressional approval C) would make it so Paulson (secretary of the treasury) could not be prosecuted nor could his actions be reviewed for what he did with the money
So basically, the bailout bill would take the power of the purse and hand it over to Paulson in the executive branch. I don't know about you, but I don't want some unelected official making large choices that greatly affect the value of my money.
So there's a few things about the bailout that are under debate... but it's hard to talking about that without inserting:
My Goddamn Opinion
At this point, there's not much more to tell you that you don't already know. So I reserve my right to soapbox for a few minutes.
1.) The Bailout is not as expensive as $700 billion.
As I said earlier, while most of these securities are losing money as a whole, they still retain SOME value. Not everyone is going to default on their loans. The fed can either hold these mortgages until they mature or sell them off, if the market has recovered. They could end up earning back between $500 billion to nearly breaking even.
The bailout is every bit as expensive as $700 billion, and probably more. As I said above, the bill authorized even further injections of money. When government is given power, they will use it to its fullest extent.
2.) It's not a bailout.
The worst thing Bernanke did in selling the bailout was to call it a bailout. Nobody is coming in and arbitrarily injecting capital into companies that don't deserve it. They are doing it in exchange for these securities. What we're doing is trading much needed liquidity into companies that don't have it.
Whether or not you call it a bailout is semantics, and it really doesn't matter at all to the discussion at hand. On your next point, what defines companies "that don't deserve it?" Companies that took horrible risks and failed because of it? Apparently not. Companies that didn't properly serve their customers? Apparently not. And who actually gets to decide which companies deserve it? Paulson. Not Congress, not an elected official, but an appointed official who has judicial immunity for whatever he does with the money.
3.) Don't handicap the bailout.
All this talk about limiting executive pay, creating incentives to negotiate, etc. etc. are valuable policies (to an extent). Geez Congress, maybe you should've instituted them BEFORE THE FUCKING CRISIS YOU TARDS. The economic crisis is not happening soon, it is not happening next year, it is happening NOW and you shitholes need to something about it and not, as my esteemed congressman Pete Stark said this morning, "hold a month of hearings". No I'm not kidding, the fucktard actually said that. Then he blamed tax policies for the crisis. Palin is more fucking informed.
Second, it's important to keep in mind that the bailout is voluntary. If companies don't want to sell their mortgage backed securities because the government requires that they have to give up equity or their severance packages, then they won't sell them, handicapping the bailout.
Throwing important legislation through Congress as fast as possible is a very, very retarded way of doing things. Thats how we got the Patriot Act. So don't you dare insult someone because they wanted to properly review a bill.
Secondly, the bailout is only voluntary to CORPORATIONS. Is it voluntary to the people whose money will be used and abused to accomplish it? Hardly. And since the government is supposed to be accountable to people, not to corporations, I think something is a little off with your logic.
4.) Not bailing out is much worse.
OK, here is the important part. The argument by free-market fundamentalists is two fold. First, they say that the market is undergoing a "correction". Second, they tell you that bailouts create a moral hazard.
First, it's true that the housing market is undergoing a correction. However, you have to keep in mind that most homes are bought through mortgages. A lot of banks are unwilling to lend even to qualified buyers, so the price of housing might even be BENEATH the ideal equilibrium price. So long as credit remains tight, housing prices will continue to fall, banks will keep bleeding money, and the economy goes down a vicious spiral into stagnation and recession.
Second, this is an inappropriate use of the concept. Bankers have already suffered plenty from the housing crisis. They know better than to let this happen again. Moreover, the costs of NOT bailing out are much higher than the cost of creating this minimal moral hazard.
Corrections are not instant. They don't happen in a day, and therefore, although people may not be able to buy homes right now, given enough time, the market will return to normal. And by normal, I mean it will be non-inflated and healthy. Because of this, it also won't be likely to cause failures in the future, assuming we can learn to keep the government in check.
The world will not end if the bailout is not passed. You're pulling a lot of Bush-like rhetoric here, and if you don't believe me:
"The risks of doing nothing far outweigh the risks of whatever it takes to disarm Saddam Hussein." ~ George W. Bush, February 10, 2003
"The risk of doing nothing far outweighs the risk of the [$700 billion-plus mortgage bail-out] package." ~ George W. Bush, September 20, 2008
Its not a minimal moral hazard, its a quite large one. See above about Paulson.
If we're lucky, Congress will hold off against this whole charade being put on and vote the bill down again.
Your only fucking response to my post is politics? Centralized power? Seriously man? All you're doing is speculating. You wanna tell me exactly what will happen that is so bad? You have nothing to say about the economics of the bailout? People making rash judgments based on moral and political principles is EXACTLY why I made this post, and yet you seem to ignore the economics entirely. You're completely unresponsive to my argument that the limited credit has pushed the housing market below equilibrium levels, or my assertion that investors, lenders, and buyers have imperfect information.
The fix you mention is a little less than obvious. It may seem intuitive, but all you're doing is propping up a problematic system that is then destined to fail *again* at a later date.
Non-unique argument. If we DON'T bail out, the system is still going to have busts and booms. What we can do is limit the extent of this particular bust.
Steven Horwitz from St Lawence University does an open letter regarding the financial crisis:
In the last week or two, I have heard frequently from you that the current financial mess has been caused by the failures of free markets and deregulation. I have heard from you that the lust after profits, any profits, that is central to free markets is at the core of our problems. And I have heard from you that only significant government intervention into financial markets can cure these problems, perhaps once and for all. I ask of you for the next few minutes to, in the words of Oliver Cromwell, consider that you may be mistaken. Consider that both the diagnosis and the cure might be equally mistaken.
And then he addresses the issue of greed:
One of the biggest confusions in the current mess is the claim that it is the result of greed. The problem with that explanation is that greed is always a feature of human interaction. It always has been. Why, all of a sudden, has greed produced so much harm? And why only in one sector of the economy? After all, isn’t there plenty of greed elsewhere? Firms are indeed profit seekers. And they will seek after profit where the institutional incentives are such that profit is available. In a free market, firms profit by providing the goods that consumers want at prices they are willing to pay. (My friends, don’t stop reading there even if you disagree - now you know how I feel when you claim this mess is a failure of free markets - at least finish this paragraph.) However, regulations and policies and even the rhetoric of powerful political actors can change the incentives to profit. Regulations can make it harder for firms to minimize their risk by requiring that they make loans to marginal borrowers. Government institutions can encourage banks to take on extra risk by offering an implicit government guarantee if those risks fail. Policies can direct self-interest into activities that only serve corporate profits, not the public.
And then he looks at the facts:
For starters, Fannie Mae and Freddie Mac are “government sponsored enterprises”. Though technically privately owned, they have particular privileges granted by the government, they are overseen by Congress, and, most importantly, they have operated with a clear promise that if they failed, they would be bailed out. Hardly a “free market.” All the players in the mortgage market knew this from early on. In the early 1990s, Congress eased Fannie and Freddie’s lending requirements (to 1/4th the capital required by regular commercial banks) so as to increase their ability to lend to poor areas.
Now think about this as the Government here passes a law requiring affordable housing in certain areas. The best of motives often lead to the worst of results.
At the same time, home prices were rising making those who had taken on large mortgages with small down payments feel as though they could handle them and inspiring a whole variety of new mortagage instruments. What’s interesting is that the rise in prices affected most strongly cities with stricter land-use regulations, which also explains the fact that not every city was affected to the same degree by the rising home values. These regulations prevented certain kinds of land from being used for homes, pushing the rising demand for housing (fueled by the considerations above) into a slowly responding supply of land. The result was rapidly rising prices. In those areas with less stringent land-use regulations, the housing price boom’s effect was much smaller. Again, it was regulation, not free markets, that drove the search for profits and was a key contributor to the rising home prices that fueled the lending spree.
Strict land use policies pushign up house prices.
The final chapter of the story is that in 2004 and 2005, following the accounting scandals at Freddie, both Freddie and Fannie paid penance to Congress by agreeing to expand their lending to low-income customers. Both agreed to acquire greater amounts of subprime and Alt-A loans, sending the green light to banks to originate them. From 2004 to 2006, the percentage of loans in those riskier categories grew from 8% to 20% of all US mortgage originations. And the quality of these loans were dropping too: downpayments were getting progressively smaller and more and more loans carried low starter interest rates that would adjust upward later on. The banks were taking on riskier borrowers, but knew they had a guaranteed buyer for those loans in Fannie and Freddie, back, of course, by us taxpayers. Yes, banks were “greedy” for new customers and riskier loans, but they were responding to incentives created by well-intentioned but misguided government interventions. It is these interventions that are ultimately responsible for the risky loans gone bad that are at the center of the current crisis, not the “free market.“
I suggest people read the full thing.
Just read much of it. It's worthwhile to read for sure. But I feel it's mostly bunk.
To say that Wall Street would not have gotten where it is at today, had Fannie Mae and Freddie Mac not behaved as they did, is a total fantasy. I think the author highly overestimates how much Wall Street's decision-making is affected by these "cues" and underestimates the profit motive.
Also, it's not clearly explained in the article (in fact it seems intentionally misleading) that, by DEFINITION, Freddie Mac and Fannie Mae do NOT originate subprime loans. The definition of a subprime loan is that made to a customer who does not meet Freddie and Fannie's requirements on down payment and customer history. Their involvement was limited to buying mortgage-based securities and/or backing other lenders' subprime loans, with the goal of increasing the number of customers who could get loans. That seems like a critical point.
Let's also not forget the people who made these loans themselves, who acted in a manner that was borderline criminal and was also motivated out of greed. Also, credit rating agencies, ditto. There's plenty of free market blame to go around.
All sort of complicated words for most people, but this is nothing else that the government taking on the private obligations of companies. It has happened before lots of time, and It will probably happen a lot in the future. I don't know if it's the first time happening in USA, probably the first time happening in this scale. it sucks, but the government is so attached to them so they can't let them go bankrupt.
On October 01 2008 11:31 TeCh)PsylO wrote: Great post. I don't know enough about this to hold a position about the bail out, but if the basic problem is houses foreclosing, how does this bill stop that? It stops the pain felt with the mortgage companies and gives them the liquidity to confidently continue to issue credit, but I don't see how it is going to stop foreclosures from taking place.
The bailout plan has provisions to help distressed homeowners by, among other things, reducing principal, and the interest rate to be paid. The new loans will be negotiated at current market value, I think. I believe there is also an insurance provision so if the homeowner defaults on the new mortgage the problem doesn't recur.
The provisions specify eligibility (certain time frame, greater than 31% debt to income ratio, etc.), and punishment (up to 5 years in prison if someone just stops making their payments to get a better deal from the gov.).
On October 01 2008 13:36 ahrara_ wrote: Your only fucking response to my post is politics? Centralized power? Seriously man? All you're doing is speculating. You wanna tell me exactly what will happen that is so bad? You have nothing to say about the economics of the bailout? People making rash judgments based on moral and political principles is EXACTLY why I made this post, and yet you seem to ignore the economics entirely. You're completely unresponsive to my argument that the limited credit has pushed the housing market below equilibrium levels, or my assertion that investors, lenders, and buyers have imperfect information.
The fix you mention is a little less than obvious. It may seem intuitive, but all you're doing is propping up a problematic system that is then destined to fail *again* at a later date.
Non-unique argument. If we DON'T bail out, the system is still going to have busts and booms. What we can do is limit the extent of this particular bust.
I think I fairly clearly stated that I don't think they government should intervene in the market, and if creating $700 billion in new credit to give to specific companies isn't intervening, I don't know what is.
I don't ignore economics, I just recognize that you can't have economic freedom without political freedom and vice versa. Politics and economics are heavily entwined, and not seperate entities as you would seem to imply. If limited credit has pushed the housing market below equilibrium levels, then they will rise in the future because its an equilibrium. Lowered prices causes increased demand which causes a rise in prices. Imperfect information is factored into the risks you take when entering a transaction, and thus factored into the costs of you entering said transaction. If a company blatantly lies, they have committed fraud, and can be sued, so no further laws or regulation is needed on that front.
Lastly, you hold that a free market means booms and busts. I contend that the booms and busts are caused by governmental interference in the market (and I think you can easily see the interference when you look at fannie mae and freddie mac in this case). If I am correct, then the proper course of action would be to limit government interference in the market in the future, not to increase it.
An argument consists of assertion and warrant. You can't just say "booms and busts are caused by government intervention". Why the hell are they? I'm not going to even entertain the next poster who thinks they've successfully rebutted 5000 words of reasoning by posting ONE assertion.
This is fantastic. I wish I had time to join in on this discussion, but I'll just throw in a blog post that I made a while back on the fundamentals of money. Needless to say, regardless of the details of what we do today, tomorrow, or a year from now, it will eventually end very badly.
On October 01 2008 15:50 ahrara_ wrote: The entire premise of Money = Debt philosophy is that the fed prints money to pay debt. IT DOESN'T. END OF STORY.
Money is created by banks not the fed, as the video describes in the first couple minutes. The reason money = debt is because our money is always someone else's liability. The dollar in your pocket represents money that somebody else OWES to someone. If everyone paid off their debt and loans, all the money would disappear out of existence.
That is why we are having the problems we are having now. Our financial system (banks) collect interest on money that doesn't exist. This is because that when someone deposits $1 in a bank, the bank can effectively loan out $10, and charge interest on all $10. Well, obviously to pay off the interest, more money has to be created. Who creates the money? The bank of course. More people must go into debt to sustain it.
We are at the point now where the american people are maxed out on debt. No one can borrow any more. The system can't sustain itself.
Money is created by banks not the fed, as the video describes in the first couple minutes.
No. It's not. Like I don't know how else to explain to you except: No. It's not. Like, you are as factually wrong as if I said that purple was pink and blue was red. You are incorrect. Informationally mistaken. Erroneous. Factually derelict. Devoid of truth. Fallacious in your beliefs. You. Are. WRONG.
Banks. Don't. Create. Money. If they do, we have a word for it: COUNTERFEITING.
If I deposit $1 in the bank, that does not allow the bank to loan out $10, it allows him to loan out $1. The editor is confusing the capital reserve rule which says you have to keep 6% or so of your capital in reserve just in case something goes wrong. That is, if I get $100 in deposits, I can loan out $94 and keep $6 of it. If the video were correct, then you would get to loan out $1000, which ISN'T BLOODY TRUE. IT IS JUST PLAIN INCORRECT AND WRONG.
If banks had the ability to print 10x more money than they had in deposits, don't you think that would lead to unbelievably rapid inflation to the point that money would be worthless, not this 4%, 5%, 6% shit we have today? I mean seriously?
This video is about as wrong about the way banks work as you can get.
You are correct with what you wrote. Lets say I deposit $100 in a bank. The bank loans out $90 lets say, the maximum amount allowed. Then, whoever gets that $90 puts it back in the bank. It can then loan out $81. Then that person puts their money in the bank, and the bank then loans out again $72.9, and so on and so forth.
The way that the fed controls the money supply is by changing the interest rate. The interest rate directly controls how banks make loans, which directly controls the money supply. Thats how it works. "So simple the mind is repelled."
On October 01 2008 16:15 fight_or_flight wrote: You are correct with what you wrote. Lets say I deposit $100 in a bank. The bank loans out $90 lets say, the maximum amount allowed. Then, whoever gets that $90 puts it back in the bank. It can then loan out $81. Then that person puts their money in the bank, and the bank then loans out again $72.9, and so on and so forth.
The way that the fed controls the money supply is by changing the interest rate. The interest rate directly controls how banks make loans, which directly controls the money supply. Thats how it works. "So simple the mind is repelled."
I want to hit you.
If I get a $90 loan, and put it back into the bank, don't you think that kinda fuckign defeats the purpose I mean are you deliberately stupid were you dropped on the head as a baby??!?!?!
On October 01 2008 16:15 fight_or_flight wrote: You are correct with what you wrote. Lets say I deposit $100 in a bank. The bank loans out $90 lets say, the maximum amount allowed. Then, whoever gets that $90 puts it back in the bank. It can then loan out $81. Then that person puts their money in the bank, and the bank then loans out again $72.9, and so on and so forth.
The way that the fed controls the money supply is by changing the interest rate. The interest rate directly controls how banks make loans, which directly controls the money supply. Thats how it works. "So simple the mind is repelled."
I want to hit you.
If I get a $90 loan, and put it back into the bank, don't you think that kinda fuckign defeats the purpose I mean are you deliberately stupid were you dropped on the head as a baby??!?!?!
edit: btw, unless you take the 10k or whatever you borrowed in cash under your bed, its probably in the banking system. You may write checks (which just transfer it to another bank), use a debit card, or whatever. Cash is a very scarce commodity, and a very small percentage of money today is in actual cash and not in the bank.
On October 01 2008 16:15 fight_or_flight wrote: You are correct with what you wrote. Lets say I deposit $100 in a bank. The bank loans out $90 lets say, the maximum amount allowed. Then, whoever gets that $90 puts it back in the bank. It can then loan out $81. Then that person puts their money in the bank, and the bank then loans out again $72.9, and so on and so forth.
The way that the fed controls the money supply is by changing the interest rate. The interest rate directly controls how banks make loans, which directly controls the money supply. Thats how it works. "So simple the mind is repelled."
I want to hit you.
If I get a $90 loan, and put it back into the bank, don't you think that kinda fuckign defeats the purpose I mean are you deliberately stupid were you dropped on the head as a baby??!?!?!
edit: btw, unless you take the 10k or whatever you borrowed in cash under your bed, its probably in the banking system. You may write checks (which just transfer it to another bank), use a debit card, or whatever. Cash is a very scarce commodity, and a very small percentage of money today is in actual cash and not in the bank.
INCREASING MONEY SUPPLY IS NOT PRINTING MONEY HOLY SHIT PLEASE STOP POSTING YOU ARE WRONG DEAL WITH IT
On October 01 2008 16:15 fight_or_flight wrote: You are correct with what you wrote. Lets say I deposit $100 in a bank. The bank loans out $90 lets say, the maximum amount allowed. Then, whoever gets that $90 puts it back in the bank. It can then loan out $81. Then that person puts their money in the bank, and the bank then loans out again $72.9, and so on and so forth.
The way that the fed controls the money supply is by changing the interest rate. The interest rate directly controls how banks make loans, which directly controls the money supply. Thats how it works. "So simple the mind is repelled."
I want to hit you.
If I get a $90 loan, and put it back into the bank, don't you think that kinda fuckign defeats the purpose I mean are you deliberately stupid were you dropped on the head as a baby??!?!?!
IN ORDER FOR A BANK TO MAKE A LOAN IT HAS TO DEDUCT FROM ITS TOTAL ASSETS. THUS THERE IS A REALISTIC LIMIT TO HOW MUCH A BANK COULD LOAN. THIS KEEPS THE MONEY SUPPLY IN CHECK. THE ONLY CIRCUMSTANCE UNDER WHICH YOUR LOGIC WOULD WORK IS IF IT COULD MAGICALLY MAKE THE VALUE OF THE LOAN APPEAR AT NO COST TO ITSELF. I READ YOUR GODDAMN GOOGLE SEARCH. NEXT TIME MAKE YOUR OWN ARGUMENTS FUCK.
Sorry if I'm harsh but fuck what you're saying is like me coming into a TvT strategy thread and start posting about how effective fuckign MnM is in late game I MEAN YOU'RE JUST THAT WRONG GODDAMN. Take a class on macroeconomics and study monetary theory very closely just... dude, you are WRONG. I don't know how else to put it.
The problem is not due to liquidity. (only if a bank is targeted by malicious speculation)
The problem is not due to relegation.
The problem is due to people who don't understand the difference between fair value and market value and odd accounting standards that doesn't work in a volatile changing market (apart from a steady growing one), and a fast paced trading market driven largely by psychological factors and ironically perhaps with too much transparancy in some cases today, and thus we have a self-fulfilling prophecy.
On October 01 2008 16:48 ahrara_ wrote: Ya, the problem is with capitalism. We should fuck this whole capitalism thing and go back to living in caves. That'll fix the problem.
GODDAMN my own thread makes me frustrated. Excuse me while I go slam myself head first into a brick wall.
Just relax. Everything works out eventually. I'm sure we'll be fine. No sense in messing up a brick wall.
On October 01 2008 16:42 ahrara_ wrote: Sorry if I'm harsh but fuck what you're saying is like me coming into a TvT strategy thread and start posting about how effective fuckign MnM is in late game I MEAN YOU'RE JUST THAT WRONG GODDAMN. Take a class on macroeconomics and study monetary theory very closely just... dude, you are WRONG. I don't know how else to put it.
I'll tell you what. I won't post again until I read your entire OP. Hopefully you will read my blog (it is longer though).
btw, I haven't been arguing with anything in this thread at all, only on the fundamentals.
Just like a physicist asking the question "What is gravity and inertia?" while his colleagues are arguing the finer points of string theory.
Calm down, ahrara. The money creation stuff are the basic examples used to demonstrate how such (particularly the math) works, maybe you should be the one taking macroeconomics over again if you are going to complain about the example itself. (By that I mean the bank loan -> save at other bank -> further loan example)
fight_or_flight, if everyone paid off their debts, the money do not disappear. Unless people don't do anything besides paying off their debt, that can't be true, and if other things are done with money, then money is created, though not necessarily in monetary form. If people pay off their debt in the future after a purchase, there is a real increase in goods produced. The increase in products counts into the strength of the dollar and thus we can, in fact, print more cash because people borrow and money magically appears out like that.
the money creation stuff are not basic examples of anythign except an untrue idea. what fight is saying is that banks arbitrarily create money, essentially printing money or counterfeiting. this is true in fucking zimbabwe where inflation is something like 10 million % (no exaggeration) but not in the u.s. money supply goes up when banks are more willing to lend, but they will only do so until they meet their capital reserve or the banks that they are borrowing from meet their capital reserve. so money is not just randomly generated.
"money = debt" is a meaningless factually incorrect and stupid term
Calm down, ahrara. The money creation stuff are the basic examples used to demonstrate how such (particularly the math) works, maybe you should be the one taking macroeconomics over again if you are going to complain about the example itself. (By that I mean the bank loan -> save at other bank -> further loan example)
wait PLEASE tell me what exactly it is an example OF. Under what circumstance would anyone want to borrow money from a bank and put it back in right after and what purpose would that serve?
On October 01 2008 16:49 ahrara_ wrote: If I can figure out even ONE thing you're trying to say in your two posts so far I'll be ready to consider myself an accomplished scholar.
wait my bad Number4 I was referrign to Luhh's post. Fuck if I can figure out wtf he's tryign to say
I am not exactly sure either but it's probably along the lines that market psychology has been been in the way of rational market decisions. We want to explain it away as something tangible. From the Left: "It's Deregulation!" From the Right: "It's the low income housing initiatives!"
It's people getting caught up in a fantasy imo.
We keep seeing bubbles appear in the markets: The tech stock market bubble; followed by housing market bubble; more recently commodities...
These bubbles arise and very savvy investors and institutions fall for them each time. Everybody is getting caught into this psychology that markets will expand infinitely. Perhaps they are caught in the elist psychology that the markets may not expand infinitely but they went to Harvard and will be able to get out near the end of the bubble because they are smater than everybody else.
We need to look no further than the subprime lending: What changed that caused everybody and their sister to want to give loans to subprime borrowers. Nothing has changed in the regulatory market since 1978.
Why now? Was it the same irrational exuberance Greenspan indentified in the tech bubble that spilled into housing causing bank lenders to be tards?
Are our markets and the market players really that weak? I think the answer is yes. And it's scary.
Typing in all caps doesn't convey a sense of calm.
He skipped the usual middle part of "That 90 bucks Joe took a loan out for he used to buy apples from Nancy, who deposited that 90 bucks into a bank and that bank lends 81 bucks to..." etc etc, but what he was bringing up should've been obvious. At least, I thought like every macro class used that chain of loan, purchase and savings to demonstrate the math of money creation. I am pretty sure by bringing that up, he isn't saying that banks just print money themselves. The money = debt analogy is pretty screwed up though.
EDIT - Why is the occurance of bubbles weird? To be fair, no one has really managed to explain why that should happen (you'd think we would learn, really). But once we've seen one that another should occur isn't too illogical.
Well, weirdness for me is the frequency with which it is occuring now. The bubble never goes away. It just moves to a different market. Right now you could argue the bubble is present in the bond market. A lot of people will be hurt by this bubble. Many will gain.
Psychology is stronger than fundamentals it seems.
The FSMA (and many other bills which tbh, I don't know enough about) took it too far. It deregulated areas it shouldn't have. Most importantly, it led to the housing bubble.
What about those who say this was purposely induced by a few bankers who predicted it would lead to recession and then force a few strategic changes that would benefit them as an excuse to save the economy. At the end of the day, they're many billions richer than before the deregulation.
How in the world are investment bankers richer than before the crisis? On what insane dream world ground do you make that argument?
Rayzorblade: APPRECIATED as always
Because they let the little guy take the fall? I have no insider information or anything, or even an extensive knowledge of the world of investment banking. But I do know that the big wigs always walk away losing less than everyone else, and if they are smart they will make money off of it too.
Of course they made money. That's where the trillions of dollars went.
On October 01 2008 08:10 jgad wrote: You know, I post on a ton of forums and no matter the theme of the place it's like suddenly the case that the entire world has become interested in economics, especially how it relates to politics. This alone brings joy to my heart - maybe this generation can grow up with better sense in its head than the last one (Sarah Palin's embarrassing demonstrations of oblivious ignorance, for example). Although the phenomenon here is far from unique, here are a bunch of Starcraft fans sitting around and having relevant, intelligent discussions which should, by all rights, be happening in a major public forum right now. Take what you can get, I suppose. For anyone with a bent curiosity, here's a great book by Murray Rothbard - Man, Economy, and State. I highly recommend it to anyone interested in what's going on.
TL has the ban hammer watching over these threads. Excessive idiots are gone before their chaos spread. In a way, TL is self regulating itself. TL economics <3
My point was that it's not just TL, though. I post in completely uncensored forums and they are much the same. My experience across the web and over about 15 years is that TL's ban hammer is largely not necessary. Or at least I've seen other sites grow with an abundance of intelligent and rich discussion without ever having threatened anyone (other than overt spammers). Here I find the ban hammer seems to provide more of a ritualistic or cultural/social role than anything actually functional - source of stories to tell around the fire, public sacrifice/execution (sort of mayan-style), etc. But that's another topic. 0_o
On October 01 2008 15:27 ahrara_ wrote: But you're not.
An argument consists of assertion and warrant. You can't just say "booms and busts are caused by government intervention". Why the hell are they? I'm not going to even entertain the next poster who thinks they've successfully rebutted 5000 words of reasoning by posting ONE assertion.
It goes back to Keynes' General Theory. He postulated the concept of an "effective demand" which was an aggregate, macro-variable to describe the total demand for goods in an economy. He further postulated that using gold as a medium of exchange was inefficient. If, for example, there was rising unemployment, he would describe this as being caused by deficient "effective demand". Not enough people were going out to buy things because they were perhaps preoccupied with uncertainties about the future and were saving more money. Less people buying means less people employed, etc.
So the solution? Well, since he considered gold mining to be a completely useless endeavour, he suggested that one could use a fiat style currency in place of gold and to create jobs one could simply pay people to bury jars full of cash and then pay other people to dig it up again. This, he thought, would serve the same purpose as gold mining did in creating economic expansions of the previous eras. If only government could create money out of thin air, then they could manage unemployment by monetising their salaries. Their jobs need not be as useless as digging up or burying jars of cash, he reasoned, but any benefit they provide would be in addition to simply being recipients of money in the global effort to raise effective demand.
All of the Marxists loved this at the time because they saw it as a way to institute a centrally managed economy without the problems even Marx himself acknowledged - that socialism eventually led to the need for a totalitarian state to work. The consequence of more regulation, he saw, was even more regulation - this ad nauseum until the entirety of society was under direct control of the central authority. Like trying to smash the gopher with the big mallet - he just pops up somewhere else.
The problem is that Keynes never appreciated that his macro variables said nothing about the distribution of specific industries or the need for actual production, and not just employment. What happened since and until now is that central banks would inflate their way out of any perceived economic downturns. Cash is injected into the system and jobs are created via some voodoo economics. It also gave governments the power to increase spending without raising taxes - deficits could just be monetised.
But the problem is always rooted in the way that the cash is injected. In the tech boom it was cheap credit following a dramatic drop in Fed interest rates (to pay for the first Gulf War) which made lots of cheap money available. People were transfixed by the ability of technology to make infinite money at the time, so the cheap money was irresponsibly invested in tech stocks. Following the invasion of Afghanistan, the Fed again crashed interest rates - this time to ONE PERCENT! This was madness, and the only difference was that this time the hot ticket items were houses (for various other regulatory reasons) and the cheap money was irresponsibly invested there. In any case, even going back to the Great Depression, the cause has been malinvestment of artificially cheap credit.
Without the power to create credit with impunity or to leverage investments through fractional reserve lending or to have such risky investments protected by a central authority, the onus would be on investors to ensure that they are investing responsibly. People selling credit would be much more careful about who they lend it to.
The boom-bust is driven in a lot of other ways too. Consider now that houses are seeing massive deflation, but other sectors of the economy (such as commodities) have seen massive inflation. The Fed can't deal with this - they can only work with one variable, the interest rate. But invariably in their cash injection frenzy, they ultimately end up putting cash into one sector of the economy or another. Here the cheap credit created a transient artificial demand for houses. This gave a false economic signal that there was actually a rise in demand for houses. Now lots of firms had been investing in new developments and housing expansions, only to find that the demand was artificial and to see the market collapse. Now these people are in financial trouble as well - they had nothing to do with mortgages, but their business is in ruins now because their entire sector of the economy has been severely screwed with.
I could go on. Intervention by a central power necessarily created distortions in the market which will ultimately tend to naturally correct themselves. Regulations are an attempt to make permanent some of these distortions, but they invariably affect more than they are intended to. Further regulation is required to fix the second-order effects of the first regulation. More problems ensue. It's a downward spiral. I'd suggest a read of the Power and Market section of the Rothbard book I posted. It's an exhaustive treatise on the topic.
On October 01 2008 16:15 fight_or_flight wrote: You are correct with what you wrote. Lets say I deposit $100 in a bank. The bank loans out $90 lets say, the maximum amount allowed. Then, whoever gets that $90 puts it back in the bank. It can then loan out $81. Then that person puts their money in the bank, and the bank then loans out again $72.9, and so on and so forth.
The way that the fed controls the money supply is by changing the interest rate. The interest rate directly controls how banks make loans, which directly controls the money supply. Thats how it works. "So simple the mind is repelled."
I want to hit you.
If I get a $90 loan, and put it back into the bank, don't you think that kinda fuckign defeats the purpose I mean are you deliberately stupid were you dropped on the head as a baby??!?!?!
edit: btw, unless you take the 10k or whatever you borrowed in cash under your bed, its probably in the banking system. You may write checks (which just transfer it to another bank), use a debit card, or whatever. Cash is a very scarce commodity, and a very small percentage of money today is in actual cash and not in the bank.
INCREASING MONEY SUPPLY IS NOT PRINTING MONEY HOLY SHIT PLEASE STOP POSTING YOU ARE WRONG DEAL WITH IT
"Printing money" is just a popular expression to imply "increasing the money supply". How it is done in the present, whether by technology or other exotic financial instruments is irrelevant. The point is that Banks do indeed have the power to expand the money supply, at a cost dictated by the Fed's interest rate, and with profits dictated by the investments they choose to make with that money.
money supply goes up when banks are more willing to lend, but they will only do so until they meet their capital reserve or the banks that they are borrowing from meet their capital reserve. so money is not just randomly generated.
"money = debt" is a meaningless factually incorrect and stupid term
Nobody said that money was randomly generated. I think the ongoing point is that expansion of the money supply is done via banks and is limited by the Fed-set interest rate as well as reserve policies for those banks. The money supply indeed increases by a substantial amount every year. Where else, if not for from banks, do these financial instruments originate?
And of course money is debt. It says right on it, in just about any country "This note entitles the bearer, on demand, to the sum of X (local currency)". It's a promise to pay by the central bank. It used to be, for example, that in the US (pre-Bretton Woods, etc), that one paper dollar was a promise to pay you an equivalent sum of gold. Now it's just a promise to pay you dollars, which is sort of cyclic, but nevertheless represent a debt. Some 96% of the money (M3) out there was originally lent out at interest to someone. That's how it comes into being.
I am 100% with tec27. The political implications are enough to completely reject the proposal, regardless how good or bad it would do economy wise.
Or, more bluntly:
I'd rather have a worldwide economy crisis, inflation, mass unemployment and people fucking starving to death on the streets in plain sight than another Patriot Act.
Lots of talk about the $700 Billion liquid injection into bank markets while at the same time the FED already shoved $630 Billion on its own to boost the economy (banks) (Bloomberg).
It's fun how miniscule these numbers are in the grand scale; US national debt is under ten Trillion (without counting in medicare and other liabilities which multiply it to insane proportions). Most of the posters here are nowadays educated enough to know that FED creates this money out of thin air, but some may still be wondering how it's possible without swaying the whole boat over. That's achieved by having trillions and trillions of USD flowing around the world economy, so a little drop of $630 Billion wont do much in the ocean of Trillions.
It's a very well woven structure, and as long as dollar is used for the trade of the most used commodities (drugs, oil, etc), the system itself will make it possible for FED to inject more money into the already sinking US economy to keep it afloat for a little longer. Also, other countries have a vested interest in keeping the US economy afloat as well, as they own huge amounts of its national debt, and are fueling the situation by buying more of it.
The problem here is that we're not fixing the leaks, but merely bailing water out of the boat, and sooner or later it will sink, we'll just have to see how it's going to happen and what structural changes will it bring with it.
I read it from start to finish. Good read, thanks for your time. Incidentally, wikipedia is a pretty neat place to read up about all this stuff to. See e.g. the wikipedia entry on the proposed bailout
I'd rather have a worldwide economy crisis, inflation, mass unemployment and people fucking starving to death on the streets in plain sight than another Patriot Act.
This is probably overreacting. Better than a few thousand people get their rights violated, than, uh, a few thousand people starving.
I'd rather have a worldwide economy crisis, inflation, mass unemployment and people fucking starving to death on the streets in plain sight than another Patriot Act.
This is probably overreacting. Better than a few thousand people get their rights violated, than, uh, a few thousand people starving.
Oh yeah? Then you would be in favor of partially disowning a few thousand wealthy people to save a few thousand starving kids in the Third World I suppose?
I am not overreacting, this is my opinion. My main reason for that is that however brutal the downfall, the economy will recover sooner or later. Any rights or freedom you give up are gone forever.
On October 01 2008 23:03 Ghin wrote: ok so im retarded, youll have to explain this step by step like a little kid to me
how is the goddamn economy failing or whatever going to make me lose my job?
It depends where you work. If what you produce or provide is something people are likely to forego buying under pressure of economisation, then reduced demand could lead to downsizing in your industry. If, for example, you do graphic arts for a magazine which is supported by advertising for products which people will be less likely to afford, then the contraction in spending could likely hit your job. If you work on the electricity grid or on a wheat farm, on the other hand, then most likely your job is much more secure. It also depends on how your employer (if you are not self-employed) has invested their money. If they own a lot of bad investments, then they may be forced to liquidate or downsize to make up the difference. Even if you don't lose your job, the effects of rising prices will still reduce your overall buying power unless you manage to get a raise better than inflation which, for things like the basics (food, energy, etc) has been enormous. The effects are complex, but many.
On October 01 2008 23:08 zatic wrote: Oh yeah? Then you would be in favor of partially disowning a few thousand wealthy people to save a few thousand starving kids in the Third World I suppose?
This is called taxes and public aid for development.
so you'd rather the Fed give money to banks as opposed to "lending" it? the fed loans money to the banks because it helps in the regulation of money's interest rate (forgot the term), so that when there is an economic hiccup like inflation or deflation the Fed can try to minimize it's effect.
On October 01 2008 15:27 ahrara_ wrote: But you're not.
An argument consists of assertion and warrant. You can't just say "booms and busts are caused by government intervention". Why the hell are they? I'm not going to even entertain the next poster who thinks they've successfully rebutted 5000 words of reasoning by posting ONE assertion.
It goes back to Keynes' General Theory. He postulated the concept of an "effective demand" which was an aggregate, macro-variable to describe the total demand for goods in an economy. He further postulated that using gold as a medium of exchange was inefficient. If, for example, there was rising unemployment, he would describe this as being caused by deficient "effective demand". Not enough people were going out to buy things because they were perhaps preoccupied with uncertainties about the future and were saving more money. Less people buying means less people employed, etc.
So the solution? Well, since he considered gold mining to be a completely useless endeavour, he suggested that one could use a fiat style currency in place of gold and to create jobs one could simply pay people to bury jars full of cash and then pay other people to dig it up again. This, he thought, would serve the same purpose as gold mining did in creating economic expansions of the previous eras. If only government could create money out of thin air, then they could manage unemployment by monetising their salaries. Their jobs need not be as useless as digging up or burying jars of cash, he reasoned, but any benefit they provide would be in addition to simply being recipients of money in the global effort to raise effective demand.
All of the Marxists loved this at the time because they saw it as a way to institute a centrally managed economy without the problems even Marx himself acknowledged - that socialism eventually led to the need for a totalitarian state to work. The consequence of more regulation, he saw, was even more regulation - this ad nauseum until the entirety of society was under direct control of the central authority. Like trying to smash the gopher with the big mallet - he just pops up somewhere else.
The problem is that Keynes never appreciated that his macro variables said nothing about the distribution of specific industries or the need for actual production, and not just employment. What happened since and until now is that central banks would inflate their way out of any perceived economic downturns. Cash is injected into the system and jobs are created via some voodoo economics. It also gave governments the power to increase spending without raising taxes - deficits could just be monetised.
But the problem is always rooted in the way that the cash is injected. In the tech boom it was cheap credit following a dramatic drop in Fed interest rates (to pay for the first Gulf War) which made lots of cheap money available. People were transfixed by the ability of technology to make infinite money at the time, so the cheap money was irresponsibly invested in tech stocks. Following the invasion of Afghanistan, the Fed again crashed interest rates - this time to ONE PERCENT! This was madness, and the only difference was that this time the hot ticket items were houses (for various other regulatory reasons) and the cheap money was irresponsibly invested there. In any case, even going back to the Great Depression, the cause has been malinvestment of artificially cheap credit.
Without the power to create credit with impunity or to leverage investments through fractional reserve lending or to have such risky investments protected by a central authority, the onus would be on investors to ensure that they are investing responsibly. People selling credit would be much more careful about who they lend it to.
The boom-bust is driven in a lot of other ways too. Consider now that houses are seeing massive deflation, but other sectors of the economy (such as commodities) have seen massive inflation. The Fed can't deal with this - they can only work with one variable, the interest rate. But invariably in their cash injection frenzy, they ultimately end up putting cash into one sector of the economy or another. Here the cheap credit created a transient artificial demand for houses. This gave a false economic signal that there was actually a rise in demand for houses. Now lots of firms had been investing in new developments and housing expansions, only to find that the demand was artificial and to see the market collapse. Now these people are in financial trouble as well - they had nothing to do with mortgages, but their business is in ruins now because their entire sector of the economy has been severely screwed with.
I could go on. Intervention by a central power necessarily created distortions in the market which will ultimately tend to naturally correct themselves. Regulations are an attempt to make permanent some of these distortions, but they invariably affect more than they are intended to. Further regulation is required to fix the second-order effects of the first regulation. More problems ensue. It's a downward spiral. I'd suggest a read of the Power and Market section of the Rothbard book I posted. It's an exhaustive treatise on the topic.
admittedly economics theory at this depth is out of my league. interesting post tho. doing much better than fight or flight anyway
the fed loans money to the banks because it helps in the regulation of money's interest rate (forgot the term), so that when there is an economic hiccup like inflation or deflation the Fed can try to minimize it's effect.
Inflation is caused by the Fed's monetary policy.
Here's a short article that offers a more free-market perspective on the crisis (it was written in 07 about the housing bubble, but obv that's relevant to the wall street collapse going on now). http://mises.org/story/2787 Exerpt: "It is the loose monetary policy of the Fed between December 2000 and June 2004 that laid the foundation for the emergence of various nonproductive activities, or bubble activities. (The federal funds rate target was lowered from 6.5% to 1%.) It is this loose monetary stance that gave rise to various bubble activities.
Between June 2004 and September 2007, the Fed reversed its stance by raising the federal funds rate from 1% to 5.25%. Once the Fed embarked on a tighter stance, this undermined various nonproductive activities that had emerged on the back of the previous loose monetary stance. In short, bubble activities came under pressure.
Now, the effect from a monetary policy change on various parts of the economy operates with a time lag that varies with respect to various sections of the economy. As a result of this, the effect from past changes in monetary policy can continue to dominate despite more recent changes. It is quite likely that the tighter stance since 2004 is only now starting to gain pace with the housing market being hit first. This means that sooner or later the various other parts of the economy are likely to exhibit difficulties."
This isn't meant as a direct counter to the OP, just somethin else to consider..
On October 02 2008 02:34 Wurzelbrumpft wrote: just a question is it foreseeable or calculatable when the stocks are at their lowest point?
Pretty much every investment bank in the world is currently hiring numerical PhD gradutates (maths, physics, etc) in droves for stupid money to figure that out. The general field is called econometrics, which is an attempt to model these complex systems with equally complex mathematics. Personally, I think it's a silly way to approach the problem, but in terms of short-term gains it has proven a somewhat successful approach. New methods in universities now are looking at attempts to parameterize the unknowns of human behaviour and decision making into hybrid socio-economic models as well. I guess you could also consider the P/E ratio and history as somewhat indicative of a company's current profitability over its historical profitability. Doesn't really say much about the future, though.
There's also the traditional approach of looking at a very narrow portfolio and having a good sense about the nature of their business and products and how the industry seems to be trending - whether their company is proving to be increasing or decreasing in competitiveness, demand, etc. In short, I guess the answer is no - trading would be a sure win otherwise. There are ways to guess, but they're not at all universal laws and are easily misapplied with disastrous results.
the fed loans money to the banks because it helps in the regulation of money's interest rate (forgot the term), so that when there is an economic hiccup like inflation or deflation the Fed can try to minimize it's effect.
Inflation is caused by the Fed's monetary policy.
Not necessarily, inflation can be caused by a myriad of things. Though I agree that government regulation of the economy should be done only in the most extreme of circumstances.
On October 01 2008 04:08 ahrara_ wrote: BAILOUT my ass
After the failure of AIG, the Fed realized that it couldn't go on giving these Ad Hoc bailouts. It had to once and for all fix the housing problem. When you want to fix anything, the best solution is to attack the root cause.
aharara, are you suggesting that we, the citizens of the United States, must attack the Fed?!?!
I, for one, think that this is a ridiculous thing to suggest and the ignorance of your statement appalls me. While it is true that the Fed is a main character in the growing debt of the United States, the upheaval of the Fed would not succeed in erasing said debts. Furthermore, a violent act of aggression that leads to an overthrow is more likely to cause problems than resolve them--not to mention the minuscule chance that an uprising against the current Fed would succeed. In short, advocating terrorism is not very appropriate in this context.
On October 01 2008 04:08 ahrara_ wrote: BAILOUT my ass
After the failure of AIG, the Fed realized that it couldn't go on giving these Ad Hoc bailouts. It had to once and for all fix the housing problem. When you want to fix anything, the best solution is to attack the root cause.
aharara, are you suggesting that we, the citizens of the United States, must attack the Fed?!?!
I, for one, think that this is a ridiculous thing to suggest and the ignorance of your statement appalls me. While it is true that the Fed is a main character in the growing debt of the United States, the upheaval of the Fed would not succeed in erasing said debts. Furthermore, a violent act of aggression that leads to an overthrow is more likely to cause problems than resolve them--not to mention the minuscule chance that an uprising against the current Fed would succeed. In short, advocating terrorism is not very appropriate in this context.
ahahaha it's sad to see people with so much time on their hands, so eager to post and jump in the conversation, but with an utter lack of reading comprehension and without any will to understand the basic framing of the debate.
well I think some of the free-market fundamentalists like jgad have been putting up a really good fight and it bothers the shit out of me I don't know how to really defend the fed. but it bothers me when some dick jumps in screaming about how debt = money and that it's all the fed's fault without really udnerstanding or being able to explain why.
Oh yeah? Then you would be in favor of partially disowning a few thousand wealthy people to save a few thousand starving kids in the Third World I suppose?
No, the lives of non-Americans are insignificant compared to the potential loss of American money.
I am not overreacting, this is my opinion. My main reason for that is that however brutal the downfall, the economy will recover sooner or later. Any rights or freedom you give up are gone forever.
Bubbles happen in capitalist economies. I don't care if you want to subscribe to the political view, the austrian view, or any other view of why, but they happen, and they're going to continue happening.
However, without government involvement they generally won't get nearly as bad. The worst bubbles IMO happen when bad monetary policies, natural cycles (depending on which view you ascribe to) and forced government over-allocation of resources combine into the perfect storm.
I have to agree with those arguing the side of long term rights. I do think that in the short-term, the bailout has a significant chance of doing a lot of good (if it's run right). Though I do think that the idea of a "fair price" is retarded, who gets the set the fair price? But in the long term, I have a lot of fears. Not only will this create and reinforce a massive moral hazard that has been building for decades, the fact that government likes to socialize losses and privatize gains, forcing rational firms to take massive risks, but I mostly fear a possible government nationalization of the entire finance and banking industry (a worst-case scenario, but certainly not impossible), something which would have dire implications for the countries economic future.
In short, are we setting ourselves up for massive crises just like this or even worse in the future if we pass this bill?
Well I actually read the entire OP (over the course of two days) and have nothing to say but thank you, ahrara, for educating me on this situation, which yesterday I knew nothing about.
Ok, have some time to kill before class so let's respond to some of the arguments presented:
I see how you could argue that poor monetary policy by the fed exacerbated the housing bubble. But nobody here has really described the alternative. Without the fed and its central lending/capital reserve controls, who would control money supply? It would be subject to the whims of the market, and that would inevitably lead to even worse inflation. Are you arguing that we return to the gold standard? In that case, what do you do when credit is tight but you can't expand supply? The fed enacts expansionary policy during busts, and contractionary policy during booms. This has been its policy so far since the crisis. Why is this bad policy?
As for moral hazard, if you are going to apply the concept, you really have to get into the nitty gritty. Systems as a whole are not subject to moral hazard, only individuals, leadership specifically. For your moral hazard argument to work, the bailout would have to create a guarantee that if a company screwed up, they would be bailed out by the government. First, imperfect information keeps executives from knowing if the fed will enact future bailouts. Stearns was bailed out, Lehman wasn't. Second, these companies have suffered aplenty because of the crisis. Those that have bailed out have had their shareholders wiped out, and some are slowly being phased out of the market. Executives were replaced. Even with the bailout, investment banks will still have lost billions.
You have to admit that any argument about moral hazard at this point is only speculation. There's no way of predicting just what psychological effect this will have on the financial system. To make such a prediction, you'd have to analyze the leadership of these companies, and that's something neither of us know enough about. In the long run though, I feel that the damage from NOT bailing out would be far worse than the moral hazard we can potentially create. If we deny ourselves any course of action that had the potential of creating moral hazard, that eliminates 90% of government policies. It's a risk we take in making ANY government action.
edit:
1.) I forget who, but someone said a while ago that the housing market will bring itself to the ideal equilibrium. They neglect to mention that this will only happen in the long run. So until that happens, without a bailout, homes will continue foreclosing and credit will remain tight. Without credit, businesses go bankrupt, jobs are lost, and real wages drop. A bailout will fix the problem sooner, and IIRC all he said was that this doesn't fix the underlying problem, to which I respond no shit the underlying problem is that capitalism has booms and busts and that will always happen until the end of time. The fed is essentially enacting a targeted expansionary monetary policy that will revive the credit market and bring us back to normal function. Will there be a bust again in the future? You betya, within your lifetime several times even. Is this going to happen whether or not we do the bailout? Yes. NON-UNIQUE.
2.) The more I think about it, the more I realize how ridiculous it is to blame the fed solely for booms and busts. In any capitalist economy, people will make bad investments. Loose monetary policy will exacerbate the problem, but it is not the sole cause. The primary cause of bubbles is IMPERFECT INFORMATION. It is difficult, if not impossible, to figure out how much growth in an industry is fueled by speculation. It is human nature to respond to trends: If people see housing prices rise, they will naturally invest more in real estate. What the fed DOES help with is to accelerate the recovery from such busts by increasing the money supply.
http://mises.org/story/3131 - That's a fairly good article you might like to read, ahrara. You probably won't agree with it much, but it does articulate the position against the Fed and against the bailout quite well.
All I can say is to read Man, Economy, and State. It's 1400 pages long and I can continue debating for about that long as we reconstruct the text to suit the topics you bring up. To be honest, I find it difficult to say what is best, but for anyone with a traditional economics background, I would highly recommend Rothbard's book - it's a totally different perspective. I was a staunch socialist for years until I ran into Austrian economics. It changed the way I looked at a lot of things.
The new bailout price tag is up to 850 billion dollars. This one loads additional tax cuts and credits on top. I'm looking forward to this failing so the Senate can go back to the drawing board and come up with a 1 trillion dollar plan.
I should be sleeping in 5 minutes, so some short comments on ahara's last post:
1) The dumping of corporate and investor losses who took the risks of enterprise on people who had no say in the matter is not only a potential future moral hazard, it is already a moral hazard, in other words, an immoral act.
2) Consider why liquidity dries up in an economy, what kind of information this sends the market, and how the Federal reserve's actions manipulates this information.
On October 02 2008 08:31 ahrara_ wrote: Ok, have some time to kill before class so let's respond to some of the arguments presented:
I see how you could argue that poor monetary policy by the fed exacerbated the housing bubble. But nobody here has really described the alternative. Without the fed and its central lending/capital reserve controls, who would control money supply? It would be subject to the whims of the market, and that would inevitably lead to even worse inflation. Are you arguing that we return to the gold standard? In that case, what do you do when credit is tight but you can't expand supply? The fed enacts expansionary policy during busts, and contractionary policy during booms. This has been its policy so far since the crisis. Why is this bad policy?
Oh, I don't think that there's a better alternative to the fed, I'm just saying that the fed certainly could've been run better. The problem is that the fed should follow those rules, but they didn't. During the early 2000s, after the dot-com bust, they kept interest rates too high for too long, making this bubble much worse than it might've been. They didn't bother reducing interest rates enough as the economy went into overdrive, and that combined with various other external incentives to invest in housing made this worse than it ever would've been. EDIT: The Austrian perspective: http://mises.org/story/3130
As for moral hazard, if you are going to apply the concept, you really have to get into the nitty gritty. Systems as a whole are not subject to moral hazard, only individuals, leadership specifically. For your moral hazard argument to work, the bailout would have to create a guarantee that if a company screwed up, they would be bailed out by the government. First, imperfect information keeps executives from knowing if the fed will enact future bailouts. Stearns was bailed out, Lehman wasn't. Second, these companies have suffered aplenty because of the crisis. Those that have bailed out have had their shareholders wiped out, and some are slowly being phased out of the market. Executives were replaced. Even with the bailout, investment banks will still have lost billions.
Any bailout doesn't have to create a guarantee of risks being socialized, just increasing the probability is enough to distort risk-management. Even if there's only a 50% or 25% chance of the government taking on all or most , or even just a significant amount, of the costs, people are going to take that into consideration.
And more important than the shareholders getting wiped out is that the creditors are getting all/most of their money back. The moral hazard doesn't just apply tot he companies that failed, it applies to the people that lent those companies money. If the creditors think that there's a 25% the government will guarantee their money, they're going to be willing to take higher risks.
You have to admit that any argument about moral hazard at this point is only speculation. There's no way of predicting just what psychological effect this will have on the financial system. To make such a prediction, you'd have to analyze the leadership of these companies, and that's something neither of us know enough about. In the long run though, I feel that the damage from NOT bailing out would be far worse than the moral hazard we can potentially create. If we deny ourselves any course of action that had the potential of creating moral hazard, that eliminates 90% of government policies. It's a risk we take in making ANY government action.
It may be speculation, but it's speculation based on logical reasoning from some fairly basic and obvious axioms of human behavior. Excuse me if I want to be Austrian for a second. I think the fallacy you're making is that it's not just about the leadership of companies, it's about the creditors than enable that leadership to do things. If the creditors/investors see that the company is doing risky things but making a lot of money, they won't care as much if they know that they're first in line for a government payout when the company goes under.
1.) I forget who, but someone said a while ago that the housing market will bring itself to the ideal equilibrium. They neglect to mention that this will only happen in the long run. So until that happens, without a bailout, homes will continue foreclosing and credit will remain tight. Without credit, businesses go bankrupt, jobs are lost, and real wages drop. A bailout will fix the problem sooner, and IIRC all he said was that this doesn't fix the underlying problem, to which I respond no shit the underlying problem is that capitalism has booms and busts and that will always happen until the end of time. The fed is essentially enacting a targeted expansionary monetary policy that will revive the credit market and bring us back to normal function. Will there be a bust again in the future? You betya, within your lifetime several times even. Is this going to happen whether or not we do the bailout? Yes. NON-UNIQUE.
http://www.forbes.com/opinions/2008/10/01/interbank-lending-ted-oped-cx_ar_1001reynolds.html Lending to consumers and businesses have stayed about even through April and most of September (up to when data is available). Loans on real estate and to banks have fallen slightly, but real estate loans are still significantly higher than a year ago. Through Sep 17th, loans have not dried up, regional banks have just been taking over from the big national banks. The only loans that have dried up significantly are bank to bank loans.
2.) The more I think about it, the more I realize how ridiculous it is to blame the fed solely for booms and busts. In any capitalist economy, people will make bad investments. Loose monetary policy will exacerbate the problem, but it is not the sole cause. The primary cause of bubbles is IMPERFECT INFORMATION. It is difficult, if not impossible, to figure out how much growth in an industry is fueled by speculation. It is human nature to respond to trends: If people see housing prices rise, they will naturally invest more in real estate. What the fed DOES help with is to accelerate the recovery from such busts by increasing the money supply.
The fed also helps makes them much worse by keeping the money supply too high. The fact that housing was overpriced has been no surprise to anyone who has been paying attention in the last 2-3 years, and probably even longer to that to many. I do believe that bubbles are natural due to human nature and outside events, but the fed can do a lot to smooth them out with the right decisions or they can do a lot to exacerbate the effects with the wrong ones.
If you think that increasing the money supply increases the recovery, then the fact that increasing the money supply when no recovery is needed creates too much investment is a pretty logical step (and the right one).
I just wanted to bring up another cause that I've been thinking about that I haven't heard much on. Not a cause for the creation of the bubble, but just another one making it worse. That would be the collapse of the dot-com bubble in 2000-2001. Located during the rise of the housing bubble, people were desperately pulling assets out of dot-coms and must have been looking for someplace to put it that would earn decent returns at (perceived) low risk now that their previous standby was gone. And they fled to housing.
On October 02 2008 08:31 ahrara_ wrote:I see how you could argue that poor monetary policy by the fed exacerbated the housing bubble. But nobody here has really described the alternative. Without the fed and its central lending/capital reserve controls, who would control money supply? It would be subject to the whims of the market, and that would inevitably lead to even worse inflation.
Without the Fed, money would return to a commodity standard, most likely gold standard since gold seems to suit the purpose well and has been chosen through history. The money supply would be directly tied to the amount of gold, which is generally pretty stable. Why do you think this would lead to worse inflation?
In that case, what do you do when credit is tight but you can't expand supply? The fed enacts expansionary policy during busts, and contractionary policy during booms. This has been its policy so far since the crisis. Why is this bad policy?
I'm not positive, but here is my understanding: If credit is tight, it's because real resources are spread thin. Expanding the money supply doesn't increase real resources or real credit. What it means is that resources will be diverted from where they're needed most, to people who are consuming more than they can afford, which creates the credit bubbles which inevitably lead to giant crashes.
2.) The more I think about it, the more I realize how ridiculous it is to blame the fed solely for booms and busts. In any capitalist economy, people will make bad investments.
People will make bad investments, but they need to be made to bear the costs of these bad investments. It is inevitable, but as you say:
Loose monetary policy will exacerbate the problem
.
What the fed DOES help with is to accelerate the recovery from such busts by increasing the money supply.
In what way does increasing the money supply accelerate the recovery (apologies if you answered this before, I didn't read the entire OP)? Increasing the money supply ala the bailout plan is simply a transfer of real money from the taxpayer to a few large financial institutions, leaving other sectors with less resources and less liquidity.
Here's a short article on why these bank failures won't fuck us over as much as people think they will: http://thecurrent.theatlantic.com/archives/2008/09/not-buying-it.php Excerpt: "So what's special about banks? According to what I keep reading, it's that without banks, nobody can borrow, and the economy grinds to a halt.
Well, let's think about that. Banks don't lend their own money; they lend other people's (their depositors' and their stockholders'). Just because the banks disappear doesn't mean the lenders will. Borrowers will still want to borrow and lenders will still want to lend. The only question is whether they'll be able to find each other."
amazing post ahrara_ ! read the whole thing and learned alot from it! Im gonna start informing others now that i'm a bit more knowledgable on the subject. Others should do the same.
On October 02 2008 10:35 CaptainMurphy wrote:In what way does increasing the money supply accelerate the recovery (apologies if you answered this before, I didn't read the entire OP)? Increasing the money supply ala the bailout plan is simply a transfer of real money from the taxpayer to a few large financial institutions, leaving other sectors with less resources and less liquidity.
Money increases in the short term trick firms into thinking that there's more demand that there really is, at least until inflation catches up. Basically, inflation is a transfer from savings into the present, as money in savings depreciates while more money is injected into the current economy. Eventually people catch on and adjust their strategies for it, but it can be used quite effectively as a relatively short-term tool.
Of course, you can't keep increasing inflation forever. Eventually you have to correct for inflation or it's going to become a massive problem. This is done through (shock) deflation, which has the opposite effect, it slows down the current economy and transfers current money into savings as savings appreciate more. That's why generally, these two tools have to be timed correctly, using inflation during downturns and deflation during times of plenty in order to smooth out business cycles.
And yes, the bailout plan is a targeted injection of money, not a more general increase in the supply. And yes, it will probably help prop up a misallocation of resources and slow down the recovery in general, even possibly providing future problems. The question is, are the short-term benefits of cushioning the fall worth it?
On October 02 2008 10:35 CaptainMurphy wrote:In what way does increasing the money supply accelerate the recovery (apologies if you answered this before, I didn't read the entire OP)? Increasing the money supply ala the bailout plan is simply a transfer of real money from the taxpayer to a few large financial institutions, leaving other sectors with less resources and less liquidity.
Money increases in the short term trick firms into thinking that there's more demand that there really is, at least until inflation catches up. Basically, inflation is a transfer from savings into the present, as money in savings depreciates while more money is injected into the current economy. Eventually people catch on and adjust their strategies for it, but it can be used quite effectively as a relatively short-term tool.
I agree that money increases 'trick' firms (to some extent) into thinking there is an increased demand. This causes them to make poor investments based on false assumptions, and as you say the transfer depreciates people's real savings. I don't see how any of that is good for the economy.
Of course, you can't keep increasing inflation forever. Eventually you have to correct for inflation or it's going to become a massive problem. This is done through (shock) deflation, which has the opposite effect, it slows down the current economy and transfers current money into savings as savings appreciate more. That's why generally, these two tools have to be timed correctly, using inflation during downturns and deflation during times of plenty in order to smooth out business cycles.
This shock deflations is always accompanied by a bust or recession, no? Can you give an example of when this has been timed correctly? I don't think this is possible.. I think it really is just a big shell game. You can't increase real wealth or standards of living through monetary policy. IMO there is no perfect timing. Loose monetary policy will always create boom-bust cycles.
On October 01 2008 04:08 ahrara_ wrote: Ok, I started writing this in my blog but I had such a negative reception because of my ahem *indignant* tone and I figured this was important enough that if that's what was costing me readers, I should post it again a little toned down. Frankly though, I am pissed about what's happening. It's something I feel passionate about. I think educating people is one way to keep shit like this from happening again, so here goes:
Fuck the false humility -- I know what I'm talking about. I read boatloads everyday, and I did large quantities of research specifically for this post. I think that will become apparent as you read it. However, I welcome corrections of any kind and I will update the post to reflect changes. Although if you're going to disagree with me outright, you better have some good reasoning.
The News Yesterday The Bailout was rejected in a not-even-close vote in the House, and the stock markets plummetted. The DOW dropped, 800 points (9%), an all-time record, although proportionately less than the 20% it fell on Black Tuesday and 14% on 9/17, because of 9/11.
Deregulation
NOTE: This part is controversial, to be fair. Before you start spouting my left wing propoganda to your friends, read some of the other views on the causes of the current crisis in the thread below. Ignore the idiot posters, but definitely read what jgad has to say, and onemephisto.
WHAT IS DEREGULATION YOU ASK? In short, it's a fetish. Mostly Republicans have it, but Democrats too, under different circumstances. Technically, it's the belief that rules and regulations are bad for economic growth, and that the less regulation the better. This is true, as we'll see, to an extent. Anyway, sometimes the stars are in the right alignment, and Democrats and Republicans will come together in an all-night long orgy of deregulation. This happened in 1999, with the Financial Services Modernization Act, also called the Gramm-Leach-Bliley Act after the people involved in the menage-a-trois that started it all. What this did was fuck you over. What it really did was repeal large portions of the Glass-Steagall act, which if you remember from history, was passed in 1933 to keep the Great Depression from happening again by regulating banking.
Regulations are not necessarily a bad thing. All economies need regulation. In an ideal world, when every investor has very good information about which companies will succeed and which will fail like ... like THE ECONOMY IS FAILING LOLOLOL ... we wouldn't need regulation, because the free market would regulate itself: bad investments won't find investors. But in reality, nobody has perfect information. A good analogy is if you're looking on Craigslist for a female companion, and they turn out to be a guy. You got bad information buddy. You got ripped off. As a result, you just wasted time and resources, and you hurt the economy because you could've used those resources for something productive, like posting on TL.
Regulation can also be a bad thing. More rules means more red tape, means higher costs to make any business transaction. The higher these costs, the less efficiently the economy operates. The key is finding the right balance: how much regulation and in what areas will give us the fastest growth and the most stability.
The FSMA (and many other bills which tbh, I don't know enough about) took it too far. It deregulated areas it shouldn't have. Most importantly, it led to the housing bubble.
The Housing Bubble: Subprime Mortgages and Stuff
First of all, you need to understand supply and demand to really understand the rest of this. Basically, the more there is of something and the easier and cheaper it is to produce, the less something will cost. The more people want something (demand), the higher something will cost. These two forces interact to create an "equilibrium price", which is the price at which a perfectly competitive market will sell that good for.
Houses are really expensive. It would take years, even decades, for most people to save up the money they need to buy a home. For that reason, banks offer a little service they like to call "mortgages". In a mortgage, the bank lends you the money you need to buy a home, on the condition that you will pay it back PLUS a premium of x%. Mortgages are a product, just like a car is a product. In exchange for letting you buy a home sooner, you pay the bank a premium. Ideally, banks would only lend money to people they were sure could pay them back: people who had a clean criminal record, good credit, and a solid income.
Unfortunately, because of deregulation, this didn't always happen. Banks and less reputable financial organizations began lending to the "sub-prime" market. These were people whose credit history meant they had a good chance of defaulting on their loan. One reason banks made these loans was because they figured that housing prices would keep rising forever. If these guys couldn't pay back their loan, we'll just repossess the house and sell it at a profit to someone who can!!!1111 (LOL HOW WRONG THEY WERE).
correction for below paragraph: I said earlier that the banks packaged them into Collateralized Debt Obligations. Wrong. Actually, the secondary mortgage market -- Mae/Mac did this.
After selling a bunch of these mortgages, banks would sell them in the secondary mortgage market to investors. You're probably thinking, "how do you sell debt???" It's simple, just remember that loans are a product. In exchange for paying for the total sum of the loan, the investor gets a portion of the premium the borrowers pay the bank. Because of rising housing costs, these mortgage backed securities were considered good investments, and were quite popular, to the point that they were acquired in the trillions of dollars by investors here and overseas.
The Housing Bubble Deflates
So long as investors kept buying mortgage backed securities, banks continued to make subprime loans. Essentially, they were speculating: gambling that because housing prices would keep rising, they would eventually make a killing. Unfortunately, speculation has the added effect of artificially inflating demand, raising prices. Thus the financial system created a self-fulfilling prophecy: By betting on increased housing prices, they made housing prices increase, creating the housing bubble.
Of course, this couldn't go on forever. Eventually, the rise in housing costs outpaced what consumers were willing to pay. This began in July 19, 2007, when the DOW hit an all-time record high. A month later, the DOW had fallen by 7%. Among the worst hit were mortgage lenders. When stocks become a bear market (it increases in volatility, and is tending toward falling), what naturally happens is that investors put their money on "safer" investments, commodities in particular. Billions were withdrawn from the mortgage industry and as a result, and banks responded by tightening their credit belts and raising interest rates.
The people on the front lines of this crisis were the subprime lenders. Most of them had signed up for Adjustable Rate Mortgages -- meaning that their interest rates were subject to change -- hoping that the inflating housing market would mean that the interest rates would gradually decline in respect to real wages. Because sub-prime mortgage lenders had been hit so hard in the stock market, they needed to raise capital, fast. So they increased interest rates. The reasoning was that even if these people couldn't pay back their loans, the banks would foreclose on them and they could sell the houses again for money. The problem with this logic was supply and demand: Because millions of homes were being foreclosed across the country at THE SAME TIME, supply went up. Because banks were tightening their credit and it was becoming harder to get a mortgage, demand was down. These two factors combined to create rapid deflation in the housing market that is still continuing today.
After a while, as banks hemorrhaged more and more money, it became not just the subprime borrowers who got fucked over, but prime borrowers as well. This happened because banks had to really tighten up credit everywhere to keep themselves afloat. Rising interest rates, combined with declining wages and increased unemployment sent even qualified homeowners into foreclosure, dropping housing prices further. This is an important theme that will appear again and again here: as one sector of the economy blows up, the rest must make up for it.
While we normally think of inflation as an indicator of an economy gone sour, in this case deflation is much worse. The more housing prices fall, the less money banks can get back from their bad loans, and the more investors lose on their mortgage backed securities.
The Next Domino: Wall Street
Until now, I haven't really talked much about what's happening right now with wall street. But this is crucial to understanding the bailout. Everything in the economy relates with what's happening now, including your wages and how long you'll be holding on to your job. People tend to think of wall street as the place rich people go to make more money, but that's just not true. When you deposit money into a bank or certificate of deposit or savings account or mutual fund or hedge fund or whatever, that money doesn't just sit there and magically grow. It's invested. Without investment, if everybody just hoarded the money they had, the economy would cease to grow. Without investment and easy access to credit, you can't start a new business, buy a new tractor for your farm, or buy a new home. Credit and investment is everything.
Bear Stearns was among the first big names to go. Bear Stearns was an investment bank, meaning you didn't just go to a bear stearns office and start a checking account. People put large sums of money into Bear Stearns through equity (shares of stock) or their "wealth management" division that got invested into things like other investment companies, oil, and SUB-PRIME MORTGAGES. Obviously, it's the last that did Bear Sterns in. What was so shocking is how fast it happened. One day Bears was trading at $130 a share, the next they were down to $10 or $20. The reason for the rapid decline was the fact that the executives over at Bear Stearns finally decided to admit just how much money they lost in the two hedge funds they had that specialized in sub-prime mortgages. BOOM! And the floor fell out right under those poor investment bankers. The only way they could even sell their company off was if the fed promised JPMorgan Chase it would cover any losses they suffered from buying out Stearns.
Which brings me to federal bailouts. I don't have the energy to cover every bailout (although I will do more work on Mae and Mac later), but in general, here's the reasoning behind them: When an investor loses lots of money in whatever, that makes them much less likely to invest again in the same sector because 1) they have less money to invest 2) they don't want to take the risk. When someone loses a few billion in mortgage backed securities, they are less likely to invest in mortgages again. The federal reserve feels it has to bail out or at least guarantee the solvency of these companies because if they were to go bankrupt, the consequent losses would have such a powerful damping effect on investment it would exacerbate the housing and credit crisis. I will openly admit that my knowledge of investment banking is limited. I think Last Romantic who is majoring in this shit (POOR GUY) knows more than I do, and if he reads this he can fill you all in more. But here's a quick review of what's going on:
Fannie Mae and Freddie Mac:
onemephisto posted an excellent review of the history of these mortgage giants, and how they contributed to the housing bubble very significantly: + Show Spoiler +
On October 01 2008 05:53 ahrara_ wrote:I'm pretty sure I covered this under Fannie Mae/Freddie Mac, although not with detail. I would argue that deregulation contributed, but that deregulation of mae/mac contributed more. My background knowledge on the two companies is poor, so if you can fill me in that'd be cool. I could add it it to the post under a spoiler, just make sure it's well written.
Well, how I understand it:
Fannie Mae and Freddie Mac were originally both created by the government as government agencies, but were later partially privatized, resulting in them being called Government Sponsored Enterprises, or GSEs. Their purpose was to use their large supply of capital to buy mortgages off of the market, repackage them into securities and other derivatives, and then sell them to other firms.
However, even though they are partially privatized, they still retain a lot of government control and influence. They're regulated by Department of Housing and Urban Development (I think this started in the early 90s) and are chartered by Congress. Since HUD has become their regulator, they have had yearly goals; they're supposed to buy a certain amount of "affordable" loans (read: low-down-payment loans to low-income families). Of course, this sounds good, as everyone wants low-income families to have housing right? However, the fact is that many people simply can't afford housing, and the government mandate for Fannie and Freddie to buy these bad loans has made them viable for banks to offer (especially considering how large Fannie and Freddie are, they buy something like 40% of mortgages created each year). And to encourage even more of these subprime loans, Congress also passed a law giving tax credits to Fannie and Freddie when they bought subprime securities, further increasing the demand for them.
So these government mandates and incentives greatly increased the amount of bad loans the Fannie and Freddie bought. What allowed other banks and investment firms to buy these repackaged securities from F&F was the implicit government guarantee behind them, basically, since the government had so much stake in F&F, people assumed that the government wouldn't let them fail or let their liabilities disappear (which was obviously true), creating a moral hazard situation where people disregard risk because there is no downside to failing.
So government regulation and interference with Fannie Mae and Freddie Mac contributed to the creation of the bubble, and the implicit government guarantee behind the securities allowed it to spread.
Of course, this isn't the only reason, but there are also many other government regulations that have helped create this crisis. The Community Reinvestment Act, which was substantially strengthened in 1995, mandated that banks make a certain amount of loans to low-income families, again creating a misallocation of resources into the housing market. There was also a recent act that reduced the capital gains taxes that people had to pay on homes substantially, but I can't find a source atm.
I'm not clearing investors of all blame, sure, they acted greedy, ignored risks, and took advantage of new derivatives and the market situation. But I'm saying that fundamentally, the problem was with too much government regulation and interference, not too little. More government regulation probably could've delayed this problem, but it would've only been a short-term fix to the underlying problems introduced by the government itself.
tl;dr, Government mandates for affordable housing loans to low-interest families and it's control over the Government Sponsored Enterprises of Fannie Mae and Freddie Mac created the underlying driving force for the creation and subsequent popping of this bubble.
This bailout was absolutely crucial. I told you earlier that Mortgaged Backed Securities were sold by the people who did the lending in the first place, right? Before that happens, the individual debts are sold in the "Secondary Mortgage Market" to Mae/Mac, these two semi-governmental entities created during the Great Depression to make it easier for people to get homes. These two companies serve as "lubricants" of the housing market. They help money flow to where housing demand is highest. For example, if I am a banker and where I live all of a sudden has a huge increase in demand for homes, but I only have a little bit of capital to lend, I can look to Mae/Mac to fully exploit this demand and meet the needs of the market. These guys together were responsible for 70% of American mortgages. SEVENTY FUCKING PERCENT HOLY SHIT.
But Because of Democrat idiocy (SORRY BUT OUR PARTY ISN'T PERFECT, DURRR), these two lenders are practically unregulated. The idea was that this would help them make it easier for people to get a home. What it actually did was to enhance the "moral hazard" situation for home lenders. Because they knew they could just sell off sub-prime mortgages to Mae/Mac, they made more subprime loans, but wiped their hands clean of the risk when they sold it. This is what economists call Moral Hazard: when somebody does something risky but the consequences of that risk is felt by someone else. It encourages unwise behavior like subprime lending. If I press a button that maybe kills YOU, I am more likely to press the button than if it maybe killed ME.
Here's the thing. When Mae/Mac sell those Collateralized Debt Obligations/Mortgage Backed Securities, they guarantee to the investor that they will pay them the full value of the investment even if the homeowner defaults on the mortgage. Uh oh. Moral Hazard anybody? Anyway, if these two companies failed, there would be TRILLIONS of dollars of losses globally. I'll go more into why that's bad specifically for the housing crisis later (although it should be obvious it's a bad thing in general).
Lehman Brothers
Allowed to go bankrupt because fed felt they did not have assets into crucial enough areas of the economy. The reason Bear Stearns was "guaranteed" was because it collapsed so quickly, and for classification reasons was outside of the fed's oversight jurisdiction, so it wasn't possible if Stearns was important to the market.
American International Group
AIG is unique because it is an insurance company that has its fingers everywhere, in every sector of the economy. It specialized in "credit default swaps" which I'm not going to even pretend to understand completely, but basically they guaranteed through insurance a lot of bad debt investments, similar to Fannie Mae and Freddie Mac. It absolutely COULD. NOT. fail. Without going into detail, it was still a profitable organization, but because of procedural issues, it needed more capital. So the fed lent it $85 billion it could use to fulfill those procedural obligations and keep working. As punishment, it took over 80% of the company's equity, or stock.
A nasty situation
Ok, before we go on the last leg of this GINORMOUS post (nobody is reading this whole thing anyway, I know), let's look at just what the situation was like before the $700 billion bailout was announced.
1.) The housing market continues to deflate. As of early September, banks had totaled some $500 billion in writedowns, and that number is growing. Write-downs are only "recognized" reductions in value. The real losses will number in the trillions.
2.) As for wall street, the problem is getting worse. Every time the fed has bailed out a company, the markets rallied, only to fall again the next day as more bad news was reported, and it became clear that the market was not done collapsing in on itself. Part of it has to do with the fact that we're in a bear market -- again, a market where the mood is generally pessimistic, and people are much more willing to sell. Part of it has to do with uncertainty that the next company will get bailed out. Finally, people are actually DISCOURAGED from investing in the companies who need it the most because in every bailout, the fed has wiped out shareholders (they acquired a large portion of the company's equity).
3.) Money is going into safer, but less profitable investments. This is evidenced by the fact that the U.S. Treasury Bill, considered one of the safest possible investments, has lowered its yield to something like .16% from 1.6% earlier this month. The yield drops as more people invest in bills. Just look at what happens to the 1 month bill after 9/12: http://www.ustreas.gov/offices/domestic-finance/debt-management/interest-rate/yield.shtml (note: it rose above 1% today, not sure why :\).
I told you earlier that consumer credit was tight because of the sub-prime market collapse. Now, the credit problem has spread to wall street. Interbank lending interest rates are at about 2% higher than normal. Depending on inflation, that's a 200%-1000% interest in the premium banks pay to borrow money from each other. Inter-bank lending serves to "lubricate" the financial system, just like Fannie Mae and Freddie Mac. Interbank lending directly affects consumer lending. A bank could WANT to give you a loan for a car can't but it might not have enough capital, so it borrows some from another bank. But if that interbank loan is really expensive, your loan will also be more expensive. Over in London, it's up to 7% for overnight loans: http://www.cbc.ca/money/story/2008/09/30/libor-record.html
BAILOUT my ass
After the failure of AIG, the Fed realized that it couldn't go on giving these Ad Hoc bailouts. It had to once and for all fix the housing problem. When you want to fix anything, the best solution is to attack the root cause.
Essentially, the problem is one of liquidity, or liquid capital. Liquidity describes how easily an asset can be transferred into a different kind of asset, and at what cost. Cash is the most liquid asset possible: Anyone will accept cash for anything, except under excess inflation. A car, on the other hand, is less liquid. You have to go through a lot more trouble to trade a car for something else of equal value, and you will always sell for less than its real value. Before the housing crisis, mortgage backed securities retained some degree of liquidity. After the crisis, they became practically illiquid: Because of the risk associated with them and all the negative headlines, nobody would buy them at a reasonable cost. Essentially, these securities still have SOME worth, but because nobody will buy them for a reasonable price, banks may as well have a black hole where these securities are. It is because they lost so much money on these securities that is fueling the credit crisis.
To fix a liquidity problem, you have to create a market for the illiquid assets. You have to help these companies convert mortgage backed securities into capital they can use to help the economy get back on its feet. Treasury Secretary Henry Paulson teamed up with Fed Chairman Ben Bernanke to write up a plan that would allocate $700 billion to create a market for these securities. Meaning, the government would offer to buy up these securities: they would take them off the hands of investment banks and replace them with cash. Then, the government would either hold on to these securities until they mature (when they "put out" in other words) or sell them to someone else. A similar system was set up in the 80's during the Savings and Loan crisis, but not at this scale.
How this will fix the problem should be obvious. By injecting liquidity into the system, banks will be again willing to lend, and credit will be looser. It will become easier to buy a home, but not so easy the bubble will begin to inflate again. Demand for housing goes up, and prices stabilize. The losses will still be there, but at least the problem won't get any worse.
There's some kinda irrelevant and esoteric information about how the fed will determine prices for these securities. If you're really interested, it's in spoilers. But it wasn't fitting into the narrative as a whole so I cut it... + Show Spoiler +
You may have heard the term "reverse auction" thrown about. Basically, that's the method the fed plans to use to determine how much they want to buy up these securities for. Why can't they just pay the market "equilibrium" price, you say? Because there IS no market. Moreover, each mortgage backed security is different from the next: it's impossible to tell exactly how much is worth. It's like trying to buy off a whole bunch of different paintings. Each one is different. You can only guess how much it's "worth". Like art, the fed plans to determine the price through auction, except that because there's only one buyer, it works in reverse: First the fed will announce the kind of security it plans to buy, then the sellers will bid for the lowest price. The fed will also be hiring help people who can "appraise" the value of each security. This doesn't play a significant role in the story... but I figured it's worth discussing and has to do with the arguments for or against why a bailout is good or bad.
So there's a few things about the bailout that are under debate... but it's hard to talking about that without inserting:
My Goddamn Opinion
At this point, there's not much more to tell you that you don't already know. So I reserve my right to soapbox for a few minutes.
1.) The Bailout is not as expensive as $700 billion.
As I said earlier, while most of these securities are losing money as a whole, they still retain SOME value. Not everyone is going to default on their loans. The fed can either hold these mortgages until they mature or sell them off, if the market has recovered. They could end up earning back between $500 billion to nearly breaking even.
2.) It's not a bailout.
The worst thing Bernanke did in selling the bailout was to call it a bailout. Nobody is coming in and arbitrarily injecting capital into companies that don't deserve it. They are doing it in exchange for these securities. What we're doing is trading much needed liquidity into companies that don't have it.
3.) Don't handicap the bailout.
All this talk about limiting executive pay, creating incentives to negotiate, etc. etc. are valuable policies (to an extent). Geez Congress, maybe you should've instituted them BEFORE THE FUCKING CRISIS YOU TARDS. The economic crisis is not happening soon, it is not happening next year, it is happening NOW and you shitholes need to something about it and not, as my esteemed congressman Pete Stark said this morning, "hold a month of hearings". No I'm not kidding, the fucktard actually said that. Then he blamed tax policies for the crisis. Palin is more fucking informed.
Second, it's important to keep in mind that the bailout is voluntary. If companies don't want to sell their mortgage backed securities because the government requires that they have to give up equity or their severance packages, then they won't sell them, handicapping the bailout.
4.) Not bailing out is much worse.
OK, here is the important part. The argument by free-market fundamentalists is two fold. First, they say that the market is undergoing a "correction". Second, they tell you that bailouts create a moral hazard.
First, it's true that the housing market is undergoing a correction. However, you have to keep in mind that most homes are bought through mortgages. A lot of banks are unwilling to lend even to qualified buyers, so the price of housing might even be BENEATH the ideal equilibrium price. So long as credit remains tight, housing prices will continue to fall, banks will keep bleeding money, and the economy goes down a vicious spiral into stagnation and recession.
Second, this is an inappropriate use of the concept. Bankers have already suffered plenty from the housing crisis. They know better than to let this happen again. Moreover, the costs of NOT bailing out are much higher than the cost of creating this minimal moral hazard.
Conclusion: Why you care and don't even know it
I'm really running out of steam... I don't feel like I could do a good job if I wrote this right now. I'll save the conclusion for another day, if I get around to it. But the gist is there. As more questions come up I'll try to fill them in here i guess.
Inside joke for debaters I hope the Bailout/Nuke War disad I ran all weekend were as flaky as judges kept telling me they were.
Fair question before committing to reading this rediculously large text: what's your background? (i'm scrolling and see generous use caps locks and "fucking retards" etc .... rant = no thx)
I know what I'm talking about. I read boatloads everyday
On October 01 2008 04:08 ahrara_ wrote: Ok, I started writing this in my blog but I had such a negative reception because of my ahem *indignant* tone and I figured this was important enough that if that's what was costing me readers, I should post it again a little toned down. Frankly though, I am pissed about what's happening. It's something I feel passionate about. I think educating people is one way to keep shit like this from happening again, so here goes:
Fuck the false humility -- I know what I'm talking about. I read boatloads everyday, and I did large quantities of research specifically for this post. I think that will become apparent as you read it. However, I welcome corrections of any kind and I will update the post to reflect changes. Although if you're going to disagree with me outright, you better have some good reasoning.
The News Yesterday The Bailout was rejected in a not-even-close vote in the House, and the stock markets plummetted. The DOW dropped, 800 points (9%), an all-time record, although proportionately less than the 20% it fell on Black Tuesday and 14% on 9/17, because of 9/11.
Deregulation
NOTE: This part is controversial, to be fair. Before you start spouting my left wing propoganda to your friends, read some of the other views on the causes of the current crisis in the thread below. Ignore the idiot posters, but definitely read what jgad has to say, and onemephisto.
WHAT IS DEREGULATION YOU ASK? In short, it's a fetish. Mostly Republicans have it, but Democrats too, under different circumstances. Technically, it's the belief that rules and regulations are bad for economic growth, and that the less regulation the better. This is true, as we'll see, to an extent. Anyway, sometimes the stars are in the right alignment, and Democrats and Republicans will come together in an all-night long orgy of deregulation. This happened in 1999, with the Financial Services Modernization Act, also called the Gramm-Leach-Bliley Act after the people involved in the menage-a-trois that started it all. What this did was fuck you over. What it really did was repeal large portions of the Glass-Steagall act, which if you remember from history, was passed in 1933 to keep the Great Depression from happening again by regulating banking.
Regulations are not necessarily a bad thing. All economies need regulation. In an ideal world, when every investor has very good information about which companies will succeed and which will fail like ... like THE ECONOMY IS FAILING LOLOLOL ... we wouldn't need regulation, because the free market would regulate itself: bad investments won't find investors. But in reality, nobody has perfect information. A good analogy is if you're looking on Craigslist for a female companion, and they turn out to be a guy. You got bad information buddy. You got ripped off. As a result, you just wasted time and resources, and you hurt the economy because you could've used those resources for something productive, like posting on TL.
Regulation can also be a bad thing. More rules means more red tape, means higher costs to make any business transaction. The higher these costs, the less efficiently the economy operates. The key is finding the right balance: how much regulation and in what areas will give us the fastest growth and the most stability.
The FSMA (and many other bills which tbh, I don't know enough about) took it too far. It deregulated areas it shouldn't have. Most importantly, it led to the housing bubble.
The Housing Bubble: Subprime Mortgages and Stuff
First of all, you need to understand supply and demand to really understand the rest of this. Basically, the more there is of something and the easier and cheaper it is to produce, the less something will cost. The more people want something (demand), the higher something will cost. These two forces interact to create an "equilibrium price", which is the price at which a perfectly competitive market will sell that good for.
Houses are really expensive. It would take years, even decades, for most people to save up the money they need to buy a home. For that reason, banks offer a little service they like to call "mortgages". In a mortgage, the bank lends you the money you need to buy a home, on the condition that you will pay it back PLUS a premium of x%. Mortgages are a product, just like a car is a product. In exchange for letting you buy a home sooner, you pay the bank a premium. Ideally, banks would only lend money to people they were sure could pay them back: people who had a clean criminal record, good credit, and a solid income.
Unfortunately, because of deregulation, this didn't always happen. Banks and less reputable financial organizations began lending to the "sub-prime" market. These were people whose credit history meant they had a good chance of defaulting on their loan. One reason banks made these loans was because they figured that housing prices would keep rising forever. If these guys couldn't pay back their loan, we'll just repossess the house and sell it at a profit to someone who can!!!1111 (LOL HOW WRONG THEY WERE).
correction for below paragraph: I said earlier that the banks packaged them into Collateralized Debt Obligations. Wrong. Actually, the secondary mortgage market -- Mae/Mac did this.
After selling a bunch of these mortgages, banks would sell them in the secondary mortgage market to investors. You're probably thinking, "how do you sell debt???" It's simple, just remember that loans are a product. In exchange for paying for the total sum of the loan, the investor gets a portion of the premium the borrowers pay the bank. Because of rising housing costs, these mortgage backed securities were considered good investments, and were quite popular, to the point that they were acquired in the trillions of dollars by investors here and overseas.
The Housing Bubble Deflates
So long as investors kept buying mortgage backed securities, banks continued to make subprime loans. Essentially, they were speculating: gambling that because housing prices would keep rising, they would eventually make a killing. Unfortunately, speculation has the added effect of artificially inflating demand, raising prices. Thus the financial system created a self-fulfilling prophecy: By betting on increased housing prices, they made housing prices increase, creating the housing bubble.
Of course, this couldn't go on forever. Eventually, the rise in housing costs outpaced what consumers were willing to pay. This began in July 19, 2007, when the DOW hit an all-time record high. A month later, the DOW had fallen by 7%. Among the worst hit were mortgage lenders. When stocks become a bear market (it increases in volatility, and is tending toward falling), what naturally happens is that investors put their money on "safer" investments, commodities in particular. Billions were withdrawn from the mortgage industry and as a result, and banks responded by tightening their credit belts and raising interest rates.
The people on the front lines of this crisis were the subprime lenders. Most of them had signed up for Adjustable Rate Mortgages -- meaning that their interest rates were subject to change -- hoping that the inflating housing market would mean that the interest rates would gradually decline in respect to real wages. Because sub-prime mortgage lenders had been hit so hard in the stock market, they needed to raise capital, fast. So they increased interest rates. The reasoning was that even if these people couldn't pay back their loans, the banks would foreclose on them and they could sell the houses again for money. The problem with this logic was supply and demand: Because millions of homes were being foreclosed across the country at THE SAME TIME, supply went up. Because banks were tightening their credit and it was becoming harder to get a mortgage, demand was down. These two factors combined to create rapid deflation in the housing market that is still continuing today.
After a while, as banks hemorrhaged more and more money, it became not just the subprime borrowers who got fucked over, but prime borrowers as well. This happened because banks had to really tighten up credit everywhere to keep themselves afloat. Rising interest rates, combined with declining wages and increased unemployment sent even qualified homeowners into foreclosure, dropping housing prices further. This is an important theme that will appear again and again here: as one sector of the economy blows up, the rest must make up for it.
While we normally think of inflation as an indicator of an economy gone sour, in this case deflation is much worse. The more housing prices fall, the less money banks can get back from their bad loans, and the more investors lose on their mortgage backed securities.
The Next Domino: Wall Street
Until now, I haven't really talked much about what's happening right now with wall street. But this is crucial to understanding the bailout. Everything in the economy relates with what's happening now, including your wages and how long you'll be holding on to your job. People tend to think of wall street as the place rich people go to make more money, but that's just not true. When you deposit money into a bank or certificate of deposit or savings account or mutual fund or hedge fund or whatever, that money doesn't just sit there and magically grow. It's invested. Without investment, if everybody just hoarded the money they had, the economy would cease to grow. Without investment and easy access to credit, you can't start a new business, buy a new tractor for your farm, or buy a new home. Credit and investment is everything.
Bear Stearns was among the first big names to go. Bear Stearns was an investment bank, meaning you didn't just go to a bear stearns office and start a checking account. People put large sums of money into Bear Stearns through equity (shares of stock) or their "wealth management" division that got invested into things like other investment companies, oil, and SUB-PRIME MORTGAGES. Obviously, it's the last that did Bear Sterns in. What was so shocking is how fast it happened. One day Bears was trading at $130 a share, the next they were down to $10 or $20. The reason for the rapid decline was the fact that the executives over at Bear Stearns finally decided to admit just how much money they lost in the two hedge funds they had that specialized in sub-prime mortgages. BOOM! And the floor fell out right under those poor investment bankers. The only way they could even sell their company off was if the fed promised JPMorgan Chase it would cover any losses they suffered from buying out Stearns.
Which brings me to federal bailouts. I don't have the energy to cover every bailout (although I will do more work on Mae and Mac later), but in general, here's the reasoning behind them: When an investor loses lots of money in whatever, that makes them much less likely to invest again in the same sector because 1) they have less money to invest 2) they don't want to take the risk. When someone loses a few billion in mortgage backed securities, they are less likely to invest in mortgages again. The federal reserve feels it has to bail out or at least guarantee the solvency of these companies because if they were to go bankrupt, the consequent losses would have such a powerful damping effect on investment it would exacerbate the housing and credit crisis. I will openly admit that my knowledge of investment banking is limited. I think Last Romantic who is majoring in this shit (POOR GUY) knows more than I do, and if he reads this he can fill you all in more. But here's a quick review of what's going on:
Fannie Mae and Freddie Mac:
onemephisto posted an excellent review of the history of these mortgage giants, and how they contributed to the housing bubble very significantly: + Show Spoiler +
On October 01 2008 05:53 ahrara_ wrote:I'm pretty sure I covered this under Fannie Mae/Freddie Mac, although not with detail. I would argue that deregulation contributed, but that deregulation of mae/mac contributed more. My background knowledge on the two companies is poor, so if you can fill me in that'd be cool. I could add it it to the post under a spoiler, just make sure it's well written.
Well, how I understand it:
Fannie Mae and Freddie Mac were originally both created by the government as government agencies, but were later partially privatized, resulting in them being called Government Sponsored Enterprises, or GSEs. Their purpose was to use their large supply of capital to buy mortgages off of the market, repackage them into securities and other derivatives, and then sell them to other firms.
However, even though they are partially privatized, they still retain a lot of government control and influence. They're regulated by Department of Housing and Urban Development (I think this started in the early 90s) and are chartered by Congress. Since HUD has become their regulator, they have had yearly goals; they're supposed to buy a certain amount of "affordable" loans (read: low-down-payment loans to low-income families). Of course, this sounds good, as everyone wants low-income families to have housing right? However, the fact is that many people simply can't afford housing, and the government mandate for Fannie and Freddie to buy these bad loans has made them viable for banks to offer (especially considering how large Fannie and Freddie are, they buy something like 40% of mortgages created each year). And to encourage even more of these subprime loans, Congress also passed a law giving tax credits to Fannie and Freddie when they bought subprime securities, further increasing the demand for them.
So these government mandates and incentives greatly increased the amount of bad loans the Fannie and Freddie bought. What allowed other banks and investment firms to buy these repackaged securities from F&F was the implicit government guarantee behind them, basically, since the government had so much stake in F&F, people assumed that the government wouldn't let them fail or let their liabilities disappear (which was obviously true), creating a moral hazard situation where people disregard risk because there is no downside to failing.
So government regulation and interference with Fannie Mae and Freddie Mac contributed to the creation of the bubble, and the implicit government guarantee behind the securities allowed it to spread.
Of course, this isn't the only reason, but there are also many other government regulations that have helped create this crisis. The Community Reinvestment Act, which was substantially strengthened in 1995, mandated that banks make a certain amount of loans to low-income families, again creating a misallocation of resources into the housing market. There was also a recent act that reduced the capital gains taxes that people had to pay on homes substantially, but I can't find a source atm.
I'm not clearing investors of all blame, sure, they acted greedy, ignored risks, and took advantage of new derivatives and the market situation. But I'm saying that fundamentally, the problem was with too much government regulation and interference, not too little. More government regulation probably could've delayed this problem, but it would've only been a short-term fix to the underlying problems introduced by the government itself.
tl;dr, Government mandates for affordable housing loans to low-interest families and it's control over the Government Sponsored Enterprises of Fannie Mae and Freddie Mac created the underlying driving force for the creation and subsequent popping of this bubble.
This bailout was absolutely crucial. I told you earlier that Mortgaged Backed Securities were sold by the people who did the lending in the first place, right? Before that happens, the individual debts are sold in the "Secondary Mortgage Market" to Mae/Mac, these two semi-governmental entities created during the Great Depression to make it easier for people to get homes. These two companies serve as "lubricants" of the housing market. They help money flow to where housing demand is highest. For example, if I am a banker and where I live all of a sudden has a huge increase in demand for homes, but I only have a little bit of capital to lend, I can look to Mae/Mac to fully exploit this demand and meet the needs of the market. These guys together were responsible for 70% of American mortgages. SEVENTY FUCKING PERCENT HOLY SHIT.
But Because of Democrat idiocy (SORRY BUT OUR PARTY ISN'T PERFECT, DURRR), these two lenders are practically unregulated. The idea was that this would help them make it easier for people to get a home. What it actually did was to enhance the "moral hazard" situation for home lenders. Because they knew they could just sell off sub-prime mortgages to Mae/Mac, they made more subprime loans, but wiped their hands clean of the risk when they sold it. This is what economists call Moral Hazard: when somebody does something risky but the consequences of that risk is felt by someone else. It encourages unwise behavior like subprime lending. If I press a button that maybe kills YOU, I am more likely to press the button than if it maybe killed ME.
Here's the thing. When Mae/Mac sell those Collateralized Debt Obligations/Mortgage Backed Securities, they guarantee to the investor that they will pay them the full value of the investment even if the homeowner defaults on the mortgage. Uh oh. Moral Hazard anybody? Anyway, if these two companies failed, there would be TRILLIONS of dollars of losses globally. I'll go more into why that's bad specifically for the housing crisis later (although it should be obvious it's a bad thing in general).
Lehman Brothers
Allowed to go bankrupt because fed felt they did not have assets into crucial enough areas of the economy. The reason Bear Stearns was "guaranteed" was because it collapsed so quickly, and for classification reasons was outside of the fed's oversight jurisdiction, so it wasn't possible if Stearns was important to the market.
American International Group
AIG is unique because it is an insurance company that has its fingers everywhere, in every sector of the economy. It specialized in "credit default swaps" which I'm not going to even pretend to understand completely, but basically they guaranteed through insurance a lot of bad debt investments, similar to Fannie Mae and Freddie Mac. It absolutely COULD. NOT. fail. Without going into detail, it was still a profitable organization, but because of procedural issues, it needed more capital. So the fed lent it $85 billion it could use to fulfill those procedural obligations and keep working. As punishment, it took over 80% of the company's equity, or stock.
A nasty situation
Ok, before we go on the last leg of this GINORMOUS post (nobody is reading this whole thing anyway, I know), let's look at just what the situation was like before the $700 billion bailout was announced.
1.) The housing market continues to deflate. As of early September, banks had totaled some $500 billion in writedowns, and that number is growing. Write-downs are only "recognized" reductions in value. The real losses will number in the trillions.
2.) As for wall street, the problem is getting worse. Every time the fed has bailed out a company, the markets rallied, only to fall again the next day as more bad news was reported, and it became clear that the market was not done collapsing in on itself. Part of it has to do with the fact that we're in a bear market -- again, a market where the mood is generally pessimistic, and people are much more willing to sell. Part of it has to do with uncertainty that the next company will get bailed out. Finally, people are actually DISCOURAGED from investing in the companies who need it the most because in every bailout, the fed has wiped out shareholders (they acquired a large portion of the company's equity).
3.) Money is going into safer, but less profitable investments. This is evidenced by the fact that the U.S. Treasury Bill, considered one of the safest possible investments, has lowered its yield to something like .16% from 1.6% earlier this month. The yield drops as more people invest in bills. Just look at what happens to the 1 month bill after 9/12: http://www.ustreas.gov/offices/domestic-finance/debt-management/interest-rate/yield.shtml (note: it rose above 1% today, not sure why :\).
I told you earlier that consumer credit was tight because of the sub-prime market collapse. Now, the credit problem has spread to wall street. Interbank lending interest rates are at about 2% higher than normal. Depending on inflation, that's a 200%-1000% interest in the premium banks pay to borrow money from each other. Inter-bank lending serves to "lubricate" the financial system, just like Fannie Mae and Freddie Mac. Interbank lending directly affects consumer lending. A bank could WANT to give you a loan for a car can't but it might not have enough capital, so it borrows some from another bank. But if that interbank loan is really expensive, your loan will also be more expensive. Over in London, it's up to 7% for overnight loans: http://www.cbc.ca/money/story/2008/09/30/libor-record.html
BAILOUT my ass
After the failure of AIG, the Fed realized that it couldn't go on giving these Ad Hoc bailouts. It had to once and for all fix the housing problem. When you want to fix anything, the best solution is to attack the root cause.
Essentially, the problem is one of liquidity, or liquid capital. Liquidity describes how easily an asset can be transferred into a different kind of asset, and at what cost. Cash is the most liquid asset possible: Anyone will accept cash for anything, except under excess inflation. A car, on the other hand, is less liquid. You have to go through a lot more trouble to trade a car for something else of equal value, and you will always sell for less than its real value. Before the housing crisis, mortgage backed securities retained some degree of liquidity. After the crisis, they became practically illiquid: Because of the risk associated with them and all the negative headlines, nobody would buy them at a reasonable cost. Essentially, these securities still have SOME worth, but because nobody will buy them for a reasonable price, banks may as well have a black hole where these securities are. It is because they lost so much money on these securities that is fueling the credit crisis.
To fix a liquidity problem, you have to create a market for the illiquid assets. You have to help these companies convert mortgage backed securities into capital they can use to help the economy get back on its feet. Treasury Secretary Henry Paulson teamed up with Fed Chairman Ben Bernanke to write up a plan that would allocate $700 billion to create a market for these securities. Meaning, the government would offer to buy up these securities: they would take them off the hands of investment banks and replace them with cash. Then, the government would either hold on to these securities until they mature (when they "put out" in other words) or sell them to someone else. A similar system was set up in the 80's during the Savings and Loan crisis, but not at this scale.
How this will fix the problem should be obvious. By injecting liquidity into the system, banks will be again willing to lend, and credit will be looser. It will become easier to buy a home, but not so easy the bubble will begin to inflate again. Demand for housing goes up, and prices stabilize. The losses will still be there, but at least the problem won't get any worse.
There's some kinda irrelevant and esoteric information about how the fed will determine prices for these securities. If you're really interested, it's in spoilers. But it wasn't fitting into the narrative as a whole so I cut it... + Show Spoiler +
You may have heard the term "reverse auction" thrown about. Basically, that's the method the fed plans to use to determine how much they want to buy up these securities for. Why can't they just pay the market "equilibrium" price, you say? Because there IS no market. Moreover, each mortgage backed security is different from the next: it's impossible to tell exactly how much is worth. It's like trying to buy off a whole bunch of different paintings. Each one is different. You can only guess how much it's "worth". Like art, the fed plans to determine the price through auction, except that because there's only one buyer, it works in reverse: First the fed will announce the kind of security it plans to buy, then the sellers will bid for the lowest price. The fed will also be hiring help people who can "appraise" the value of each security. This doesn't play a significant role in the story... but I figured it's worth discussing and has to do with the arguments for or against why a bailout is good or bad.
So there's a few things about the bailout that are under debate... but it's hard to talking about that without inserting:
My Goddamn Opinion
At this point, there's not much more to tell you that you don't already know. So I reserve my right to soapbox for a few minutes.
1.) The Bailout is not as expensive as $700 billion.
As I said earlier, while most of these securities are losing money as a whole, they still retain SOME value. Not everyone is going to default on their loans. The fed can either hold these mortgages until they mature or sell them off, if the market has recovered. They could end up earning back between $500 billion to nearly breaking even.
2.) It's not a bailout.
The worst thing Bernanke did in selling the bailout was to call it a bailout. Nobody is coming in and arbitrarily injecting capital into companies that don't deserve it. They are doing it in exchange for these securities. What we're doing is trading much needed liquidity into companies that don't have it.
3.) Don't handicap the bailout.
All this talk about limiting executive pay, creating incentives to negotiate, etc. etc. are valuable policies (to an extent). Geez Congress, maybe you should've instituted them BEFORE THE FUCKING CRISIS YOU TARDS. The economic crisis is not happening soon, it is not happening next year, it is happening NOW and you shitholes need to something about it and not, as my esteemed congressman Pete Stark said this morning, "hold a month of hearings". No I'm not kidding, the fucktard actually said that. Then he blamed tax policies for the crisis. Palin is more fucking informed.
Second, it's important to keep in mind that the bailout is voluntary. If companies don't want to sell their mortgage backed securities because the government requires that they have to give up equity or their severance packages, then they won't sell them, handicapping the bailout.
4.) Not bailing out is much worse.
OK, here is the important part. The argument by free-market fundamentalists is two fold. First, they say that the market is undergoing a "correction". Second, they tell you that bailouts create a moral hazard.
First, it's true that the housing market is undergoing a correction. However, you have to keep in mind that most homes are bought through mortgages. A lot of banks are unwilling to lend even to qualified buyers, so the price of housing might even be BENEATH the ideal equilibrium price. So long as credit remains tight, housing prices will continue to fall, banks will keep bleeding money, and the economy goes down a vicious spiral into stagnation and recession.
Second, this is an inappropriate use of the concept. Bankers have already suffered plenty from the housing crisis. They know better than to let this happen again. Moreover, the costs of NOT bailing out are much higher than the cost of creating this minimal moral hazard.
Conclusion: Why you care and don't even know it
I'm really running out of steam... I don't feel like I could do a good job if I wrote this right now. I'll save the conclusion for another day, if I get around to it. But the gist is there. As more questions come up I'll try to fill them in here i guess.
Inside joke for debaters I hope the Bailout/Nuke War disad I ran all weekend were as flaky as judges kept telling me they were.
Fair question before committing to reading this rediculously large text: what's your background? (i'm scrolling and see generous use caps locks and "fucking retards" etc .... rant = no thx)
don't believe a word of it. got it all from places like brookings, the economist, the new york times, CFR, Cato, etc. etc.
tricked you didn't I.
Seriously, no I don't have the fucking credentials. I never claimed to be an expert as has been made obvious by the couple of times posters in here have stumped me. What I've posted is common knowledge to those who have been following the crisis. But I have an interest in following what's going on. If you see a factual error, please correct me. If you don't, you're obviously even worse informed than I am, so just deal.
edit:
After some reflection, I think it's fair to criticize my credentials, and that it probably sounds arrogant to say I'm qualified just because "I read a lot." So let me qualify that statement more.
1.) I have taken Macroecon, but most of my understanding is "grounds up" learning. That means I picked it up in bits and pieces through my reading, and used my macroecon text to weave it all together. That leaves holes in my knowledge in places that aren't covered as often in my reading. Obviously in the discussion of the fed is one example.
2.) I'm on the debate team at my school (a decent one I might add) and about 2-3 hours of my day consists of reading from the Economist, NYT, and a selection of 20-30 think tanks from every side of the spectrum. I've been doing this for a few months, and while admittedly there are still holes in my knowledge, my understanding of world events is pretty comprehensive.
3.) It's frustrating being accused of ignorance by people who have neither made the effort to show how I am factually incorrect. You may disagree with me ideologically, but except for the parts that's clearly MY OPINION, you never tell me where I'm wrong. I made a good-faith effort to keep the facts straight and to clearly distinguish my ideology.
On October 01 2008 04:08 ahrara_ wrote: Ok, I started writing this in my blog but I had such a negative reception because of my ahem *indignant* tone and I figured this was important enough that if that's what was costing me readers, I should post it again a little toned down. Frankly though, I am pissed about what's happening. It's something I feel passionate about. I think educating people is one way to keep shit like this from happening again, so here goes:
Fuck the false humility -- I know what I'm talking about. I read boatloads everyday, and I did large quantities of research specifically for this post. I think that will become apparent as you read it. However, I welcome corrections of any kind and I will update the post to reflect changes. Although if you're going to disagree with me outright, you better have some good reasoning.
The News Yesterday The Bailout was rejected in a not-even-close vote in the House, and the stock markets plummetted. The DOW dropped, 800 points (9%), an all-time record, although proportionately less than the 20% it fell on Black Tuesday and 14% on 9/17, because of 9/11.
Deregulation
NOTE: This part is controversial, to be fair. Before you start spouting my left wing propoganda to your friends, read some of the other views on the causes of the current crisis in the thread below. Ignore the idiot posters, but definitely read what jgad has to say, and onemephisto.
WHAT IS DEREGULATION YOU ASK? In short, it's a fetish. Mostly Republicans have it, but Democrats too, under different circumstances. Technically, it's the belief that rules and regulations are bad for economic growth, and that the less regulation the better. This is true, as we'll see, to an extent. Anyway, sometimes the stars are in the right alignment, and Democrats and Republicans will come together in an all-night long orgy of deregulation. This happened in 1999, with the Financial Services Modernization Act, also called the Gramm-Leach-Bliley Act after the people involved in the menage-a-trois that started it all. What this did was fuck you over. What it really did was repeal large portions of the Glass-Steagall act, which if you remember from history, was passed in 1933 to keep the Great Depression from happening again by regulating banking.
Regulations are not necessarily a bad thing. All economies need regulation. In an ideal world, when every investor has very good information about which companies will succeed and which will fail like ... like THE ECONOMY IS FAILING LOLOLOL ... we wouldn't need regulation, because the free market would regulate itself: bad investments won't find investors. But in reality, nobody has perfect information. A good analogy is if you're looking on Craigslist for a female companion, and they turn out to be a guy. You got bad information buddy. You got ripped off. As a result, you just wasted time and resources, and you hurt the economy because you could've used those resources for something productive, like posting on TL.
Regulation can also be a bad thing. More rules means more red tape, means higher costs to make any business transaction. The higher these costs, the less efficiently the economy operates. The key is finding the right balance: how much regulation and in what areas will give us the fastest growth and the most stability.
The FSMA (and many other bills which tbh, I don't know enough about) took it too far. It deregulated areas it shouldn't have. Most importantly, it led to the housing bubble.
The Housing Bubble: Subprime Mortgages and Stuff
First of all, you need to understand supply and demand to really understand the rest of this. Basically, the more there is of something and the easier and cheaper it is to produce, the less something will cost. The more people want something (demand), the higher something will cost. These two forces interact to create an "equilibrium price", which is the price at which a perfectly competitive market will sell that good for.
Houses are really expensive. It would take years, even decades, for most people to save up the money they need to buy a home. For that reason, banks offer a little service they like to call "mortgages". In a mortgage, the bank lends you the money you need to buy a home, on the condition that you will pay it back PLUS a premium of x%. Mortgages are a product, just like a car is a product. In exchange for letting you buy a home sooner, you pay the bank a premium. Ideally, banks would only lend money to people they were sure could pay them back: people who had a clean criminal record, good credit, and a solid income.
Unfortunately, because of deregulation, this didn't always happen. Banks and less reputable financial organizations began lending to the "sub-prime" market. These were people whose credit history meant they had a good chance of defaulting on their loan. One reason banks made these loans was because they figured that housing prices would keep rising forever. If these guys couldn't pay back their loan, we'll just repossess the house and sell it at a profit to someone who can!!!1111 (LOL HOW WRONG THEY WERE).
correction for below paragraph: I said earlier that the banks packaged them into Collateralized Debt Obligations. Wrong. Actually, the secondary mortgage market -- Mae/Mac did this.
After selling a bunch of these mortgages, banks would sell them in the secondary mortgage market to investors. You're probably thinking, "how do you sell debt???" It's simple, just remember that loans are a product. In exchange for paying for the total sum of the loan, the investor gets a portion of the premium the borrowers pay the bank. Because of rising housing costs, these mortgage backed securities were considered good investments, and were quite popular, to the point that they were acquired in the trillions of dollars by investors here and overseas.
The Housing Bubble Deflates
So long as investors kept buying mortgage backed securities, banks continued to make subprime loans. Essentially, they were speculating: gambling that because housing prices would keep rising, they would eventually make a killing. Unfortunately, speculation has the added effect of artificially inflating demand, raising prices. Thus the financial system created a self-fulfilling prophecy: By betting on increased housing prices, they made housing prices increase, creating the housing bubble.
Of course, this couldn't go on forever. Eventually, the rise in housing costs outpaced what consumers were willing to pay. This began in July 19, 2007, when the DOW hit an all-time record high. A month later, the DOW had fallen by 7%. Among the worst hit were mortgage lenders. When stocks become a bear market (it increases in volatility, and is tending toward falling), what naturally happens is that investors put their money on "safer" investments, commodities in particular. Billions were withdrawn from the mortgage industry and as a result, and banks responded by tightening their credit belts and raising interest rates.
The people on the front lines of this crisis were the subprime lenders. Most of them had signed up for Adjustable Rate Mortgages -- meaning that their interest rates were subject to change -- hoping that the inflating housing market would mean that the interest rates would gradually decline in respect to real wages. Because sub-prime mortgage lenders had been hit so hard in the stock market, they needed to raise capital, fast. So they increased interest rates. The reasoning was that even if these people couldn't pay back their loans, the banks would foreclose on them and they could sell the houses again for money. The problem with this logic was supply and demand: Because millions of homes were being foreclosed across the country at THE SAME TIME, supply went up. Because banks were tightening their credit and it was becoming harder to get a mortgage, demand was down. These two factors combined to create rapid deflation in the housing market that is still continuing today.
After a while, as banks hemorrhaged more and more money, it became not just the subprime borrowers who got fucked over, but prime borrowers as well. This happened because banks had to really tighten up credit everywhere to keep themselves afloat. Rising interest rates, combined with declining wages and increased unemployment sent even qualified homeowners into foreclosure, dropping housing prices further. This is an important theme that will appear again and again here: as one sector of the economy blows up, the rest must make up for it.
While we normally think of inflation as an indicator of an economy gone sour, in this case deflation is much worse. The more housing prices fall, the less money banks can get back from their bad loans, and the more investors lose on their mortgage backed securities.
The Next Domino: Wall Street
Until now, I haven't really talked much about what's happening right now with wall street. But this is crucial to understanding the bailout. Everything in the economy relates with what's happening now, including your wages and how long you'll be holding on to your job. People tend to think of wall street as the place rich people go to make more money, but that's just not true. When you deposit money into a bank or certificate of deposit or savings account or mutual fund or hedge fund or whatever, that money doesn't just sit there and magically grow. It's invested. Without investment, if everybody just hoarded the money they had, the economy would cease to grow. Without investment and easy access to credit, you can't start a new business, buy a new tractor for your farm, or buy a new home. Credit and investment is everything.
Bear Stearns was among the first big names to go. Bear Stearns was an investment bank, meaning you didn't just go to a bear stearns office and start a checking account. People put large sums of money into Bear Stearns through equity (shares of stock) or their "wealth management" division that got invested into things like other investment companies, oil, and SUB-PRIME MORTGAGES. Obviously, it's the last that did Bear Sterns in. What was so shocking is how fast it happened. One day Bears was trading at $130 a share, the next they were down to $10 or $20. The reason for the rapid decline was the fact that the executives over at Bear Stearns finally decided to admit just how much money they lost in the two hedge funds they had that specialized in sub-prime mortgages. BOOM! And the floor fell out right under those poor investment bankers. The only way they could even sell their company off was if the fed promised JPMorgan Chase it would cover any losses they suffered from buying out Stearns.
Which brings me to federal bailouts. I don't have the energy to cover every bailout (although I will do more work on Mae and Mac later), but in general, here's the reasoning behind them: When an investor loses lots of money in whatever, that makes them much less likely to invest again in the same sector because 1) they have less money to invest 2) they don't want to take the risk. When someone loses a few billion in mortgage backed securities, they are less likely to invest in mortgages again. The federal reserve feels it has to bail out or at least guarantee the solvency of these companies because if they were to go bankrupt, the consequent losses would have such a powerful damping effect on investment it would exacerbate the housing and credit crisis. I will openly admit that my knowledge of investment banking is limited. I think Last Romantic who is majoring in this shit (POOR GUY) knows more than I do, and if he reads this he can fill you all in more. But here's a quick review of what's going on:
Fannie Mae and Freddie Mac:
onemephisto posted an excellent review of the history of these mortgage giants, and how they contributed to the housing bubble very significantly: + Show Spoiler +
On October 01 2008 05:53 ahrara_ wrote:I'm pretty sure I covered this under Fannie Mae/Freddie Mac, although not with detail. I would argue that deregulation contributed, but that deregulation of mae/mac contributed more. My background knowledge on the two companies is poor, so if you can fill me in that'd be cool. I could add it it to the post under a spoiler, just make sure it's well written.
Well, how I understand it:
Fannie Mae and Freddie Mac were originally both created by the government as government agencies, but were later partially privatized, resulting in them being called Government Sponsored Enterprises, or GSEs. Their purpose was to use their large supply of capital to buy mortgages off of the market, repackage them into securities and other derivatives, and then sell them to other firms.
However, even though they are partially privatized, they still retain a lot of government control and influence. They're regulated by Department of Housing and Urban Development (I think this started in the early 90s) and are chartered by Congress. Since HUD has become their regulator, they have had yearly goals; they're supposed to buy a certain amount of "affordable" loans (read: low-down-payment loans to low-income families). Of course, this sounds good, as everyone wants low-income families to have housing right? However, the fact is that many people simply can't afford housing, and the government mandate for Fannie and Freddie to buy these bad loans has made them viable for banks to offer (especially considering how large Fannie and Freddie are, they buy something like 40% of mortgages created each year). And to encourage even more of these subprime loans, Congress also passed a law giving tax credits to Fannie and Freddie when they bought subprime securities, further increasing the demand for them.
So these government mandates and incentives greatly increased the amount of bad loans the Fannie and Freddie bought. What allowed other banks and investment firms to buy these repackaged securities from F&F was the implicit government guarantee behind them, basically, since the government had so much stake in F&F, people assumed that the government wouldn't let them fail or let their liabilities disappear (which was obviously true), creating a moral hazard situation where people disregard risk because there is no downside to failing.
So government regulation and interference with Fannie Mae and Freddie Mac contributed to the creation of the bubble, and the implicit government guarantee behind the securities allowed it to spread.
Of course, this isn't the only reason, but there are also many other government regulations that have helped create this crisis. The Community Reinvestment Act, which was substantially strengthened in 1995, mandated that banks make a certain amount of loans to low-income families, again creating a misallocation of resources into the housing market. There was also a recent act that reduced the capital gains taxes that people had to pay on homes substantially, but I can't find a source atm.
I'm not clearing investors of all blame, sure, they acted greedy, ignored risks, and took advantage of new derivatives and the market situation. But I'm saying that fundamentally, the problem was with too much government regulation and interference, not too little. More government regulation probably could've delayed this problem, but it would've only been a short-term fix to the underlying problems introduced by the government itself.
tl;dr, Government mandates for affordable housing loans to low-interest families and it's control over the Government Sponsored Enterprises of Fannie Mae and Freddie Mac created the underlying driving force for the creation and subsequent popping of this bubble.
This bailout was absolutely crucial. I told you earlier that Mortgaged Backed Securities were sold by the people who did the lending in the first place, right? Before that happens, the individual debts are sold in the "Secondary Mortgage Market" to Mae/Mac, these two semi-governmental entities created during the Great Depression to make it easier for people to get homes. These two companies serve as "lubricants" of the housing market. They help money flow to where housing demand is highest. For example, if I am a banker and where I live all of a sudden has a huge increase in demand for homes, but I only have a little bit of capital to lend, I can look to Mae/Mac to fully exploit this demand and meet the needs of the market. These guys together were responsible for 70% of American mortgages. SEVENTY FUCKING PERCENT HOLY SHIT.
But Because of Democrat idiocy (SORRY BUT OUR PARTY ISN'T PERFECT, DURRR), these two lenders are practically unregulated. The idea was that this would help them make it easier for people to get a home. What it actually did was to enhance the "moral hazard" situation for home lenders. Because they knew they could just sell off sub-prime mortgages to Mae/Mac, they made more subprime loans, but wiped their hands clean of the risk when they sold it. This is what economists call Moral Hazard: when somebody does something risky but the consequences of that risk is felt by someone else. It encourages unwise behavior like subprime lending. If I press a button that maybe kills YOU, I am more likely to press the button than if it maybe killed ME.
Here's the thing. When Mae/Mac sell those Collateralized Debt Obligations/Mortgage Backed Securities, they guarantee to the investor that they will pay them the full value of the investment even if the homeowner defaults on the mortgage. Uh oh. Moral Hazard anybody? Anyway, if these two companies failed, there would be TRILLIONS of dollars of losses globally. I'll go more into why that's bad specifically for the housing crisis later (although it should be obvious it's a bad thing in general).
Lehman Brothers
Allowed to go bankrupt because fed felt they did not have assets into crucial enough areas of the economy. The reason Bear Stearns was "guaranteed" was because it collapsed so quickly, and for classification reasons was outside of the fed's oversight jurisdiction, so it wasn't possible if Stearns was important to the market.
American International Group
AIG is unique because it is an insurance company that has its fingers everywhere, in every sector of the economy. It specialized in "credit default swaps" which I'm not going to even pretend to understand completely, but basically they guaranteed through insurance a lot of bad debt investments, similar to Fannie Mae and Freddie Mac. It absolutely COULD. NOT. fail. Without going into detail, it was still a profitable organization, but because of procedural issues, it needed more capital. So the fed lent it $85 billion it could use to fulfill those procedural obligations and keep working. As punishment, it took over 80% of the company's equity, or stock.
A nasty situation
Ok, before we go on the last leg of this GINORMOUS post (nobody is reading this whole thing anyway, I know), let's look at just what the situation was like before the $700 billion bailout was announced.
1.) The housing market continues to deflate. As of early September, banks had totaled some $500 billion in writedowns, and that number is growing. Write-downs are only "recognized" reductions in value. The real losses will number in the trillions.
2.) As for wall street, the problem is getting worse. Every time the fed has bailed out a company, the markets rallied, only to fall again the next day as more bad news was reported, and it became clear that the market was not done collapsing in on itself. Part of it has to do with the fact that we're in a bear market -- again, a market where the mood is generally pessimistic, and people are much more willing to sell. Part of it has to do with uncertainty that the next company will get bailed out. Finally, people are actually DISCOURAGED from investing in the companies who need it the most because in every bailout, the fed has wiped out shareholders (they acquired a large portion of the company's equity).
3.) Money is going into safer, but less profitable investments. This is evidenced by the fact that the U.S. Treasury Bill, considered one of the safest possible investments, has lowered its yield to something like .16% from 1.6% earlier this month. The yield drops as more people invest in bills. Just look at what happens to the 1 month bill after 9/12: http://www.ustreas.gov/offices/domestic-finance/debt-management/interest-rate/yield.shtml (note: it rose above 1% today, not sure why :\).
I told you earlier that consumer credit was tight because of the sub-prime market collapse. Now, the credit problem has spread to wall street. Interbank lending interest rates are at about 2% higher than normal. Depending on inflation, that's a 200%-1000% interest in the premium banks pay to borrow money from each other. Inter-bank lending serves to "lubricate" the financial system, just like Fannie Mae and Freddie Mac. Interbank lending directly affects consumer lending. A bank could WANT to give you a loan for a car can't but it might not have enough capital, so it borrows some from another bank. But if that interbank loan is really expensive, your loan will also be more expensive. Over in London, it's up to 7% for overnight loans: http://www.cbc.ca/money/story/2008/09/30/libor-record.html
BAILOUT my ass
After the failure of AIG, the Fed realized that it couldn't go on giving these Ad Hoc bailouts. It had to once and for all fix the housing problem. When you want to fix anything, the best solution is to attack the root cause.
Essentially, the problem is one of liquidity, or liquid capital. Liquidity describes how easily an asset can be transferred into a different kind of asset, and at what cost. Cash is the most liquid asset possible: Anyone will accept cash for anything, except under excess inflation. A car, on the other hand, is less liquid. You have to go through a lot more trouble to trade a car for something else of equal value, and you will always sell for less than its real value. Before the housing crisis, mortgage backed securities retained some degree of liquidity. After the crisis, they became practically illiquid: Because of the risk associated with them and all the negative headlines, nobody would buy them at a reasonable cost. Essentially, these securities still have SOME worth, but because nobody will buy them for a reasonable price, banks may as well have a black hole where these securities are. It is because they lost so much money on these securities that is fueling the credit crisis.
To fix a liquidity problem, you have to create a market for the illiquid assets. You have to help these companies convert mortgage backed securities into capital they can use to help the economy get back on its feet. Treasury Secretary Henry Paulson teamed up with Fed Chairman Ben Bernanke to write up a plan that would allocate $700 billion to create a market for these securities. Meaning, the government would offer to buy up these securities: they would take them off the hands of investment banks and replace them with cash. Then, the government would either hold on to these securities until they mature (when they "put out" in other words) or sell them to someone else. A similar system was set up in the 80's during the Savings and Loan crisis, but not at this scale.
How this will fix the problem should be obvious. By injecting liquidity into the system, banks will be again willing to lend, and credit will be looser. It will become easier to buy a home, but not so easy the bubble will begin to inflate again. Demand for housing goes up, and prices stabilize. The losses will still be there, but at least the problem won't get any worse.
There's some kinda irrelevant and esoteric information about how the fed will determine prices for these securities. If you're really interested, it's in spoilers. But it wasn't fitting into the narrative as a whole so I cut it... + Show Spoiler +
You may have heard the term "reverse auction" thrown about. Basically, that's the method the fed plans to use to determine how much they want to buy up these securities for. Why can't they just pay the market "equilibrium" price, you say? Because there IS no market. Moreover, each mortgage backed security is different from the next: it's impossible to tell exactly how much is worth. It's like trying to buy off a whole bunch of different paintings. Each one is different. You can only guess how much it's "worth". Like art, the fed plans to determine the price through auction, except that because there's only one buyer, it works in reverse: First the fed will announce the kind of security it plans to buy, then the sellers will bid for the lowest price. The fed will also be hiring help people who can "appraise" the value of each security. This doesn't play a significant role in the story... but I figured it's worth discussing and has to do with the arguments for or against why a bailout is good or bad.
So there's a few things about the bailout that are under debate... but it's hard to talking about that without inserting:
My Goddamn Opinion
At this point, there's not much more to tell you that you don't already know. So I reserve my right to soapbox for a few minutes.
1.) The Bailout is not as expensive as $700 billion.
As I said earlier, while most of these securities are losing money as a whole, they still retain SOME value. Not everyone is going to default on their loans. The fed can either hold these mortgages until they mature or sell them off, if the market has recovered. They could end up earning back between $500 billion to nearly breaking even.
2.) It's not a bailout.
The worst thing Bernanke did in selling the bailout was to call it a bailout. Nobody is coming in and arbitrarily injecting capital into companies that don't deserve it. They are doing it in exchange for these securities. What we're doing is trading much needed liquidity into companies that don't have it.
3.) Don't handicap the bailout.
All this talk about limiting executive pay, creating incentives to negotiate, etc. etc. are valuable policies (to an extent). Geez Congress, maybe you should've instituted them BEFORE THE FUCKING CRISIS YOU TARDS. The economic crisis is not happening soon, it is not happening next year, it is happening NOW and you shitholes need to something about it and not, as my esteemed congressman Pete Stark said this morning, "hold a month of hearings". No I'm not kidding, the fucktard actually said that. Then he blamed tax policies for the crisis. Palin is more fucking informed.
Second, it's important to keep in mind that the bailout is voluntary. If companies don't want to sell their mortgage backed securities because the government requires that they have to give up equity or their severance packages, then they won't sell them, handicapping the bailout.
4.) Not bailing out is much worse.
OK, here is the important part. The argument by free-market fundamentalists is two fold. First, they say that the market is undergoing a "correction". Second, they tell you that bailouts create a moral hazard.
First, it's true that the housing market is undergoing a correction. However, you have to keep in mind that most homes are bought through mortgages. A lot of banks are unwilling to lend even to qualified buyers, so the price of housing might even be BENEATH the ideal equilibrium price. So long as credit remains tight, housing prices will continue to fall, banks will keep bleeding money, and the economy goes down a vicious spiral into stagnation and recession.
Second, this is an inappropriate use of the concept. Bankers have already suffered plenty from the housing crisis. They know better than to let this happen again. Moreover, the costs of NOT bailing out are much higher than the cost of creating this minimal moral hazard.
Conclusion: Why you care and don't even know it
I'm really running out of steam... I don't feel like I could do a good job if I wrote this right now. I'll save the conclusion for another day, if I get around to it. But the gist is there. As more questions come up I'll try to fill them in here i guess.
Inside joke for debaters I hope the Bailout/Nuke War disad I ran all weekend were as flaky as judges kept telling me they were.
Fair question before committing to reading this rediculously large text: what's your background? (i'm scrolling and see generous use caps locks and "fucking retards" etc .... rant = no thx)
I know what I'm talking about. I read boatloads everyday
-_-;; nvm
He decided on page 6 he wasn't qualified to discuss economics:
I'm going to leave the economics to econ majors and sit my poli-sci major ass on the discussion of the fed.
But apparently he left up the huge long OP that has a lot to do with economics
PLEASE CORRECT MY ERRORS USING YOUR SUPERIOR REASONING AND KNOWLEDGE. Many other posters have done it. I've updated my text a couple of times already. So if you know more than I do, inform me. If not, quit bitching. I don't see you taking 4 hours on this writeup.
Moreover, I've responded to all your arguments in my last big block of a post.
On October 02 2008 02:34 Wurzelbrumpft wrote: just a question is it foreseeable or calculatable when the stocks are at their lowest point?
It is calculatable but what they could do is just forecasting, and it is prone to assumption. Whatever the method you use, the best result that it can give you is one figure with marginal errors on it depending on how you assume the uncertainty in the future great thread btw, I have learnt alot about this financial crisis. Actually, I dont know much about American financial sector and finance is also not my major. I read some articles that there are around 200 economists that are opposing the bailout pla,. I have read some of the letters but seeing how they are so aggressive about letting the market adjust itself is quite weird to me. First great depression brought about the Keyne theory which addressed the role of government and now it is yet but very potential for another one, and the government is just to play its role imo
Just chiming in to thank ahrara_ for a well-written and informative post. Your hard work is much appreciated, especially for someone who doesn't do this sort of thing for a living. Thank you for clarifying a difficult topic in an extremely lucid manner, and don't let the haters get you down.
On October 02 2008 12:00 EmeraldSparks wrote: The amount of stuff goes up and the amount of gold does not.
I see having a stable currency as a good thing.
If the money you have increases value without you investing it anywhere, the economy stagnates. That isn't stability but deflation, which is a bad thing. See: The Great Depression.
I don't have time to go into detail but I mentioned the main problem with the gold standard before. You have no control over the money supply. (note that this does NOT keep the money supply from changing with the amount of gold being mined. what it does is make those changes arbitrary and dependent on if the gold industry can find more gold to mine). Secondly, the gold standard encourages deflation, which discourages investment.
The only advantage of the gold standard is that it protects you from irresponsible inflationary policies. Fortunately, the fed in its decades of existence has never decided to arbitrarily print large quantities of money and probably never will.
edit: I read the OP, here are some comments. Last half of post contains the important comments on previous discussion.
On October 01 2008 04:08 ahrara_ wrote: WARNING IF YOU MAKE A STUPID POST I WILL KILL YOU
was this here before?
Banks and less reputable financial organizations began lending to the "sub-prime" market. These were people whose credit history meant they had a good chance of defaulting on their loan. One reason banks made these loans was because they figured that housing prices would keep rising forever. If these guys couldn't pay back their loan, we'll just repossess the house and sell it at a profit to someone who can!!!1111 (LOL HOW WRONG THEY WERE).
So long as investors kept buying mortgage backed securities, banks continued to make subprime loans. Essentially, they were speculating: gambling that because housing prices would keep rising, they would eventually make a killing. Unfortunately, speculation has the added effect of artificially inflating demand, raising prices. Thus the financial system created a self-fulfilling prophecy: By betting on increased housing prices, they made housing prices increase, creating the housing bubble.
I'm not going to argue that this is true, but it is not the reason why they began lending to subprime borrowers. The root cause of it all was that interest rates (from the fed) were too low for too long, causing an overabundance of easy money. All of that money had to go somewhere, so it was pumped into the housing market (because it was one of the last areas that could sustain increased debt.....in addition to the reasons ahara listed). You have this huge pile of money and you have to find people to borrow it.
I'm very surprised that no one brought this up in this thread so far besides jgad (and no one addressed his comment on this).
The problem is that when the economy began to improve, bernake didn't raise interest rates. Not to mention greenspan, who is much more responsible.
Essentially, the problem is one of liquidity, or liquid capital. ...............
To fix a liquidity problem, you have to create a market for the illiquid assets. ......................
How this will fix the problem should be obvious. By injecting liquidity into the system, banks will be again willing to lend, and credit will be looser. ..............
Again, correct but not necessarily the whole story. The liquidity problem is a symptom which causes many other real problems. The other more fundamental factor is confidence. If investors lose confidence, the fed could literally put trillions of dollars of liquidity in the market and things would still come crashing down (I think we are actually short like $5 trillion, so the $700 billion is not a "true" once-and-for-all fix). The correct action may actually injecting massive amounts of money, but one must look at the cause of the fundamental loss of confidence. If investors think that every bank is cooking its books and about to fail, and worse, have NO idea which bank will fail, they'll just pull their money out all together.
This could be fixed partly by having more transparency of balance sheets. True, a number of banks would fail immediately because investors would know their true risk, but people would also be more likely to invest in the system. Bailouts could be given as necessary for some failures, but just a blanket bailout doesn't address the fundamental loss of confidence (because again, that $700 billion can't cover everything).
1.) The Bailout is not as expensive as $700 billion.
As I said earlier, while most of these securities are losing money as a whole, they still retain SOME value. Not everyone is going to default on their loans. The fed can either hold these mortgages until they mature or sell them off, if the market has recovered. They could end up earning back between $500 billion to nearly breaking even.
You're right, its not $700 billion. Its a hell of a lot more. The $700 billion is only the amount on the government's balance sheet. Doesn't count if its sold at a loss! For example, the government could buy $500 trillion at .5 on the dollar from company A, and sell it later that day at .1 on the dollar to company B, and have a balance sheet of zero again. The only limit is "cap" on national debt (which is always increased of course).
3.) Don't handicap the bailout.
All this talk about limiting executive pay, creating incentives to negotiate, etc. etc. are valuable policies (to an extent). Geez Congress, maybe you should've instituted them BEFORE THE FUCKING CRISIS YOU TARDS. The economic crisis is not happening soon, it is not happening next year, it is happening NOW and you shitholes need to something about it and not, as my esteemed congressman Pete Stark said this morning, "hold a month of hearings". No I'm not kidding, the fucktard actually said that. Then he blamed tax policies for the crisis. Palin is more fucking informed.
Second, it's important to keep in mind that the bailout is voluntary. If companies don't want to sell their mortgage backed securities because the government requires that they have to give up equity or their severance packages, then they won't sell them, handicapping the bailout.
4.) Not bailing out is much worse.
If it shouldn't be handicapped, why did paulson say that he would recommend a veto if the bill excluded bad foreign debt transferred to a US bank after september 20? If its so urgent, why does he threaten to veto over that? Weren't we supposed to crash a week ago? That didn't happen.
Keep in mind exactly what this is. This is a huge power grab. One man, with the stroke of his pen, controls hundreds of billions of dollars. He can pick the winners and losers. He is a GOD. He probably has more power than the president. This is essentially the financial patriot act, where one man controls an infinite amount of money. No hearings, no questioning, no appeals, no limit.
On October 02 2008 06:33 ahrara_ wrote: well I think some of the free-market fundamentalists like jgad have been putting up a really good fight and it bothers the shit out of me I don't know how to really defend the fed. but it bothers me when some dick jumps in screaming about how debt = money and that it's all the fed's fault without really udnerstanding or being able to explain why.
I didn't jump in screaming anything, I just posted my blog link.
On October 01 2008 16:59 ahrara_ wrote: im not angry
the money creation stuff are not basic examples of anythign except an untrue idea. what fight is saying is that banks arbitrarily create money, essentially printing money or counterfeiting. this is true in fucking zimbabwe where inflation is something like 10 million % (no exaggeration) but not in the u.s. money supply goes up when banks are more willing to lend, but they will only do so until they meet their capital reserve or the banks that they are borrowing from meet their capital reserve. so money is not just randomly generated.
"money = debt" is a meaningless factually incorrect and stupid term
Have we agreed that banks create money yet? This is simply a fact. They can't do it "out of control" because that example I gave you before was a geometric sum, with a finite limit. More simply, it is known as the money multiplier. Banks multiply the money supply through the fractional reserve system....by, in my example, 10.
So, what is all that multiplied money? its someone else's debt because it was created through loans. If everyone paid off their loans, all that money multiplying stuff would go away, so 90% of our money would disappear in that example.
#2 is money created through loans. That money is someone else's debt, thats how it came into existence, and thats how it must increase. If more and more people aren't continually found to accept that new debt, the money supply can't increase anymore. Thats why mortgages bubbled, because housing was a reservoir of potential new debt.
If you look at the picture below, you will see the relative amounts of this money plotted. Everything except the green represents debt that someone somewhere owes to someone else.
Can americans keep absorbing exponentially increasing amounts of debt (which are required because interest is collected on that nonexistent money)? I don't think so. This is a fundamental problem, not something a bailout will solve permanently.
If the money you have increases value without you investing it anywhere, the economy stagnates.
How can the economy be stagnating if the increase in purchasing power is a result of an increase in real assets? Doesn't that contradict the definition of stagnation?
That isn't stability but deflation, which is a bad thing. See: The Great Depression.
The causes of the great depression is still a debated topic, I'd be interested to see your reasoning as to why you think it was caused by the gold standard. Myself I subscribe more to the Austrian explanation. The Federal Reserve was created in 1913. Through the 1920s the Fed engaged in expansive monetary policy to help out Britain which was suffering from high unemployment. This led to an unsustainable credit-driven boom, as loose monetary policy tends to do, which led to the inevitable bust. Also, increase in money supply due to fractional reserve banking is what made bank runs possible.
On October 02 2008 12:44 fight_or_flight wrote: edit: I read the OP, here are some comments. Last half of post contains the important comments on previous discussion.
Banks and less reputable financial organizations began lending to the "sub-prime" market. These were people whose credit history meant they had a good chance of defaulting on their loan. One reason banks made these loans was because they figured that housing prices would keep rising forever. If these guys couldn't pay back their loan, we'll just repossess the house and sell it at a profit to someone who can!!!1111 (LOL HOW WRONG THEY WERE).
So long as investors kept buying mortgage backed securities, banks continued to make subprime loans. Essentially, they were speculating: gambling that because housing prices would keep rising, they would eventually make a killing. Unfortunately, speculation has the added effect of artificially inflating demand, raising prices. Thus the financial system created a self-fulfilling prophecy: By betting on increased housing prices, they made housing prices increase, creating the housing bubble.
I'm not going to argue that this is true, but it is not the reason why they began lending to subprime borrowers. The root cause of it all was that interest rates (from the fed) were too low for too long, causing an overabundance of easy money. All of that money had to go somewhere, so it was pumped into the housing market (because it was one of the last areas that could sustain increased debt.....in addition to the reasons ahara listed). You have this huge pile of money and you have to find people to borrow it.
I'm very surprised that no one brought this up in this thread so far besides jgad (and no one addressed his comment on this).
The problem is that when the economy began to improve, bernake didn't raise interest rates. Not to mention greenspan, who is much more responsible.
Essentially, the problem is one of liquidity, or liquid capital. ...............
To fix a liquidity problem, you have to create a market for the illiquid assets. ......................
How this will fix the problem should be obvious. By injecting liquidity into the system, banks will be again willing to lend, and credit will be looser. ..............
Again, correct but not necessarily the whole story. The liquidity problem is a symptom which causes many other real problems. The other more fundamental factor is confidence. If investors lose confidence, the fed could literally put trillions of dollars of liquidity in the market and things would still come crashing down (I think we are actually short like $5 trillion, so the $700 billion is not a "true" once-and-for-all fix). The correct action may actually injecting massive amounts of money, but one must look at the cause of the fundamental loss of confidence. If investors think that every bank is cooking its books and about to fail, and worse, have NO idea which bank will fail, they'll just pull their money out all together.
This could be fixed partly by having more transparency of balance sheets. True, a number of banks would fail immediately because investors would know their true risk, but people would also be more likely to invest in the system. Bailouts could be given as necessary for some failures, but just a blanket bailout doesn't address the fundamental loss of confidence (because again, that $700 billion can't cover everything).
1.) The Bailout is not as expensive as $700 billion.
As I said earlier, while most of these securities are losing money as a whole, they still retain SOME value. Not everyone is going to default on their loans. The fed can either hold these mortgages until they mature or sell them off, if the market has recovered. They could end up earning back between $500 billion to nearly breaking even.
You're right, its not $700 billion. Its a hell of a lot more. The $700 billion is only the amount on the government's balance sheet. Doesn't count if its sold at a loss! For example, the government could buy $500 trillion at .5 on the dollar from company A, and sell it later that day at .1 on the dollar to company B, and have a balance sheet of zero again. The only limit is "cap" on national debt (which is always increased of course).
All this talk about limiting executive pay, creating incentives to negotiate, etc. etc. are valuable policies (to an extent). Geez Congress, maybe you should've instituted them BEFORE THE FUCKING CRISIS YOU TARDS. The economic crisis is not happening soon, it is not happening next year, it is happening NOW and you shitholes need to something about it and not, as my esteemed congressman Pete Stark said this morning, "hold a month of hearings". No I'm not kidding, the fucktard actually said that. Then he blamed tax policies for the crisis. Palin is more fucking informed.
Second, it's important to keep in mind that the bailout is voluntary. If companies don't want to sell their mortgage backed securities because the government requires that they have to give up equity or their severance packages, then they won't sell them, handicapping the bailout.
4.) Not bailing out is much worse.
If it shouldn't be handicapped, why did paulson say that he would recommend a veto if the bill excluded bad foreign debt transferred to a US bank after september 20? If its so urgent, why does he threaten to veto over that? Weren't we supposed to crash a week ago? That didn't happen.
Keep in mind exactly what this is. This is a huge power grab. One man, with the stroke of his pen, controls hundreds of billions of dollars. He can pick the winners and losers. He is a GOD. He probably has more power than the president. This is essentially the financial patriot act, where one man controls an infinite amount of money. No hearings, no questioning, no appeals, no limit.
On October 02 2008 06:33 ahrara_ wrote: well I think some of the free-market fundamentalists like jgad have been putting up a really good fight and it bothers the shit out of me I don't know how to really defend the fed. but it bothers me when some dick jumps in screaming about how debt = money and that it's all the fed's fault without really udnerstanding or being able to explain why.
I didn't jump in screaming anything, I just posted my blog link.
On October 01 2008 16:59 ahrara_ wrote: im not angry
the money creation stuff are not basic examples of anythign except an untrue idea. what fight is saying is that banks arbitrarily create money, essentially printing money or counterfeiting. this is true in fucking zimbabwe where inflation is something like 10 million % (no exaggeration) but not in the u.s. money supply goes up when banks are more willing to lend, but they will only do so until they meet their capital reserve or the banks that they are borrowing from meet their capital reserve. so money is not just randomly generated.
"money = debt" is a meaningless factually incorrect and stupid term
Have we agreed that banks create money yet? This is simply a fact. They can't do it "out of control" because that example I gave you before was a geometric sum, with a finite limit. More simply, it is known as the money multiplier. Banks multiply the money supply through the fractional reserve system....by, in my example, 10.
So, what is all that multiplied money? its someone else's debt because it was created through loans. If everyone paid off their loans, all that money multiplying stuff would go away, so 90% of our money would disappear in that example.
#2 is money created through loans. That money is someone else's debt, thats how it came into existence, and thats how it must increase. If more and more people aren't continually found to accept that new debt, the money supply can't increase anymore. Thats why mortgages bubbled, because housing was a reservoir of potential new debt.
If you look at the picture below, you will see the relative amounts of this money plotted. Everything except the green represents debt that someone somewhere owes to someone else.
Can americans keep absorbing exponentially increasing amounts of debt (which are required because interest is collected on that nonexistent money)? I don't think so. This is a fundamental problem, not something a bailout will solve permanently.
Not my full response, but AFAI can tell the ratio of currency to total money supply has been static, according to your own diagrams. The actual change in money supply is not nearly as drastic as the diagram suggests when you adjust for inflation. Since this inflation hasn't been very rapid, in the long run it's had little effect on real values. Also, the expansionary effect of the spending multiplier is mitigated by two things:
1.) In the U.S., the multiplier is not actually the ideal sum, but something like 2x or 3x because people hold on to a large part of their loans as cash and
2.) Withdrawals from deposits have an equal and opposite effect on money supply.
Therefore... what's the big deal then? Further, if you are going to criticize a system, you must provide an alternative. What is your alternative to fractional reserve banking, and how is it better than the present system? The fractional reserve system works because not everyone will be using their deposited cash at the same time, except in the case of a run which is prevented by the FDIC's deposit insurance. The same resources can be put to better use. What is bad about this?
Inflation is only a problem in the short run. In the long run, prices and wages adjust accordingly.
The current system is bad because the Federal Reserve has the sole power to set interest rates. History has shown the Federal Reserve has not done a very good job at setting them as they constantly set them to low which encourages malinvestments in the market which manifest themselves in asset bubbles which have constantly become larger.
Basically all the Federal Reserve does is create the boom and bust business cycle which is not a by product of capitalism or free markets, but one of government interference in the market. In a free market system something as important as the value of a currency should not be set by the government. The obvious alternative of the system is the one that we had before the Federal Reserve was instituted. A gold standard.
On October 02 2008 12:00 EmeraldSparks wrote: The amount of stuff goes up and the amount of gold does not.
I see having a stable currency as a good thing.
If the money you have increases value without you investing it anywhere, the economy stagnates. That isn't stability but deflation, which is a bad thing. See: The Great Depression.
It's just price deflation. It doesn't necessarily have to be a bad thing. Price deflation is good, in fact. It means that everyone is getting richer.
On October 02 2008 12:22 ahrara_ wrote: Secondly, the gold standard encourages deflation, which discourages investment.
The only advantage of the gold standard is that it protects you from irresponsible inflationary policies. Fortunately, the fed in its decades of existence has never decided to arbitrarily print large quantities of money and probably never will.
It would discourage investment to the degree that it would discourage reckless investment, but less gold invested in a deflating economy would be worth more. The balance between investment and spending is defined by the availability of and demand for consumer goods. And of course the Fed has "printed" silly amounts of money. The oil shocks of the 70s, the '87 bubble, the tech bubble, the housing bubble - every time it was caused by too much cheap credit.
If the money you have increases value without you investing it anywhere, the economy stagnates.
How can the economy be stagnating if the increase in purchasing power is a result of an increase in real assets? Doesn't that contradict the definition of stagnation?
That isn't stability but deflation, which is a bad thing. See: The Great Depression.
The causes of the great depression is still a debated topic, I'd be interested to see your reasoning as to why you think it was caused by the gold standard. Myself I subscribe more to the Austrian explanation. The Federal Reserve was created in 1913. Through the 1920s the Fed engaged in expansive monetary policy to help out Britain which was suffering from high unemployment. This led to an unsustainable credit-driven boom, as loose monetary policy tends to do, which led to the inevitable bust. Also, increase in money supply due to fractional reserve banking is what made bank runs possible.
There was one final straw as well - when things went bad, the bank reacted by tightening fiscal policy, but ruthlessly so. Banks, traders, everyone went under and a few rich men bought up the spoils for pennies on the pound, so to speak - basically how Rothschild got control of the Bank of England after Napoleon fell at Waterloo. Being a man with the biggest merchant fleet in Europe, he had fast access to information. He came to London knowing the result of the battle - that England had won, and he walked into the London exchange looking stern and silent. Though he said nothing, others took his silence to mean that things had gone badly in the war and that Britain was likely in for a protracted bout of extended war with the French. People dumped stocks like hotcakes and Rothschild had agents of his on the floor buying them all up at bargain prices. When the news finally came that Britain had won, Rothschild was instantly a very rich man. This is what happened in America - the biggest consolidation of financial institutions in history, bought up by the rich on the back of bad fiscal policy.
Great article from Rothbard written in 1969 explaining how the Fed causes boom and bust cycles. Ludwig von Mises, an early developer of the Austrian theory of business cycles, used his theory to predict the Great Depression during the early 1920s, well before Keynesian nonsense set economic theory back decades.
Not my full response, but AFAI can tell the ratio of currency to total money supply has been static, according to your own diagrams.
I'm not sure about the ratio, but the problem is that some 90+% was created as debt, essentially out of thin air.
The actual change in money supply is not nearly as drastic as the diagram suggests when you adjust for inflation. Since this inflation hasn't been very rapid, in the long run it's had little effect on real values.
It is a very drastic change in money supply, even with inflation accounted for.
Also, the expansionary effect of the spending multiplier is mitigated by two things:
1.) In the U.S., the multiplier is not actually the ideal sum, but something like 2x or 3x because people hold on to a large part of their loans as cash and
2.) Withdrawals from deposits have an equal and opposite effect on money supply.
I'm not quite following you on point 1, but in response to point 2, a withdrawl doesn't shrink the money supply at all, it just moves an amount of cash from the bank into the hands of the person who withdrew the money.
Therefore... what's the big deal then? Further, if you are going to criticize a system, you must provide an alternative. What is your alternative to fractional reserve banking, and how is it better than the present system?
The alternative to fractional reserve banking is to have two types of banks. One would be a 100% reserve bank in which the bank does not lend out its patrons money, and people would pay a fee to keep their money there. The other type would be a lending bank which pays interest to its investors and lends out their money, but these funds would not be immediately available for withdrawl; people would actually be lending their money to these banks. The problem with fractional reserve banking is that it tries to have it both ways.. it lends out the money of its investors, but at the same time tells them their money is still in the bank and available for withdrawl.. the same money is in two places at once, increasing the money supply. Only when the debt is repaid does the money supply shrink.
The fractional reserve system works because not everyone will be using their deposited cash at the same time, except in the case of a run which is prevented by the FDIC's deposit insurance. The same resources can be put to better use. What is bad about this?
What's bad about fractional reserve banking is that it increases the money supply which artificially lowers interest rates which encourages malinvestments that create boom-bust cycles. If the FDIC injects more money into the economy, it's ony going to increase inflation even more.
On October 02 2008 12:44 fight_or_flight wrote: edit: I read the OP, here are some comments. Last half of post contains the important comments on previous discussion.
On October 01 2008 04:08 ahrara_ wrote: WARNING IF YOU MAKE A STUPID POST I WILL KILL YOU
was this here before?
Banks and less reputable financial organizations began lending to the "sub-prime" market. These were people whose credit history meant they had a good chance of defaulting on their loan. One reason banks made these loans was because they figured that housing prices would keep rising forever. If these guys couldn't pay back their loan, we'll just repossess the house and sell it at a profit to someone who can!!!1111 (LOL HOW WRONG THEY WERE).
So long as investors kept buying mortgage backed securities, banks continued to make subprime loans. Essentially, they were speculating: gambling that because housing prices would keep rising, they would eventually make a killing. Unfortunately, speculation has the added effect of artificially inflating demand, raising prices. Thus the financial system created a self-fulfilling prophecy: By betting on increased housing prices, they made housing prices increase, creating the housing bubble.
I'm not going to argue that this is true, but it is not the reason why they began lending to subprime borrowers. The root cause of it all was that interest rates (from the fed) were too low for too long, causing an overabundance of easy money. All of that money had to go somewhere, so it was pumped into the housing market (because it was one of the last areas that could sustain increased debt.....in addition to the reasons ahara listed). You have this huge pile of money and you have to find people to borrow it.
I'm very surprised that no one brought this up in this thread so far besides jgad (and no one addressed his comment on this).
The problem is that when the economy began to improve, bernake didn't raise interest rates. Not to mention greenspan, who is much more responsible.
Essentially, the problem is one of liquidity, or liquid capital. ...............
To fix a liquidity problem, you have to create a market for the illiquid assets. ......................
How this will fix the problem should be obvious. By injecting liquidity into the system, banks will be again willing to lend, and credit will be looser. ..............
Again, correct but not necessarily the whole story. The liquidity problem is a symptom which causes many other real problems. The other more fundamental factor is confidence. If investors lose confidence, the fed could literally put trillions of dollars of liquidity in the market and things would still come crashing down (I think we are actually short like $5 trillion, so the $700 billion is not a "true" once-and-for-all fix). The correct action may actually injecting massive amounts of money, but one must look at the cause of the fundamental loss of confidence. If investors think that every bank is cooking its books and about to fail, and worse, have NO idea which bank will fail, they'll just pull their money out all together.
This could be fixed partly by having more transparency of balance sheets. True, a number of banks would fail immediately because investors would know their true risk, but people would also be more likely to invest in the system. Bailouts could be given as necessary for some failures, but just a blanket bailout doesn't address the fundamental loss of confidence (because again, that $700 billion can't cover everything).
1.) The Bailout is not as expensive as $700 billion.
As I said earlier, while most of these securities are losing money as a whole, they still retain SOME value. Not everyone is going to default on their loans. The fed can either hold these mortgages until they mature or sell them off, if the market has recovered. They could end up earning back between $500 billion to nearly breaking even.
You're right, its not $700 billion. Its a hell of a lot more. The $700 billion is only the amount on the government's balance sheet. Doesn't count if its sold at a loss! For example, the government could buy $500 trillion at .5 on the dollar from company A, and sell it later that day at .1 on the dollar to company B, and have a balance sheet of zero again. The only limit is "cap" on national debt (which is always increased of course).
3.) Don't handicap the bailout.
All this talk about limiting executive pay, creating incentives to negotiate, etc. etc. are valuable policies (to an extent). Geez Congress, maybe you should've instituted them BEFORE THE FUCKING CRISIS YOU TARDS. The economic crisis is not happening soon, it is not happening next year, it is happening NOW and you shitholes need to something about it and not, as my esteemed congressman Pete Stark said this morning, "hold a month of hearings". No I'm not kidding, the fucktard actually said that. Then he blamed tax policies for the crisis. Palin is more fucking informed.
Second, it's important to keep in mind that the bailout is voluntary. If companies don't want to sell their mortgage backed securities because the government requires that they have to give up equity or their severance packages, then they won't sell them, handicapping the bailout.
4.) Not bailing out is much worse.
If it shouldn't be handicapped, why did paulson say that he would recommend a veto if the bill excluded bad foreign debt transferred to a US bank after september 20? If its so urgent, why does he threaten to veto over that? Weren't we supposed to crash a week ago? That didn't happen.
Keep in mind exactly what this is. This is a huge power grab. One man, with the stroke of his pen, controls hundreds of billions of dollars. He can pick the winners and losers. He is a GOD. He probably has more power than the president. This is essentially the financial patriot act, where one man controls an infinite amount of money. No hearings, no questioning, no appeals, no limit.
On October 02 2008 06:33 ahrara_ wrote: well I think some of the free-market fundamentalists like jgad have been putting up a really good fight and it bothers the shit out of me I don't know how to really defend the fed. but it bothers me when some dick jumps in screaming about how debt = money and that it's all the fed's fault without really udnerstanding or being able to explain why.
I didn't jump in screaming anything, I just posted my blog link.
On October 01 2008 16:59 ahrara_ wrote: im not angry
the money creation stuff are not basic examples of anythign except an untrue idea. what fight is saying is that banks arbitrarily create money, essentially printing money or counterfeiting. this is true in fucking zimbabwe where inflation is something like 10 million % (no exaggeration) but not in the u.s. money supply goes up when banks are more willing to lend, but they will only do so until they meet their capital reserve or the banks that they are borrowing from meet their capital reserve. so money is not just randomly generated.
"money = debt" is a meaningless factually incorrect and stupid term
Have we agreed that banks create money yet? This is simply a fact. They can't do it "out of control" because that example I gave you before was a geometric sum, with a finite limit. More simply, it is known as the money multiplier. Banks multiply the money supply through the fractional reserve system....by, in my example, 10.
So, what is all that multiplied money? its someone else's debt because it was created through loans. If everyone paid off their loans, all that money multiplying stuff would go away, so 90% of our money would disappear in that example.
#2 is money created through loans. That money is someone else's debt, thats how it came into existence, and thats how it must increase. If more and more people aren't continually found to accept that new debt, the money supply can't increase anymore. Thats why mortgages bubbled, because housing was a reservoir of potential new debt.
If you look at the picture below, you will see the relative amounts of this money plotted. Everything except the green represents debt that someone somewhere owes to someone else.
Can americans keep absorbing exponentially increasing amounts of debt (which are required because interest is collected on that nonexistent money)? I don't think so. This is a fundamental problem, not something a bailout will solve permanently.
Not my full response, but AFAI can tell the ratio of currency to total money supply has been static, according to your own diagrams. The actual change in money supply is not nearly as drastic as the diagram suggests when you adjust for inflation. Since this inflation hasn't been very rapid, in the long run it's had little effect on real values. Also, the expansionary effect of the spending multiplier is mitigated by two things:
1.) In the U.S., the multiplier is not actually the ideal sum, but something like 2x or 3x because people hold on to a large part of their loans as cash and
2.) Withdrawals from deposits have an equal and opposite effect on money supply.
Therefore... what's the big deal then? Further, if you are going to criticize a system, you must provide an alternative. What is your alternative to fractional reserve banking, and how is it better than the present system? The fractional reserve system works because not everyone will be using their deposited cash at the same time, except in the case of a run which is prevented by the FDIC's deposit insurance. The same resources can be put to better use. What is bad about this?
Inflation is only a problem in the short run. In the long run, prices and wages adjust accordingly.
I really don't know if the ratio of borrowed money vs currency is constant, but I don't think that is important. You're right, the actual money multiplier from banks is less than the reserve ratio. But there are other financial instruments which are more leveraged, and these account for the data thats shown in the picture.
The real problem is that since interest is collected on the money supply, new money must always be created to cover the principal. So essentially, if the money supply doesn't increase exponentially, we have a crash because people can't pay off their loans and go into foreclosure/bankruptcy.
The fundamental problem: if only $10 exists in the universe, and I give it to you with the condition that you pay me $11 back, somebody somewhere has to borrow that $1 (which a bank can create for them).
The problem is not so much inflation as it is no one being able to absorb debt. The people who are left holding the debt will all have to default because no one is out there creating new money for them.
The exponential curve can't increase forever because people can only borrow so much (remember, when it stops being exponential that means people are not paying their loans back).
A few interesting solutions where given at the end of that video in my blog. Since I pretty much agree with it and don't really have anything to add, you can just watch it yourself.
I particularly like their system of the government creating all the money by initially spending it on government expenses, and allowing inflation to be a kind of tax.
Of course it is flawed because, how do you measure inflation? Not more flawed that the current system I'd say.
The first graph shows M3 as well as the "True Money Supply" which I guess is what you get when you change the debt money to what it would be if it was currency money. The money created by banks doesn't inflate as much because its tied up and everyone has to pay interest on that money, and can't spend it all on goods. http://globaleconomicanalysis.blogspot.com/2008/07/tms-truer-money-supply.html
On October 02 2008 05:08 HonestTea wrote: ahahaha it's sad to see people with so much time on their hands, so eager to post and jump in the conversation, but with an utter lack of reading comprehension and without any will to understand the basic framing of the debate.
Hi HonestTea! How are you? Sure are a lot of words in this thread!
Fannie Mae forgives loan for woman who shot herself + Show Spoiler +
Fannie Mae said it will set aside the loan of a woman who shot herself as sheriff's deputies tried to evict her from her foreclosed home. Addie Polk, 90, of Akron, Ohio, became a symbol of the nation's home mortgage crisis when she was hospitalized after shooting herself at least twice in the upper body Wednesday afternoon.
On Friday, Fannie Mae spokesman Brian Faith said the mortgage association had decided to halt action against Polk and sign the property "outright" to her.
"We're going to forgive whatever outstanding balance she had on the loan and give her the house," Faith said. "Given the circumstances, we think it's appropriate."
Residents of Akron have rallied behind Polk, who is being treated at Akron General Medical Center. She was listed in critical condition Friday afternoon, according to Akron City Council President Marco Sommerville.
U.S. Rep. Dennis Kucinich, D-Ohio, mentioned Polk on the House floor Friday during debate over the latest economic rescue proposal.
"This bill does nothing for the Addie Polks of the world," Kucinich said after telling her story. "This bill fails to address the fact that millions of homeowners are facing foreclosure, are facing the loss of their home. This bill will take care of Wall Street, and the market may go up for a few days, but democracy is going downhill."
Neighbor Robert Dillon, 62, used a ladder to enter a second-story bathroom window of Polk's home after he and the deputies heard loud noises inside, Dillon said.
"I was calling her name as I went in, and she wasn't responding," he said.
He found her lying on a bed, and he could see she was breathing. He also noticed a long-barreled handgun on the bed, but thought she just had it there for protection. He touched her on the shoulder.
"Then she kind of moved toward me a little and I saw that blood, and I said, 'Oh, no. Miss Polk musta done shot herself,' " Dillon said.
He hurried downstairs and let the deputies in. He said they told him they found Polk's car keys, pocketbook and life insurance policy laid out neatly where they could be found, suggesting that she intended to kill herself.
"There's a lot of people like Miss Polk right now. That's the sad thing about it," said Sommerville, who had met Polk before and rushed to the scene when contacted by police. "They might not be as old as her, some could be as old as her. This is just a major problem."
In 2004, Polk took out a 30-year, 6.375 percent mortgage for $45,620 with a Countrywide Home Loan office in Cuyahoga Falls, Ohio. The same day, she also took out an $11,380 line of credit.
Over the next couple of years, Polk missed payments on the 101-year-old home that she and her late husband purchased in 1970. In 2007, Fannie Mae assumed the mortgage and later filed for foreclosure.
Deputies had tried to serve Polk's eviction notice more than 30 times before Wednesday's incident, Sommerville said. She never came to the door, but the notes the deputies left would always disappear, so they knew she was inside and ambulatory, he said.
The city is creating programs to help people keep their homes, Sommerville said. "But what do you do when there's just so many people out there and the economy is in the shape that it's in?"
Many businesses and individuals have called since Wednesday offering to help Polk, Sommerville said.
"We're going to do an evaluation to see what's best for her," he said. "If she's strong enough and can go home, I think we should work with her to where she goes back home. If not, we need to find another place for her to live where she won't have to worry about this ever again."
For his part, Dillon hopes his neighbor of 38 years can return to her home.
"She loves that house," he said. "I hope they can get her back in. That would make me feel better because I don't know what they're going to put in there once she leaves."
He said the neighborhood is declining because so many people have lost their homes.
"There's a lot of vacant houses around here. ... Now I'm going to have a house on my left and a house on my right, vacant," he said. "That don't make me feel good, because we were good neighbors, we trusted each other, and we looked out for each other.
"This neighborhood is shot, to me, from what it used to be," he added.
"When I moved here, if it were like it is now, I would have never moved here. But it was a nice neighborhood. ...
"I'll just tough it out. I'm too old to start thinking about buying another house." Sommerville said that by the time people call for help with an impending foreclosure, it's usually too late.
"I'm glad it's not too late for Miss Polk, because she could have taken her life," Sommerville said. "Miss Polk will probably end up on her feet. But I'm not sure if anybody else will."
On October 02 2008 11:45 HeadBangaa wrote: Why are political science majors so angry? Is it the lackluster job opportunities of your field? What?
Bush has actually put us into business, at least as much as most social science fields are atm.
So I finally finished my May 4th movement paper and another one on leadership ethics so I've only just now gotten to read this thread. Just a few thoughts while I'm digesting it all:
I think it's important to note the first step the Treasury dept. is taking to use the money. http://bloomberg.com/apps/news?pid=20601103&refer=news&sid=aVVOrzOIBedo Is there another way to effectively plan something of this magnitude? Probably not. Is it still disheartening to think they're basically hiring a ton of the people who just lost their jobs? Yep.
We know regulation played a part in creating incentives for this to happen and we also know it's extremely difficult for the Fed to be accurate or precise in its adjustment to meet different needs of different markets but I simply haven't seen a convincing case for hands off monetary policy instead. Markets are never close to ideal and even if the long run is truly guaranteed to correctly adjust itself (which it may not be), there's not a chance in hell that you can survive in a democracy with short term exploitation (and I'm not arguing against self-interest, just saying it's inevitable.) Yes. it ties directly to politics and neo-classicism doesn't provide a pragmatic solution. TBH, the internet is probably even exacerbating the problem, as less schooled people enter directly into markets and confidence is easily swayed. Even asymmetrical information will not be fixed.
It's accurate to say "x activity by the government caused y problem" but it's not exactly fair because it makes the implication that we would be problem free had government not enacted x. That's simply not true. The case of affordable housing loans doesn't prove my point that well because it was an exceptionally idiotic decision but I don't think we'd be crisis free regardless. Are you presupposing that the overinflated tech bubble was a bad thing and that without intervention from the very beginning, we'd be better off? I'm not sure that 1 is necessarily true and I don't think 2 is..
We now know classical Keynes models are outdated and arguably inaccurate to begin with but subscribing strictly to one school seems ridiculous to me, and I've been guilty of it in the past. I'm glad someone brought up econometrics because as it stands, Austrian, Chicago, Stockholm, etc. schools are all able to present seemingly sound rationalist perspectives to anyone not pre-committed and for a lot of people it comes down to whichever journal they most recently read. Ron Paul has done wonders for the Austrian school on english speaking forums, but I'm sure the popular tune is quite different on other forums of other languages. Are any of us quality judges to determine the merit of Cato or Brookings? Doubtful. I don't understand econometric theory very well and I've seen criticisms of its empiricism, but I'm still extremely curious to see what it'll yield.
This was not a vote I'd want to make because I haven't bought into either side.
EDIT: Is anyone here knowledgeable enough to sort through AER?
Gold standard is a good monetary system IMO. It's stable, predictable, and won't make mistakes (unlike the fed).
Steady, predictable deflation isn't a problem. As long as it's caused by the creation of goods and not the reduction of the actual money supply, it just means that firms have to adjust and take into account future deflation (which should be easy since it's predictable). The market will adjust and investment will continue on just the same once it does.
The only problem with the gold standard is that it isn't very flexible. Regardless of whether you believe in the Austrian business cycle theory or not, I think that you have to admit that circumstances external to the economy in question will still cause downturns. Under the gold standard, there's not much anyone can do to deal with downturns, while under a competent central bank with fiat currency, there is. The question is how competent are we going to assume our national bankers are going to be.
Funny to see people argue FOR deflation lol, really, deflation is one of the worst things that can happen to the economy. Economists actually considered it an almost purely theoretical myth until it occured in Japan in the nineties. Three obvious reasons why deflation is so bad for the economy: - Any rational consumer will start postponing his consumption, expecting prices to go down even more, final result, the economy shrinks - Loans become more expensive, investments go down, once again, the economy shrinks - Wages have downward rigidity, it is almost impossible to lower wages in an even slightly unionized environment. This means that even when a wage block is in effect, wages will still be going up.
stop telling me the gold standard will fix things when it's a fact we were ON the gold standard before the Great Depression.
UGH.
Gold standard is not a good thing. Deflation is not a good thing. You cannot just arbitrarily say "well companies account for it..." that's not the problem! It discourages investment and encourages hoarding etc etc I have covered this in at least 3 posts can I stop repeating myself.
On October 06 2008 01:20 pfff wrote: Funny to see people argue FOR deflation lol, really, deflation is one of the worst things that can happen to the economy. Economists actually considered it an almost purely theoretical myth until it occured in Japan in the nineties. Three obvious reasons why deflation is so bad for the economy: - Any rational consumer will start postponing his consumption, expecting prices to go down even more, final result, the economy shrinks - Loans become more expensive, investments go down, once again, the economy shrinks - Wages have downward rigidity, it is almost impossible to lower wages in an even slightly unionized environment. This means that even when a wage block is in effect, wages will still be going up.
Benign deflation isn't bad at all (deflation caused by an increase in goods), however, harmful deflation is (deflation caused by decline in money supply).
Economists did not consider deflation a myth at all... In the late 1800s the United States experienced the "great deflation", a period of 20 years that included pretty much constant deflation. And real GDP per capita still grew by about 50% during that time.
To address your points: Yes prices will go down, however, if banks know that steady deflation will occur, interest rates will also be lower. Interest rates include a premium based on inflation, a 5% interest rate while there is 2% inflation is a 3% real interest rate; banks have to attempt to guess at future inflation and charge this premium accordingly. If banks know that steady deflation will occur, interest rates go down, therefore returns on investment go down, and these lower returns counter the expectation of lower prices in the future.
Wait, you're saying two opposite things here. You're saying that people will invest and postpone consumption, shrinking the economy, and that people will invest less since it's more expensive, also shrinking the economy. Obviously, both can't be true.
And loans don't become more expensive, they just stay the same. The only difference is that the inflation premium charged on them goes down. The nominal interest rates fall, but the real rates stay the same. Though I guess you could say that the opportunity cost of loans goes up somewhat, but too much investment can be just as bad as too little,
The wage problem is real though. Getting rid of such powerful unions would help (I mean, we are talking about getting on a gold standard, we might as well include other impossibilities). However, I don't think it's that much of a problem simply because productivity is rising so much across sectors of the economy. If productivity can keep up with real wage increases due to deflation then everything is fine. If not, then it ups the competitiveness of industries a bit more, as they know that they have to reduce costs even more or die as an industry, or unions have to accept wage cuts, or something bad happens.
On October 06 2008 01:35 ahrara_ wrote: stop telling me the gold standard will fix things when it's a fact we were ON the gold standard before the Great Depression.
Gold standard is not a good thing. Deflation is not a good thing. You cannot just arbitrarily say "well companies account for it..." that's not the problem! It discourages investment and encourages hoarding etc etc I have covered this in at least 3 posts can I stop repeating myself.
It would only really encourage hoarding if it got to the point that nominal interest rates were negative. Historically, the gold standard has mostly resulted in a pretty even rate of inflation, close to 0, slightly negative or positive depending on mining and growth. Under those circumstances, people would still rather earn a good return on their money and have the safety of bank guarantees than go the mattress-stuffing route.
Either way, one of our problems is that people are over-investing because of too high of inflation rates (which translates into too low of interest rates). If businesses had kept more cash on hand and invested less, we wouldn't be having this bubble problem at all. High inflation causes over-investment which causes bubbles which causes popping bubbles.
And the great contraction of the money supply during the great depression was much more a result of fractional banking, retarded government regulations (like no branch banking), and the subsequent collapse of the banking system. It had almost nothing to do with the gold standard.
And note that I'm not even a supporter of the gold standard. I like the federal reserve, I just wish that it's leaders weren't so incompetent so much of the time. If Volcker could come back it would probably do better, but it just needs to be more restrained in general. But I just recognize that the gold standard has a lot of things going for it and isn't prone to human mistakes. It lacks flexibility, but makes up for that in stability.
Who exactly are you trying to pin it on? Bernanke? I think he's unfortunately become more of a public figure head than he'd like and he's been trained to work behind closed doors, not in front of a podium.
Ideally, banks would only lend money to people they were sure could pay them back: people who had a clean criminal record, good credit, and a solid income.
Unfortunately, because of deregulation, this didn't always happen.
Yes, because banks just love to lose money when mortages default. In fact, banks were *pressured* by the government to lend to mainly minorities who can't pay back their loans. Both parties supported this. The idea was to "help" blacks (and hispanics) catch up in home ownership with whites. Banks have been getting accused of racism for not lending enough to minorities, who were disproportionately liable to default even for the same income level. Banks aren't free of blame; they went along with this because of greed, and because they assumed the taxpayer would bail them out if something goes wrong. But it's not as simple as "lack of government regulation caused the crisis".
First of all thanks to the OP, very informative post and well written. This statement kind of bothered me though, you might be correct in saying that minorities might be more liable to default in the same income level, but they are also disproportionately more likely to receive higher interest rates on sub-prime loans than whites. In this study "Unfair Lending"the number was, I believe for blacks was 31% more likely to receive higher interest rate (fixed rate loans) taking into account the same risk factors and income level . Predatory lending is real and is a large problem, that is not to say individuals do not have a responsibility to look for loans they can afford and like you say banks are also to blame, but who do you think is more responsible, the drug dealer or the drug user.
i'm at 0:53 and i need to stop this shit. i'll watch the rest tomorrow but i'm sick of these "fight club sound trackish" documentaries with hardly any diverse interviews and an assload of assertions.
On October 02 2008 11:45 HeadBangaa wrote: Why are political science majors so angry? Is it the lackluster job opportunities of your field? What?
Bush has actually put us into business, at least as much as most social science fields are atm.
What is the order of business that Bush has afforded your craft? Passionate teaching?
Serious question. My roommate just got his BA in poli sci, and he's saying that you can't do shit with it except teach, because getting in on campaigns is too competitive or something.
finding campaign work/community organizing jobs is impossible, not unless you want to get paid. i've friends who work practically full time for the Obama campaign doing state-level coordinating and don't get a cent. all summer i slaved my ass off for an unnamed congresswoman and all i got was a tshirt and deep psychological scars that won't leave me until i die and that makeup the substance of my nightmares. anyway no one gets a PS degree for the JOB OPPORTUNITIES lololol... just something I want to study. most PS grads go on to law school, or for those of us who aren't concerned about money or throwing themselves head first into a dying industry... JOURNALISM!
edit: and i'm not sure what jibba's saying about bush either, except that the motherfucker's economic policies is why the most i'll ever get paid is $50k a year, if i'm lucky.
On October 02 2008 11:45 HeadBangaa wrote: Why are political science majors so angry? Is it the lackluster job opportunities of your field? What?
Bush has actually put us into business, at least as much as most social science fields are atm.
What is the order of business that Bush has afforded your craft? Passionate teaching?
Serious question. My roommate just got his BA in poli sci, and he's saying that you can't do shit with it except teach, because getting in on campaigns is too competitive or something.
Obama actually started hiring like crazy over the summer and I guess the feeling is that those positions were also going to lead into staff hiring. I was only an intern so I'm not sure.
I should've clarified what I meant more. Yeah, right now is a terrible time to hold just a BA but that's true for a lot of different fields. Grad school is probably the next step for a lot of people, but I don't think it would be that difficult to find a staff position somewhere in civil service. They replace a shit ton of people everytime a new president takes office and I think a lot of the baby boomers are getting ready to retire. Iraq always needs more rebuilders. :x
On October 06 2008 09:29 ahrara_ wrote: finding campaign work/community organizing jobs is impossible, not unless you want to get paid. i've friends who work practically full time for the Obama campaign doing state-level coordinating and don't get a cent. all summer i slaved my ass off for an unnamed congresswoman and all i got was a tshirt and deep psychological scars that won't leave me until i die and that makeup the substance of my nightmares. anyway no one gets a PS degree for the JOB OPPORTUNITIES lololol... just something I want to study. most PS grads go on to law school, or for those of us who aren't concerned about money or throwing themselves head first into a dying industry... JOURNALISM!
edit: and i'm not sure what jibba's saying about bush either, except that the motherfucker's economic policies is why the most i'll ever get paid is $50k a year, if i'm lucky.
tbh i never did much research into PS job opportunities. what else do poli sci students do?
Obama actually started hiring like crazy over the summer and I guess the feeling is that those positions were also going to lead into staff hiring. I was only an intern so I'm not sure.
I think you're way exaggerating the hiring. The Obama campaign has thousands of volunteers who'd love to have a paid position. Maybe 0.1% of them will get one, probably less. Paid field work is impossible to come by unless you've been working as an organizer for a long time. Almost all important positions are hired through word of mouth.
Nope, I was working with FOs over the summer who were hired at the same time I was selected. One guy had just applied for the job the weekend before we started. It probably depends where you're living, since MI was a pretty important state.
the right kind of regulations need be extremely rare.
deregulation can only thrive if we get rid of the corrupt organizations along with it. deregulation implies free markets, but as long as the fed dominates the money supply and prints like a Gutenberg knowing his press will be burned by the catholic church at sundown.
i'm surprised at how many people i talk to support regulation over deregulation and interventional market over freemarket. a constant point they all bring up is freemarkets don't work and corruption will abound and monopolies will rise without it. yet the ironic thing is that those creating regulations are also the ones in league with the FED which manipulates the market and prevents true free markets. and people say free markets don't work. as if we have a free market . theyre' like T cells that recognize healthy cells as harmful particles, adn then call in the harmful particles to solve the problem. accurate picture of hte players and the problems is crucial.
there are plenty of facts about the fed, how they contracted the money supply by 1/3 CAUSING the 1929 depression, he value of the dollar , the methods and tools they use... despite the censorship and media un-coverage. before being quick to dismiss unfamiliar accusations, think, "we've had these guys in forever, and the problems only get worse. should we keep them or change to sound money?"
In my opinion the sub prime crisis and all this financial market turmoil which has followed is a symptom of the problem, it is not the cause it self. As the press and many people seem to believe. The problem is the real economy. Over the course of decades the real wages of lower and middle income earners has fallen, reaching its peak by some measures in the 1970's, the minimum wage peaked in the mid 1970's for example. Over the slow progression of decades the real wages of these individuals has continued to slide. This has led to increasing levels of debt as people use borrowings to make up the difference between real income and required expenses. In my opinion this idea that the lower and middle income earners spending too much is a myth disguising the fact that insufficient wages are the real problem.
Given this it is no coincidence that the part of the financial market to go down first was that part which lends to the poor. If the poor were growing richer they would have met their mortgage payments and this situation would never have arisen to begin with.
Poor financial market regulations don't help but this is not where the problem really lies.
Whats more the Bush administration has followed a small government, free market approach and this has made the problem far far worse. Before anyone says how can you say he followed a small government approach when he has increased spending and increased the deficit significantly I will explain. The Bush administration has cut spending on health care education social security, then poured money into defense and tax cuts to the rich. This is exactly what a small government approach will do (except not by definition spending on defense) and McCain is promising to cut spending on services even more.
The Bush administration has been firing public sector workers by the tens of thousands. Clearly this is bad news for a contracting economy.
Thus you have the double wammy going. On the one hand contracting wages for the majority of the populace reduces demand. On the other the government is reducing spending in the economy contracting demand even further. The inevitable consequence of a contractionary effort on this scale is absolutely catastrophic and defies out comprehension. So long as the economy continues to contract more people will be defaulting on their mortgages and will continue to reduce their consumption. This will put continued downward pressure on the stock markets and on the banks.
The bailout does nothing to fix the real problem but it does dramatically undermine the capacity of the government to actually do something which will. People often say that the bailout is bad but it is better than doing nothing, they basically believe that either you do this or you do nothing. Why doesn't anyone suggest a third option. If I was running the show i would use that money to create jobs by the hundreds of thousands, killing two birds with one stone in the process. Hire more teachers, stimulate the economy and help fix the education system. Do this same thing across the board and the economic situation will quickly improve but if the policies that are currently in place remain so the situation can only deteriorate further.
McCain promises policies which will be disastrous. Obama advocates doing basically the same thing I do the worry is ether it will be too late, and of course whether he will actually get elected at all.
The current ideas to stimulate the economy (education and science) are only long term solutions. Make no mistake about it, the bailout is intended to be a short term solution only so that the people who had legitimate mortgages don't become affected, with the hope that it'll buy time to make those future corrections. A lot of people don't think this bandaid will be helpful and they're justified in thinking so, but just remember that quite a few congressmen are going to lose their jobs over the bailout, especially the republicans, so I don't think you can simply write off their rationale either.
1.) The plan hasn't been put into effect yet. How hard is this for people to understand? Reddit and digg have been stroking themselves all day over exactly what you're saying but goddammit it's that simple.
2.) The problem is that even as you're fixing bank's balance sheet, the fed won't put enough equity back into banks, and banks refuse to lend to each other, which is another root of the problem. To fix this, the fed must cut the discount rate, which is probably going to happen soon.
On October 06 2008 15:47 ahrara_ wrote: 1.) The plan hasn't been put into effect yet. How hard is this for people to understand? Reddit and digg have been stroking themselves all day over exactly what you're saying but goddammit it's that simple.
2.) The problem is that even as you're fixing bank's balance sheet, the fed won't put enough equity back into banks, and banks refuse to lend to each other, which is another root of the problem. To fix this, the fed must cut the discount rate, which is probably going to happen soon.
Unfortunately, the $700 billion can't actually cover everything. There is like a $5 trillion shortfall. The whole point is to increase confidence, not actually provide the raw cash to fix everything. If its not helping confidence, then when they actually do pay out it won't do much.
There are two elements to rebuilding confidence was my point. The discount rate must follow. What's the point of knowing that months from now, your banks could finally take these bad assets off their hands when right now they have to pay an obscene premium for an overnight loan?
On October 06 2008 16:03 ahrara_ wrote: There are two elements to rebuilding confidence was my point. The discount rate must follow. What's the point of knowing that months from now, your banks could finally take these bad assets off their hands when right now they have to pay an obscene premium for an overnight loan?
Well, there is another factor too. Did you notice that leading up to the bailout bill, the market was up a couple hundred points, then after it was passed, it just kept falling like a rock until the markets closed? Who's to say that monday morning it won't just keep going? Thats all I'm saying.
Maybe the market doesn't like this bill. Maybe it was pushed through to bailout foreign investors, and thats the reason. We'll have to wait and see.
On October 06 2008 13:03 Choros wrote: In my opinion the sub prime crisis and all this financial market turmoil which has followed is a symptom of the problem, it is not the cause it self. As the press and many people seem to believe. The problem is the real economy. Over the course of decades the real wages of lower and middle income earners has fallen, reaching its peak by some measures in the 1970's, the minimum wage peaked in the mid 1970's for example. Over the slow progression of decades the real wages of these individuals has continued to slide. This has led to increasing levels of debt as people use borrowings to make up the difference between real income and required expenses. In my opinion this idea that the lower and middle income earners spending too much is a myth disguising the fact that insufficient wages are the real problem.
Given this it is no coincidence that the part of the financial market to go down first was that part which lends to the poor. If the poor were growing richer they would have met their mortgage payments and this situation would never have arisen to begin with.
Poor financial market regulations don't help but this is not where the problem really lies.
Whats more the Bush administration has followed a small government, free market approach and this has made the problem far far worse. Before anyone says how can you say he followed a small government approach when he has increased spending and increased the deficit significantly I will explain. The Bush administration has cut spending on health care education social security, then poured money into defense and tax cuts to the rich. This is exactly what a small government approach will do (except not by definition spending on defense) and McCain is promising to cut spending on services even more.
The Bush administration has been firing public sector workers by the tens of thousands. Clearly this is bad news for a contracting economy.
Thus you have the double wammy going. On the one hand contracting wages for the majority of the populace reduces demand. On the other the government is reducing spending in the economy contracting demand even further. The inevitable consequence of a contractionary effort on this scale is absolutely catastrophic and defies out comprehension. So long as the economy continues to contract more people will be defaulting on their mortgages and will continue to reduce their consumption. This will put continued downward pressure on the stock markets and on the banks.
The bailout does nothing to fix the real problem but it does dramatically undermine the capacity of the government to actually do something which will. People often say that the bailout is bad but it is better than doing nothing, they basically believe that either you do this or you do nothing. Why doesn't anyone suggest a third option. If I was running the show i would use that money to create jobs by the hundreds of thousands, killing two birds with one stone in the process. Hire more teachers, stimulate the economy and help fix the education system. Do this same thing across the board and the economic situation will quickly improve but if the policies that are currently in place remain so the situation can only deteriorate further.
McCain promises policies which will be disastrous. Obama advocates doing basically the same thing I do the worry is ether it will be too late, and of course whether he will actually get elected at all.
Unbelievable. An economics major that doesn't understand that full employment != full production.
On October 06 2008 13:03 Choros wrote: In my opinion the sub prime crisis and all this financial market turmoil which has followed is a symptom of the problem, it is not the cause it self. As the press and many people seem to believe. The problem is the real economy. Over the course of decades the real wages of lower and middle income earners has fallen, reaching its peak by some measures in the 1970's, the minimum wage peaked in the mid 1970's for example. Over the slow progression of decades the real wages of these individuals has continued to slide. This has led to increasing levels of debt as people use borrowings to make up the difference between real income and required expenses. In my opinion this idea that the lower and middle income earners spending too much is a myth disguising the fact that insufficient wages are the real problem.
Given this it is no coincidence that the part of the financial market to go down first was that part which lends to the poor. If the poor were growing richer they would have met their mortgage payments and this situation would never have arisen to begin with.
Poor financial market regulations don't help but this is not where the problem really lies.
Whats more the Bush administration has followed a small government, free market approach and this has made the problem far far worse. Before anyone says how can you say he followed a small government approach when he has increased spending and increased the deficit significantly I will explain. The Bush administration has cut spending on health care education social security, then poured money into defense and tax cuts to the rich. This is exactly what a small government approach will do (except not by definition spending on defense) and McCain is promising to cut spending on services even more.
The Bush administration has been firing public sector workers by the tens of thousands. Clearly this is bad news for a contracting economy.
Thus you have the double wammy going. On the one hand contracting wages for the majority of the populace reduces demand. On the other the government is reducing spending in the economy contracting demand even further. The inevitable consequence of a contractionary effort on this scale is absolutely catastrophic and defies out comprehension. So long as the economy continues to contract more people will be defaulting on their mortgages and will continue to reduce their consumption. This will put continued downward pressure on the stock markets and on the banks.
The bailout does nothing to fix the real problem but it does dramatically undermine the capacity of the government to actually do something which will. People often say that the bailout is bad but it is better than doing nothing, they basically believe that either you do this or you do nothing. Why doesn't anyone suggest a third option. If I was running the show i would use that money to create jobs by the hundreds of thousands, killing two birds with one stone in the process. Hire more teachers, stimulate the economy and help fix the education system. Do this same thing across the board and the economic situation will quickly improve but if the policies that are currently in place remain so the situation can only deteriorate further.
McCain promises policies which will be disastrous. Obama advocates doing basically the same thing I do the worry is ether it will be too late, and of course whether he will actually get elected at all.
Unbelievable. An economics major that doesn't understand that full employment != full production.
LoL what does that have to do with anything? If increasing the level of production is your objective, which ultimately it is to deal with a recession, then an expansionary fiscal policy will lower the unemployment rate and increase the levels of output, this is exactly what i argue for. This has been done before and is a proven method of economic stimulus and the fiscal stimulus package actually goes a way toward achieving this although not enough. The United States is nowhere near its production capacity at the moment. These supply side economics advocates say we need to increase investment by cutting taxes to the rich and this will create jobs. This will not happen. Increasing levels of investment increases capacity but it does not in its own right increase the levels of production. Supply equates to Demand, you increase demand you increase the quantity supplied. This is how to increase employment and fix the economy.
Before anyone says the economy isnt in recession I will provide my explanation for the confusing economic statistics we have been seeing of late. If your in recession then the amount people buys decreases, thus the levels of stock increase and the quantity of imports falls, both of these things are a positive to your GDP statistics and both of these factors have had a massive impact in making the GDP growth statistics look alot better than they actually are. The unemployment rate in the United States is increasing at the fastest rate in 20 years, a prominent American economist summed it up well when he commented after the unemployment data was released when he said "well that settles it there cannot be any doubt now we are in a recession."
Yes I apologize for my flippant response. I am well aware that you are appealing to Keynes here and that you think short term infrastructure and "job creation" investment will save us from economic hell.
It is also about as proven a method of economic stimulus as acupuncture is a proven method of physical healing.
Step out of your theoretical mindset and compare the options really quickly: If you create public sector jobs here's what happens:
1.) This crowds out the private sector, making the costs of production higher. 2.) This money takes a while to trickle up, not to mention the time it takes to establish these projects and do the hiring. 3.) This does not fix the credit problem. Does not solve the fundamental problem of market confidence. Consumers will be less likely to save or invest when a.) they have to pay back debt b.) they have little confidence themselves 4.) "Job creation" is an extremely inefficient way of stimulating demand. I think this is self-explanatory.
Seriously your credentials are consistently inconsistent with the quality of your ideas. It's like you're copying and pasting out of a textbook. The market fundamentalists in this thread have consistently had more sophisticated reasoning than you.
Well, there is another factor too. Did you notice that leading up to the bailout bill, the market was up a couple hundred points, then after it was passed, it just kept falling like a rock until the markets closed? Who's to say that monday morning it won't just keep going? Thats all I'm saying.
Maybe the market doesn't like this bill. Maybe it was pushed through to bailout foreign investors, and thats the reason. We'll have to wait and see.
it's a simple question of looking ahead to all the other problems that the bailout is not immediately fixing, most of which have to do with tight credit. the unemployment survey sure didn't help.
On October 06 2008 17:14 ahrara_ wrote: Yes I apologize for my flippant response. I am well aware that you are appealing to Keynes here and that you think short term infrastructure and "job creation" investment will save us from economic hell.
It is also about as proven a method of economic stimulus as acupuncture is a proven method of physical healing.
Step out of your theoretical mindset and compare the options really quickly: If you create public sector jobs here's what happens:
1.) This crowds out the private sector, making the costs of production higher. 2.) This money takes a while to trickle up, not to mention the time it takes to establish these projects and do the hiring. 3.) This does not fix the credit problem. Does not solve the fundamental problem of market confidence. Consumers will be less likely to save or invest when a.) they have to pay back debt b.) they have little confidence themselves 4.) "Job creation" is an extremely inefficient way of stimulating demand. I think this is self-explanatory.
Seriously your credentials are consistently inconsistent with the quality of your ideas. It's like you're copying and pasting out of a textbook. The market fundamentalists in this thread have consistently had more sophisticated reasoning than you.
Well, there is another factor too. Did you notice that leading up to the bailout bill, the market was up a couple hundred points, then after it was passed, it just kept falling like a rock until the markets closed? Who's to say that monday morning it won't just keep going? Thats all I'm saying.
Maybe the market doesn't like this bill. Maybe it was pushed through to bailout foreign investors, and thats the reason. We'll have to wait and see.
it's a simple question of looking ahead to all the other problems that the bailout is not immediately fixing, most of which have to do with tight credit. the unemployment survey sure didn't help.
1) Where is the evidence of this? Every single decent economy on the planet was essentially created in the public sector. This is a big statement to make so i will provide examples (and there are probably extremely limited examples which would disagree with this.) Japan underwent a massive government investment program in the late 1800's to early 1900's which created incredible economic success for the public and private sector. South Korea and Taiwan both underwent public sector economic stimulus policies across a broad spectrum to create infrastructure and jobs as well as stimulate production of commodities and heavy manufacturing. The same is true for European economies as well as the United States itself. A strong public sector leads in turn to a strong private sector as it generates higher levels of demand and infrastructure. The growth in China today is also a direct result of this. The government spends hundreds of billions on infrastructure which establishes the environment in which the private sector can flourish. I find it frustrating that something which is essentially an empircial fact is controversial.
2) I do not think it takes very long for it to trickle up but even if it does so what? You hire a new teacher and a week later that money in being spend on groceries and movie tickets etc. Each dollar the government places in the economy starts a positive multiplies effect, that dollar counts as several dollars in the real economy and it goes straight into the private sector and into further job creation.
It wont take long to get this money into the system at the moment because the system is already in place.
3) It will solve the stock market problem in my opinion because increasing the levels of employment will resuscitate the housing market which will boost up the banks, it will increase the levels of corporate revenues and in turn will put upward pressure on the stock market overall.
Confidence? An economy showing genuine strength will boost confidence far more than mere words ever will. Sure the market went up when they announced the package, its like saying to a junkie 'ill give you more heroin tomorrow' of course they will be pleased....in the short term. The only way to put long term upward pressure on the stock market is to create genuine economic strength at the basic level. The bailout does nothing to achieve this.
4) I'm not talking about job creation to stimulate demand, i'm talking about stimulating demand to create job creation. Increase the wages to teachers, bam money in the economy over night. The same is true for increasing welfare etc.
I do talk about increasing employment in the public sector as well this is required to solve the long run problem. It is fundamentally a long run problem which caused all this. I believe it has been in the cooking for decades, but in the past the economy has started to go under and lowering interest rates has been able to stimulate demand and create the illusion that stuffs alright but the long run problem remains. The United States has gotten to the point where short run lowering of interest rates wont be able to fix the problem this time.
Sounds like i'm talking out of a text book? Well im not, in fact all the text books i read effectively assume that what is happening now is an impossibility and this is crippling effective policy responses.
I'm talking about Keynesian economic your quite right. In my opinion this is appropriate under the current circumstances. I believe that the rejection of Keynesian economics is an absolute tragedy. It was basically because Keynes and Friedman were rivals, and Friedman was in his shadow, then he got his way and he set about destroying Keynesian economics outright and was quite successful at doing this.
I will respond to Choros tomorrow, but Europe has been having its own problems with bank failures. A key problem has been that the kind of coordinated bailout is difficult over there because there's no organization that has the appropriate jurisdiction.
edit:
1.) guaranteeing bank deposits is completely different from guaranteeing firms? the reason this escalating competition is happening is because otherwise it would drive deposits to places that have pumped up their deposit insurance. the deposit insurance is really meaningless because in every case of total bank failure, the central bank in the states and in europe has offered to cover every cent of every deposit.
2.) 73% as MUCH exposure as banks, not 73% more. -_-'''
On October 06 2008 17:52 ahrara_ wrote: I will respond to Choros tomorrow, but Europe has been having its own problems with bank failures. A key problem has been that the kind of coordinated bailout is difficult over there because there's no organization that has the appropriate jurisdiction.
edit:
1.) guaranteeing bank deposits is completely different from guaranteeing firms? the reason this escalating competition is happening is because otherwise it would drive deposits to places that have pumped up their deposit insurance. the deposit insurance is really meaningless because in every case of total bank failure, the central bank in the states and in europe has offered to cover every cent of every deposit.
2.) 73% as MUCH exposure as banks, not 73% more. -_-'''
sorry, its 2am here, I should just stop before I'm not coherent any more
Ok, just remembered I dont have class tomorrow morning so let's see what we can do with Choros' post:
1.) I think you are confused about the meaning of public sector? The examples you cite are examples of public investment in the private sector, which is indeed a great way to encourage growth and build capital infrastructure provided you have a sufficient budget surplus. but what you are advocating is essentially a.) wage controls b.) building infrastructure just to create jobs.
a is just a terrible idea. more on that later. b is most valuable when it is contracted out to private companies because otherwise you have government inefficiency and you crowd out the private sector. but the benefits of that infrastructure won't be seen for years, and will have no impact on the current crisis. creating jobs just to create jobs is the same thing as economic stimulus package. you may as well just provide government hand outs.
How does the public sector / wage controls crowd out the private sector?
a.) The private sector, to compete for workers, has to increase its wages. Drives up inflation, real wages go down. This would happen with private sector growth too, except that's made up for by the
b.) The private sector is more efficient. If you don't believe this, then really I can't debate with you. Seriously. Industries and markets that could've been occupied by the private sector are instead taken over by the less efficient public sector whose proceeds don't go to investment, but still more inefficient public works.
2.) That point was really an aggregate of my next two...
3.) How in the world does increased employment resuscitate the housing market? This makes no sense at all. Banks STILL suffer from a lack of confidence. This lack of confidence derives from a lack of capital in other banks and the incalculable weight of mortgage and CDO losses. This is what's killing the housing market -- banks are unwilling to lend, not consumers are unable to afford. Your plan does nothing to address the CORE problem. If I may quote from Network:
Am I getting through to you, Mr. Beale? You get up on your little twenty-one inch screen and howl about America and democracy. There is no America. There is no democracy. There is only IBM, and ITT, and AT&T, and DuPont, Dow, Union Carbide, and Exxon. Those *are* the nations of the world today.
THE BANKS ARE THE GENUINE ECONOMIC STRENGTH. Credit is everything. I am not referring to consumer confidence, I am talking about creditor confidence. Creditor confidence is low because they don't know which banks will go next. The root of the problem are the complex MBS and their new-found illiquidity. The bailout serves to stabilize balance sheets to get credit going again. Your plan also addresses this problem, but only in the long run as wages accumulate. Your multiplier doesn't work when there's no credit, no loans being made and everything is being held on reserve. The bailout (combined with a drop in the discount rate) fixes credit confidence, and we have the multiplier effect too.
Do you have no idea how stock markets work? People will not invest in a company if they fear it will collapse soon. They will not invest until they have good information about that company's odds for success. What the bailout does is restore liquidity and more perfect ifnormation about companies, restore confidence. As credit is restored, the housing market stops falling, losses stop accumulating, and JESUS SAVES.
4.) See the bottom paragraph in my analysis. This is outweighed by the fact the bailout fixes the credit crisis as well.
1) I am not talking about wage controls. I am talking about boosting public sector wages indeed but this is NOT controls. I agree that price and wages schemes generate inefficiency. You say that the public sector investment was investment in the private sector. This is true to an extent, but every single good education system on the planet (that i am aware of) was build and maintained in the public sector, this is true with health care also. This is what I'm talking about government investment in the private sector is not particularly important to my argument. I'm talking about public sector jobs.
I read an article recently about how in California the economy is contracting which was decreasing government revenues and increasing their deficit. So in response Schwarzenegger decided to cut billions of dollars from public education cutting such classes as art science and music. He is firing workers by the thousand, this contracts the economy even more. The story is the same across the country I advocate doing the exact opposite.
Private sector is always more efficient? This is a horrible preconception is my opinion. Efficiency by what measure? Profits? This can be applied as a general rule and I do not object to it overall but there are examples where increased 'efficiency' is a detriment to society and the economy. Again Education is an example of this. Private firms attempt to maximise profit. In education they achieve it by firing teachers and over stacking classes and poorly funding maintenance, in this circumstance increased 'efficiency' is actually a detrimental thing.
Private sector competing with the public sector for workers? When you have labor shortages then sure but this is a problem for another day, and it is easily rectified. Rising wages cause inflation maybe, rising wages is the key to increasing peoples standard of living. If wages rise faster than the ability of the supply side of the economy to provide for it then yes it will generate inflation. What you gotta do is ensure that wages rise inline with the supply side so that real wages increase and inflation is kept low, this is irrelevant under current conditions so i wont continue to go into it.
3) How in the world does increased employment help the housing market? If someone has a job and is earning an income they are a hell of a lot more likely to buy a house and be able to pay for it. The fact that peoples wages are falling decreases the capacity of individuals to meet their repayments, this destroys confidence. Banks are unwilling to lend because people do not have enough money to meet their repayments. If people have the physical capacity to meet those repayments it will increase confidence and it will increase the availability of credit.
"People will not invest in a company if they fear it will collapse soon." People will not fear business's collapsing if the economy is in good health. Fixing the real economy will fix the stock market and nothing else can.
Credits effect on the multiplier is irrelevant. Because I am providing physical stimulus then this physical wealth will multiply credit or no credit. In fact the higher a persons marginal propensity to consume then the higher the multiplier. The only time the multiplier wont work thus is if people save more than they spend, this is not the case as far as i can tell. The Bailout balances their books sure, but as long as the unemployment rate is rising and wages are falling more and more people will default of their mortgages and the banks will continue to go down and confidence will continue to fall.
People are not and will not take on more credit when they have no confidence in their ability to pay for it.
I can't argue with you anymore. You just fundamentally have no idea what you're talking about. No clue whatsoever. Read the news sometime. Pick up a magazine. Get a grasp of the situation, and then come back. Normally people posting like you wouldn't bother me, but you go ahead and tap on that you're an econ major, which scares me, because you just don't understand some fairly basic things that simply aren't true.
i.e.
Credits effect on the multiplier is irrelevant
ORLY?! I was facepalming hard by the time I read this.
Banks are unwilling to lend because people do not have enough money to meet their repayments
Not a major factor. It's just NOT. I can't really put it to you in any other way except you are factually incorrect.
I don't think either of us are going to win the debate about wages. Bottom line is, yes creating jobs/stimulus will help. But it won't be as effective as the bailout, because you never address the credit issue. The credit problem doesn't have as much to do with income as you think and your repeated, unwarranted denials of that fact won't change that.
edit: and i swear i brought this up earlier but also consumers are unlikely to spend their newfound wages when a.) they have to pay back debt b.) they have less confidence in the economy. The banks will also be holding their money in reserve because of the liquidity problem.
On October 06 2008 18:58 Choros wrote: Private sector is always more efficient? This is a horrible preconception is my opinion. Efficiency by what measure? Profits? This can be applied as a general rule and I do not object to it overall but there are examples where increased 'efficiency' is a detriment to society and the economy. Again Education is an example of this. Private firms attempt to maximise profit. In education they achieve it by firing teachers and over stacking classes and poorly funding maintenance, in this circumstance increased 'efficiency' is actually a detrimental thing.
He's right Yale, Harvard, Princeton, etc, are such horrible schools.
On October 06 2008 18:58 Choros wrote: 1) I am not talking about wage controls. I am talking about boosting public sector wages indeed but this is NOT controls. I agree that price and wages schemes generate inefficiency. You say that the public sector investment was investment in the private sector. This is true to an extent, but every single good education system on the planet (that i am aware of) was build and maintained in the public sector, this is true with health care also. This is what I'm talking about government investment in the private sector is not particularly important to my argument. I'm talking about public sector jobs.
Oh man, look how good our education system's doing.
The fact that every good education system has originated in the public sector means nothing, as no modern market-based education system has ever been tried. I'm extremely confident that a correctly-implemented voucher+private school system would be better than anything we have now.
And this is not true with health care. Every nationalized government healthcare system suffers from massive waiting lists, not enough doctors, subpar equipment, and worse health. http://www.cato.org/pubs/pas/pa532.pdf
I read an article recently about how in California the economy is contracting which was decreasing government revenues and increasing their deficit. So in response Schwarzenegger decided to cut billions of dollars from public education cutting such classes as art science and music. He is firing workers by the thousand, this contracts the economy even more. The story is the same across the country I advocate doing the exact opposite.
So you'd rather all government run up massive deficits that they can't pay, inflate their way out of it, and create runs on the dollar that collapse our economy and destroy any international standing we have?
Private sector is always more efficient? This is a horrible preconception is my opinion. Efficiency by what measure? Profits? This can be applied as a general rule and I do not object to it overall but there are examples where increased 'efficiency' is a detriment to society and the economy. Again Education is an example of this. Private firms attempt to maximise profit. In education they achieve it by firing teachers and over stacking classes and poorly funding maintenance, in this circumstance increased 'efficiency' is actually a detrimental thing.
You have no clue what you're talking about. Things such as that only happen when people have no alternatives, which coincidentally, can only happen if the government creates that situation. Whenever people have alternatives, companies have incentives to attract people, and those things don't attract people. Government-run industries are the only situations where these detrimental things can happen and people are just forced to deal with them, any private sector firm would be out of business long ago.
Private sector competing with the public sector for workers? When you have labor shortages then sure but this is a problem for another day, and it is easily rectified. Rising wages cause inflation maybe, rising wages is the key to increasing peoples standard of living. If wages rise faster than the ability of the supply side of the economy to provide for it then yes it will generate inflation. What you gotta do is ensure that wages rise inline with the supply side so that real wages increase and inflation is kept low, this is irrelevant under current conditions so i wont continue to go into it.
Wages are determined by productivity, which also determines production. Inflation is a monetary phenomenon. Read some Friedman.
The key to increasing standards of living is increasing productivity, it's impossible to simply increase wages (there's no such thing as a free lunch). No matter how much you want it to, the government isn't simply capable of lifting wages out of nothing. In fact, raising government wages is detrimental on the whole, because the government's productivity isn't going up, therefore they're just generating more deficits which must be taxed or inflated out of.
The ONLY way to increase standards of living is to increase productivity. The most efficient way of increasing productivity is letting the market provide the incentives that unleash the capabilities of the human mind.
You have no clue what you're talking about. Thank you very much.
EDIT: Wait, you're an econ major? Right. We'll go with that. While we're at it, my income is about the same as the GDP of France.
One point I will make regarding this debate is that it is in the nature of economic debates that two economists will debate each other, both will leave believing they have won, and convinced the other is totally mad. It is only the impact that these policies have which can conclusively prove who is correct and who is not. I believe that the failure of the policies you advocate has already begun and has been progressing for some time now. In 12 to 16 months it will be more clear we will probably conclusively know just how bad it will get. At that time I expect I will be saying 'I told you so', but for now all we have are debates without any conclusive result.
It is true that a market based education system has never been tried, in my opinion this has more to do with the fact that only the United States are insane enough to consider such a diabolical and fundamentally flawed system. But I concede that such ideas are relatively new so it is not surprising that they are untried, but no other country would even consider suggesting such policies as the public outcry would be immense. Everything good about our education system was created in the public sector, if it aint broke don't fix it.
The American Education system however is broke, but the fundamental reason for this is the neglect of the public system and consistently deteriorating funding levels. Will a voucher system work? Only time will tell, but I have supreme confidence it will fail.
"So you'd rather all government run up massive deficits that they can't pay, inflate their way out of it, and create runs on the dollar that collapse our economy and destroy any international standing we have?"
At the start of the great depression nations cut expenses as their revenues contracted to minimize their deficits. You put a contractionary policy atop a contracting economy and it will contract even faster. One of the great lessons of the great depression experience is the realisation that increased budget deficits must be weathered in order to prevent the further deterioration of the economy. I am stunned how people consistently argue that policies which have been proven disastrous are appropriate. Whats more maintaining funding levels, in this context I'm not talking about increasing funding rather simply maintaining it, will have no significant inflationary impact, but if it did a higher rate of short run inflation is a small price to pay to prevent economic apocalypse.
How does putting downward pressure on a contracting economy increase your international standing? The United States is almost entirely out of respect at the moment and its respect is falling at a rapid pace. Economic collapse will put a nail in the coffin and in my opinion collapse is the only outcome from contracting a contracting economy. But only time will tell.
I have no clue what I'm talking about hey? Such things can only happen if there is no alternative? Well indeed that is true, but when you say to a poor family here take your voucher and get some education what alternatives do they have. Pathetic school A or abysmal school B. There is no effective alternatives available to these people. Indeed it is the government which has allowed this situation to develop. You ever heard of market failure?
Clearly you have no understanding of microeconomics.
Microeconomics is the study of firms, because firms are profit maximising entities we can predict how they will act under certain conditions. If you do not have a genuine competitive market situation then you will have a monopoly or an oligopoly (among others). Under those conditions firms produce inferior product at a higher price. A voucher system effectively creates a monopolistic situation as the individuals have no buyer power. Rich people do have buyer power, but they already go to private schools so they do not count.
The private sector is not always more efficient monopolies and oligopolies are a testament to that fact. The assumption that the private sector is always more efficient is not true. It is more efficient under certain circumstances. Its like saying that 14cc is ALWAYS the best build to do. It is not true, follow this oversimplification at your peril.
"Read some Friedman" Well I am in fact reviewing a Friedman article about the use of monetary policy at present. "Inflation is a monetary phenomenon". Wrong. Have you ever heard of stagflation? 'Normal' inflation is a monetary phenomenon yes but it is far from the end of the story. The rising cost of oil increases inflation regardless of any monetary impact this is stagflation and it is affecting us right now. For decades economists believed stagflation impossible, ahh the wisdom of economists.
I basically said that boosting the supply side of the economy is the key to prosperity and higher wages. You then say oh your wrong what we need to do is boost the supply side of the economy. Please. Of course productivity is important, this is largely why a good education system is so important. But productivity achieved by paying your workers 50c an hour is the wrong way to go about it. This is effectively what Friedman advocates, the man said many correct things, but he is largely delusional. They live in a fantasy world of economic models which simply do not hold true in the real world. And they use confusing maths and economic jargon to stifle genuine debate. Germany is a good example of how productivity can be immense yet the public sector large. American workers are the most 'productive' on the planet, and look what they have to show for it, the lowest standard of living in the western world.
The following economies were devastated by Friedman trained economists: Chile, Argentina, Bolivia, Brazil, Venezuela, El Salvador, Panama. At this is only a portion of them all, I'm reading a book about it and I have not yet finished. Friedman himself was economic adviser to Augusto Pinochet and his economy catastrophically collapsed as a consequence of the policies he had them implement. They cut government spending on education and health care and these services simply rolled over and died, they cut welfare and it sucked vast quantities of money out of their economic system, they opened up to free trade and their fledgling industries could not compete and they failed. Friedman and his lot call victory and move on the further conquests (Argentina was next). It was not until the abandonment of these abominable polices that these economies began to recover is what was called the "Santiago Consensus" (http://www.weforum.org/pdf/summitreports/latinamerica2007/perspectives.htm) Where these countries instead adopted 'Developmental Economics', this is essentially what I advocate.
I doubt many people are aware that in the 1960's people were marveling at the tremendous success of the 'Latin Core' economies, everyone was saying wow in 50 years time these will be among the most powerful economies on the planet. Well Friedman and his policies ensured they would suffer an entirely different fate.
You are advocating policies that have been tried and have failed. And now we have come full circle, these policies were spawned in the United States and now they have returned to the land of their creation. The current economic downturn is no coincidence rather it is a continence of a long and depressing tale of economic vandalism.
People suggest that the United States is too large to collapse many economies have done over the last 50 years (almost every single one had Friendman's economists behind it). The size of the United States makes collapse less likely but there is only so much beating any economic system can take and right now American economists are brutalizing their economy with a hatchet I doubt it can take much more punishment.
At the end of the day only time will tell, but I remind you that the Bush administration has followed the policies you advocate and I will let the consequences speak for themselves.
The following economies were devastated by Friedman trained economists: Chile, Argentina, Bolivia, Brazil, Venezuela, El Salvador, Panama. At this is only a portion of them all, I'm reading a book about it and I have not yet finished.
^ Let me guess, you're reading Naomi Klein? And you want us to take her opinions seriously?
I mean, Friedman lost it in the 80s - he totally betrayed everything he previously stood for in the rape of South America. Have you even compared what happened in South America to what is being talked about in terms of economic principles here? Have you thought about how South America was absolutely ravaged by illegal wars waged by the US? That was the antithesis of free capitalism - Klein's book is a very confused and very misguided lashing out at something she has very little understanding of. I would suggest a reading of real history and real economics - not some pulp nonsense by a woman with no idea of what she's talking about. I mean, her heart is in the right place and she is certainly pointing at real issues of oppression, but her inferred conclusions about what exactly it was that caused them is lacking, to say the least.
The following economies were devastated by Friedman trained economists: Chile, Argentina, Bolivia, Brazil, Venezuela, El Salvador, Panama. At this is only a portion of them all, I'm reading a book about it and I have not yet finished.
^ Let me guess, you're reading Naomi Klein? And you want us to take her opinions seriously?
I mean, Friedman lost it in the 80s - he totally betrayed everything he previously stood for in the rape of South America. Have you even compared what happened in South America to what is being talked about in terms of economic principles here? Have you thought about how South America was absolutely ravaged by illegal wars waged by the US? That was the antithesis of free capitalism - Klein's book is a very confused and very misguided lashing out at something she has very little understanding of. I would suggest a reading of real history and real economics - not some pulp nonsense by a woman with no idea of what she's talking about. I mean, her heart is in the right place and she is certainly pointing at real issues of oppression, but her inferred conclusions about what exactly it was that caused them is lacking, to say the least.
Indeed I am reading this book. And am surprised people are aware of it here. The specific circumstances which existed in each economy was different, but the impact in a general sence is much the same. In Chile you have unemployment rise from 5% to 40% in the space of a week, now this is not the case in the United States thus far because these policies were put in place incredibly rapidly so their effects were correspondingly rapid. This is not however the antithesis of free capitalism. Much the same was taught to me in my developmental economics course, this free market ideology has ravaged the developing world, underfunding services leads to decay in those services, opening up to the free market kills new industry, reduced government spending contracts the economy.
I'm actually reading a book called 'The battle between the free market and government which is changing the world' created by Chicago school economists which is where Friedman of course comes from, this effectively is arguing for exactly that which those I have been debating before are arguing for so I would disagree that I am based on a single populist story. Indeed I disagree passionately with 'populist economics'.
None the less the history as described by Klein is accurate in terms of the facts, the interpretation we place upon that is what is really important and I create such conclusions based upon my own understanding.
Now South America was absolutely ravaged by secret wars waged by the United States, this of course had terrible consequences which translate into the economic sphere, but it is possible to differentiate between the effects of the wars and the effects of Friedmanite economic policies.
Klein is an economics professor so I would hesitate before questioning her understanding of economics, but I am not here to defend her or her book, rather I am here to point out the impact that these economic policies have had and are having today.
Edit: You point out how Friedman betrayed things which he stood for and I would like to acknowledge this point, however he made this betrayal because he was still able to try and test his economic policies, he followed his beliefs far more than he betrayed them.
I don't remember advocating Friedman. I'll let others deal with the above. The key point though, is that nothing you've said is responsive to what I said about the bailout.
On October 07 2008 15:45 Choros wrote: One point I will make regarding this debate is that it is in the nature of economic debates that two economists will debate each other, both will leave believing they have won, and convinced the other is totally mad. It is only the impact that these policies have which can conclusively prove who is correct and who is not. I believe that the failure of the policies you advocate has already begun and has been progressing for some time now. In 12 to 16 months it will be more clear we will probably conclusively know just how bad it will get. At that time I expect I will be saying 'I told you so', but for now all we have are debates without any conclusive result.
None of the policies that I advocate have been put into practice. The people who are saying that this crisis is a result of laissez faire and a failure of markets are retards, this crisis is a result of absolutely stupid monetary policy and government mandates/interference. Laissez-faire has never existed.
It is true that a market based education system has never been tried, in my opinion this has more to do with the fact that only the United States are insane enough to consider such a diabolical and fundamentally flawed system. But I concede that such ideas are relatively new so it is not surprising that they are untried, but no other country would even consider suggesting such policies as the public outcry would be immense. Everything good about our education system was created in the public sector, if it aint broke don't fix it.
The American Education system however is broke, but the fundamental reason for this is the neglect of the public system and consistently deteriorating funding levels. Will a voucher system work? Only time will tell, but I have supreme confidence it will fail. ... Microeconomics is the study of firms, because firms are profit maximising entities we can predict how they will act under certain conditions. If you do not have a genuine competitive market situation then you will have a monopoly or an oligopoly (among others). Under those conditions firms produce inferior product at a higher price. A voucher system effectively creates a monopolistic situation as the individuals have no buyer power. Rich people do have buyer power, but they already go to private schools so they do not count.
The US education system is a government imposed monopoly. Monopolies are inefficient (by your own admission). Therefore, the government-run education systems must be inefficient, because they are just monopolies with little to no incentives to increase quality or decrease costs.
A voucher system with for-profit schools would be absolutely the best following microeconomic principles. People will be able to choose from different schools competing for students. Therefore, people will flock to the absolute best schools in the area, and if there aren't any good schools in the area, someone will see a chance to make a lot of money and will come found one. I don't see how you see this as anything close to monopolistic, and I especially don't see how you think this is more monopolistic than government schools.
Either way, how about we do this. Set up a voucher system alongside the current government schools. Give vouchers to students who request to go to private schools that are worth the same amount the government pays per student. Let people decide whether they want to go to private or public schools, and either way the government will be footing the bill (and the same bill). Let private schools keep any and all profits they make off the vouchers.
And rather that giving individuals no buying power, it gives everyone the same buying power (depending on implementation). By the way, your argument about deteriorating funding is an absolute joke, funding per student in the US is astronomical, has been growing at an astonishing rate, and is much higher than pretty much all other countries.
"So you'd rather all government run up massive deficits that they can't pay, inflate their way out of it, and create runs on the dollar that collapse our economy and destroy any international standing we have?"
At the start of the great depression nations cut expenses as their revenues contracted to minimize their deficits. You put a contractionary policy atop a contracting economy and it will contract even faster. One of the great lessons of the great depression experience is the realisation that increased budget deficits must be weathered in order to prevent the further deterioration of the economy. I am stunned how people consistently argue that policies which have been proven disastrous are appropriate. Whats more maintaining funding levels, in this context I'm not talking about increasing funding rather simply maintaining it, will have no significant inflationary impact, but if it did a higher rate of short run inflation is a small price to pay to prevent economic apocalypse.
How does putting downward pressure on a contracting economy increase your international standing? The United States is almost entirely out of respect at the moment and its respect is falling at a rapid pace. Economic collapse will put a nail in the coffin and in my opinion collapse is the only outcome from contracting a contracting economy. But only time will tell.
Right, because FDR's New Deal was such a contractionary program. Look at all the good it did (aka lengthening the Great Depression by years).
Creating inflation during times of depression is only okay if you cut back during times of plenty, which we didn't (Negative inflation-adjusted interest rates during the 2000's anyone?). You can't inflate during times of prosperity, and then inflate more during down-turns.
I have no clue what I'm talking about hey? Such things can only happen if there is no alternative? Well indeed that is true, but when you say to a poor family here take your voucher and get some education what alternatives do they have. Pathetic school A or abysmal school B. There is no effective alternatives available to these people. Indeed it is the government which has allowed this situation to develop. You ever heard of market failure?
I should've addressed this up there, but whatever.
Markets would create choice. If the only choices in the are were schools A and B, entrepreneur C would go "Hey look, I can make a massive profit by creating decent school C." In fact, the worse the schools in the area, the easier it is to attract students at low cost and make huge profits, the more schools will come in to compete.
Government monopolies destroy choice. The only choice in a government-run school system is to go to the school in the area, regardless of whether it's good, decent, horrible, or worse. It's not like a market system where it's self-correcting; instead of a battle of the fittest where only the schools that best serve the consumer at the lowest cost survive we get a system where inefficiency is rewarded and innovation and improvement are largely ignored.
Ever hear of government failure? Either way, any positive externality would be accounted for by the fact that the government is still subsidizing education, just not controlling it directly. And I don't see any negative externalities either.
"Inflation is a monetary phenomenon". Wrong. Have you ever heard of stagflation? 'Normal' inflation is a monetary phenomenon yes but it is far from the end of the story. The rising cost of oil increases inflation regardless of any monetary impact this is stagflation and it is affecting us right now. For decades economists believed stagflation impossible, ahh the wisdom of economists.
I admit that I oversimplified it. But I have to note that only Keynesians thought that stagflation was impossible, and Keynes was an idiot who put economic thinking back decades. He's only popular because FDR liked him because his theories validated FDR's retarded government programs. And interestingly enough, Friedman predicted stagflation.
I basically said that boosting the supply side of the economy is the key to prosperity and higher wages. You then say oh your wrong what we need to do is boost the supply side of the economy. Please. Of course productivity is important, this is largely why a good education system is so important. But productivity achieved by paying your workers 50c an hour is the wrong way to go about it. This is effectively what Friedman advocates, the man said many correct things, but he is largely delusional. They live in a fantasy world of economic models which simply do not hold true in the real world. And they use confusing maths and economic jargon to stifle genuine debate. Germany is a good example of how productivity can be immense yet the public sector large. American workers are the most 'productive' on the planet, and look what they have to show for it, the lowest standard of living in the western world.
Right, Americans have the lowest standard of living in the western world. I'd like to see some data on that. Not only do we have more disposable income that almost any country, but we also don't have to wait in 3-month lines to get into hospitals. Gotta love that 12% German unemployment (is that it currently? I know it's up past 10). And you gotta love how American income per household is still one of the highest in the world.
I think you're missing out of something called competition for labor. If every company is paying $1 wages, it's in every individual company's interest to charge $2 in order to get the best available talent. This continues up to productivity as long as there isn't an external factor affecting supply (like rampant immigration). Labor is fundamentally a product, and is driven by the same supply and demand forces that any other product is. And just as any product's price will approach marginal cost (or as close as information dispersion and ease of transition will let it), wages will approach marginal productivity.
I never said that we need to boost the supply said (or I might've, but I don't believe it). We need to let the market find the stable equilibria. The government doesn't need to do anything, because almost anything the government does will distort the equilibria and bring on future price corrections.
And if you've ever actually read lots of Friedman's work, it's very readable and understandable. Sure he has a bunch of work directed at the professional economist and backed up by mathematical models, but he also has a bunch of work directed at the layman, relatively easy readings filled with logic and reason.
You are advocating policies that have been tried and have failed. And now we have come full circle, these policies were spawned in the United States and now they have returned to the land of their creation. The current economic downturn is no coincidence rather it is a continence of a long and depressing tale of economic vandalism.
To risk beating a dead horse, these policies have not been tried, no matter how much people want to think that they have. Though I do have to say over world history, I'd like you to find an economic system that has worked better than relatively free capitalism.
And Friedman and his fellow Chicagoans who tried to mold South American economies were retarded. Their fundamental failure was that the institutions and culture needed for market economies to thrive didn't exist and couldn't be created on a whim.
And yes, I agree that it is the result of a "long and depression tale of economic vandalism". That vandalism has been the increasingly large role of government in the economy and it's desire to "do good" without looking at the consequences or worrying about the money it's spending.
People suggest that the United States is too large to collapse many economies have done over the last 50 years (almost every single one had Friendman's economists behind it). The size of the United States makes collapse less likely but there is only so much beating any economic system can take and right now American economists are brutalizing their economy with a hatchet I doubt it can take much more punishment.
Let's look at the two probably biggest economic collapses in the last 50 years. The Soviet Union and Communist China. Because these were so free-market and directed by Friedman, obviously state intervention and control are the only answers.
At the end of the day only time will tell, but I remind you that the Bush administration has followed the policies you advocate and I will let the consequences speak for themselves.
Not at all, and the "Bush administration" didn't do anything. "Administrations" aren't actors, and either way, Bush didn't control much of this, much was by the fed or previous administrations/Congress (though he might've enabled it).
The consequences are from disastrous management by the federal reserve, bad government mandates on home ownership, and a good bit of overzealous government intervention and regulation. This bubble would've never happened if the government hadn't caused it to happen.
What I get from you is that you're a pretty hardcore Keynesian that also believes that the government is perfect. Except that you're a classical Keynesian, which has been discredited time after time, and you haven't read up much on public choice theory. Either way, I won't be responding to you again, as it simply isn't worth my time or effort anymore. You're economic education is... lacking to say the least. And either way, this discussion has gotten way off-topic.
I'm not sure you can rule out a government run education system so easily. Geography plays a massive role, which is a weak point of a private+voucher program, and I think we'd see more polarization in schools than we already do currently. I don't have any reports on hand to back it up, but there's plenty of wrenches to throw into the mix that make it vastly different from any other type of business and the improvement wouldn't be much greater from what the best schools already have. It's not like we're seeing a failure of government run school systems across the board, only with ours because we implemented a system advocated by the former governor of the state with the 49th worst education system. We can create incentive for teaching without privatizing it.
The South America example is incredibly poor and all it really does is work against Ricardo's competitive advantage in most cases. There was no infrastructure or culture in place to support that kind of development. You can make the case that protectionism or a large degree of government intervention is needed in developing countries but those states have little in common to the US in 2008.
On October 07 2008 15:45 Choros wrote: One point I will make regarding this debate is that it is in the nature of economic debates that two economists will debate each other, both will leave believing they have won, and convinced the other is totally mad. It is only the impact that these policies have which can conclusively prove who is correct and who is not. I believe that the failure of the policies you advocate has already begun and has been progressing for some time now. In 12 to 16 months it will be more clear we will probably conclusively know just how bad it will get. At that time I expect I will be saying 'I told you so', but for now all we have are debates without any conclusive result.
None of the policies that I advocate have been put into practice. The people who are saying that this crisis is a result of laissez faire and a failure of markets are retards, this crisis is a result of absolutely stupid monetary policy and government mandates/interference. Laissez-faire has never existed.
It is true that a market based education system has never been tried, in my opinion this has more to do with the fact that only the United States are insane enough to consider such a diabolical and fundamentally flawed system. But I concede that such ideas are relatively new so it is not surprising that they are untried, but no other country would even consider suggesting such policies as the public outcry would be immense. Everything good about our education system was created in the public sector, if it aint broke don't fix it.
The American Education system however is broke, but the fundamental reason for this is the neglect of the public system and consistently deteriorating funding levels. Will a voucher system work? Only time will tell, but I have supreme confidence it will fail. ... Microeconomics is the study of firms, because firms are profit maximising entities we can predict how they will act under certain conditions. If you do not have a genuine competitive market situation then you will have a monopoly or an oligopoly (among others). Under those conditions firms produce inferior product at a higher price. A voucher system effectively creates a monopolistic situation as the individuals have no buyer power. Rich people do have buyer power, but they already go to private schools so they do not count.
The US education system is a government imposed monopoly. Monopolies are inefficient (by your own admission). Therefore, the government-run education systems must be inefficient, because they are just monopolies with little to no incentives to increase quality or decrease costs.
A voucher system with for-profit schools would be absolutely the best following microeconomic principles. People will be able to choose from different schools competing for students. Therefore, people will flock to the absolute best schools in the area, and if there aren't any good schools in the area, someone will see a chance to make a lot of money and will come found one. I don't see how you see this as anything close to monopolistic, and I especially don't see how you think this is more monopolistic than government schools.
Either way, how about we do this. Set up a voucher system alongside the current government schools. Give vouchers to students who request to go to private schools that are worth the same amount the government pays per student. Let people decide whether they want to go to private or public schools, and either way the government will be footing the bill (and the same bill). Let private schools keep any and all profits they make off the vouchers.
And rather that giving individuals no buying power, it gives everyone the same buying power (depending on implementation). By the way, your argument about deteriorating funding is an absolute joke, funding per student in the US is astronomical, has been growing at an astonishing rate, and is much higher than pretty much all other countries.
"So you'd rather all government run up massive deficits that they can't pay, inflate their way out of it, and create runs on the dollar that collapse our economy and destroy any international standing we have?"
At the start of the great depression nations cut expenses as their revenues contracted to minimize their deficits. You put a contractionary policy atop a contracting economy and it will contract even faster. One of the great lessons of the great depression experience is the realisation that increased budget deficits must be weathered in order to prevent the further deterioration of the economy. I am stunned how people consistently argue that policies which have been proven disastrous are appropriate. Whats more maintaining funding levels, in this context I'm not talking about increasing funding rather simply maintaining it, will have no significant inflationary impact, but if it did a higher rate of short run inflation is a small price to pay to prevent economic apocalypse.
How does putting downward pressure on a contracting economy increase your international standing? The United States is almost entirely out of respect at the moment and its respect is falling at a rapid pace. Economic collapse will put a nail in the coffin and in my opinion collapse is the only outcome from contracting a contracting economy. But only time will tell.
Right, because FDR's New Deal was such a contractionary program. Look at all the good it did (aka lengthening the Great Depression by years).
Creating inflation during times of depression is only okay if you cut back during times of plenty, which we didn't (Negative inflation-adjusted interest rates during the 2000's anyone?). You can't inflate during times of prosperity, and then inflate more during down-turns.
I have no clue what I'm talking about hey? Such things can only happen if there is no alternative? Well indeed that is true, but when you say to a poor family here take your voucher and get some education what alternatives do they have. Pathetic school A or abysmal school B. There is no effective alternatives available to these people. Indeed it is the government which has allowed this situation to develop. You ever heard of market failure?
I should've addressed this up there, but whatever.
Markets would create choice. If the only choices in the are were schools A and B, entrepreneur C would go "Hey look, I can make a massive profit by creating decent school C." In fact, the worse the schools in the area, the easier it is to attract students at low cost and make huge profits, the more schools will come in to compete.
Government monopolies destroy choice. The only choice in a government-run school system is to go to the school in the area, regardless of whether it's good, decent, horrible, or worse. It's not like a market system where it's self-correcting; instead of a battle of the fittest where only the schools that best serve the consumer at the lowest cost survive we get a system where inefficiency is rewarded and innovation and improvement are largely ignored.
Ever hear of government failure? Either way, any positive externality would be accounted for by the fact that the government is still subsidizing education, just not controlling it directly. And I don't see any negative externalities either.
"Inflation is a monetary phenomenon". Wrong. Have you ever heard of stagflation? 'Normal' inflation is a monetary phenomenon yes but it is far from the end of the story. The rising cost of oil increases inflation regardless of any monetary impact this is stagflation and it is affecting us right now. For decades economists believed stagflation impossible, ahh the wisdom of economists.
I admit that I oversimplified it. But I have to note that only Keynesians thought that stagflation was impossible, and Keynes was an idiot who put economic thinking back decades. He's only popular because FDR liked him because his theories validated FDR's retarded government programs. And interestingly enough, Friedman predicted stagflation.
I basically said that boosting the supply side of the economy is the key to prosperity and higher wages. You then say oh your wrong what we need to do is boost the supply side of the economy. Please. Of course productivity is important, this is largely why a good education system is so important. But productivity achieved by paying your workers 50c an hour is the wrong way to go about it. This is effectively what Friedman advocates, the man said many correct things, but he is largely delusional. They live in a fantasy world of economic models which simply do not hold true in the real world. And they use confusing maths and economic jargon to stifle genuine debate. Germany is a good example of how productivity can be immense yet the public sector large. American workers are the most 'productive' on the planet, and look what they have to show for it, the lowest standard of living in the western world.
Right, Americans have the lowest standard of living in the western world. I'd like to see some data on that. Not only do we have more disposable income that almost any country, but we also don't have to wait in 3-month lines to get into hospitals. Gotta love that 12% German unemployment (is that it currently? I know it's up past 10). And you gotta love how American income per household is still one of the highest in the world.
I think you're missing out of something called competition for labor. If every company is paying $1 wages, it's in every individual company's interest to charge $2 in order to get the best available talent. This continues up to productivity as long as there isn't an external factor affecting supply (like rampant immigration). Labor is fundamentally a product, and is driven by the same supply and demand forces that any other product is. And just as any product's price will approach marginal cost (or as close as information dispersion and ease of transition will let it), wages will approach marginal productivity.
I never said that we need to boost the supply said (or I might've, but I don't believe it). We need to let the market find the stable equilibria. The government doesn't need to do anything, because almost anything the government does will distort the equilibria and bring on future price corrections.
And if you've ever actually read lots of Friedman's work, it's very readable and understandable. Sure he has a bunch of work directed at the professional economist and backed up by mathematical models, but he also has a bunch of work directed at the layman, relatively easy readings filled with logic and reason.
You are advocating policies that have been tried and have failed. And now we have come full circle, these policies were spawned in the United States and now they have returned to the land of their creation. The current economic downturn is no coincidence rather it is a continence of a long and depressing tale of economic vandalism.
To risk beating a dead horse, these policies have not been tried, no matter how much people want to think that they have. Though I do have to say over world history, I'd like you to find an economic system that has worked better than relatively free capitalism.
And Friedman and his fellow Chicagoans who tried to mold South American economies were retarded. Their fundamental failure was that the institutions and culture needed for market economies to thrive didn't exist and couldn't be created on a whim.
And yes, I agree that it is the result of a "long and depression tale of economic vandalism". That vandalism has been the increasingly large role of government in the economy and it's desire to "do good" without looking at the consequences or worrying about the money it's spending.
People suggest that the United States is too large to collapse many economies have done over the last 50 years (almost every single one had Friendman's economists behind it). The size of the United States makes collapse less likely but there is only so much beating any economic system can take and right now American economists are brutalizing their economy with a hatchet I doubt it can take much more punishment.
Let's look at the two probably biggest economic collapses in the last 50 years. The Soviet Union and Communist China. Because these were so free-market and directed by Friedman, obviously state intervention and control are the only answers.
At the end of the day only time will tell, but I remind you that the Bush administration has followed the policies you advocate and I will let the consequences speak for themselves.
Not at all, and the "Bush administration" didn't do anything. "Administrations" aren't actors, and either way, Bush didn't control much of this, much was by the fed or previous administrations/Congress (though he might've enabled it).
The consequences are from disastrous management by the federal reserve, bad government mandates on home ownership, and a good bit of overzealous government intervention and regulation. This bubble would've never happened if the government hadn't caused it to happen.
What I get from you is that you're a pretty hardcore Keynesian that also believes that the government is perfect. Except that you're a classical Keynesian, which has been discredited time after time, and you haven't read up much on public choice theory. Either way, I won't be responding to you again, as it simply isn't worth my time or effort anymore. You're economic education is... lacking to say the least. And either way, this discussion has gotten way off-topic.
I will respond to your response however why don't you detail your plan for the economy rather than criticize mine?
however why don't you detail your plan for the economy rather than criticize mine?
I'll suggest a reading of Man, Economy, and State. It's pretty much a 1500 page detail of such a plan. In discussion we draw on that base to make arguments against specific instances of public policy, but a complete reading of that book should provide an insight into the logical framework that drives that criticism.
Britain's bailout is a little different in that they're directly injecting capital into banks by offering cheap loans and underwriting interbank loans.
the problem with europe is that their economies are very tightly integrated, but their financial oversight isn't.
anyway the world is pretty much ending, if i were you i'd call my loved ones and say goodbye before nuclear armageddon begins
I didn't read the hole post but it looks like you are missing the importance of Federal Reserve rate cuts and how it made all this sub-prime mess possible. It was Greenspan's mistake which he acknowledged.
Also the speclulator's activity is out of spectre. It were speculators who span the Hi-Tech boom in late 90s and early 2000's, after it broke out they switched to real estate, and after it to oil. They all crashed and now there is no market to switch and you can see the consequences. The speculators are normal thing. What's not normal is when economy has no recessions for 17 years (since 1991, the year 2001 recession doesn't really count). Such environment produces speculators en masse, and they produce overvalued economy, which will fall sooner or later. My opinion is that the drastic rate cuts by Fed back in 2001 were a mistake, it should have given economy the chance to cool off. It's like when the runner is injured and you inject him antidote and send him on track instead of healing the wound. It will be a disaster in the end. So the conclusion: 1) Recessions are necessary. 2) Fed should make them smoother but not try to eliminate them.
On October 07 2008 15:45 Choros wrote: One point I will make regarding this debate is that it is in the nature of economic debates that two economists will debate each other, both will leave believing they have won, and convinced the other is totally mad. It is only the impact that these policies have which can conclusively prove who is correct and who is not. I believe that the failure of the policies you advocate has already begun and has been progressing for some time now. In 12 to 16 months it will be more clear we will probably conclusively know just how bad it will get. At that time I expect I will be saying 'I told you so', but for now all we have are debates without any conclusive result.
None of the policies that I advocate have been put into practice. The people who are saying that this crisis is a result of laissez faire and a failure of markets are retards, this crisis is a result of absolutely stupid monetary policy and government mandates/interference. Laissez-faire has never existed.
It is true that a market based education system has never been tried, in my opinion this has more to do with the fact that only the United States are insane enough to consider such a diabolical and fundamentally flawed system. But I concede that such ideas are relatively new so it is not surprising that they are untried, but no other country would even consider suggesting such policies as the public outcry would be immense. Everything good about our education system was created in the public sector, if it aint broke don't fix it.
The American Education system however is broke, but the fundamental reason for this is the neglect of the public system and consistently deteriorating funding levels. Will a voucher system work? Only time will tell, but I have supreme confidence it will fail. ... Microeconomics is the study of firms, because firms are profit maximising entities we can predict how they will act under certain conditions. If you do not have a genuine competitive market situation then you will have a monopoly or an oligopoly (among others). Under those conditions firms produce inferior product at a higher price. A voucher system effectively creates a monopolistic situation as the individuals have no buyer power. Rich people do have buyer power, but they already go to private schools so they do not count.
The US education system is a government imposed monopoly. Monopolies are inefficient (by your own admission). Therefore, the government-run education systems must be inefficient, because they are just monopolies with little to no incentives to increase quality or decrease costs.
A voucher system with for-profit schools would be absolutely the best following microeconomic principles. People will be able to choose from different schools competing for students. Therefore, people will flock to the absolute best schools in the area, and if there aren't any good schools in the area, someone will see a chance to make a lot of money and will come found one. I don't see how you see this as anything close to monopolistic, and I especially don't see how you think this is more monopolistic than government schools.
Either way, how about we do this. Set up a voucher system alongside the current government schools. Give vouchers to students who request to go to private schools that are worth the same amount the government pays per student. Let people decide whether they want to go to private or public schools, and either way the government will be footing the bill (and the same bill). Let private schools keep any and all profits they make off the vouchers.
And rather that giving individuals no buying power, it gives everyone the same buying power (depending on implementation). By the way, your argument about deteriorating funding is an absolute joke, funding per student in the US is astronomical, has been growing at an astonishing rate, and is much higher than pretty much all other countries.
"So you'd rather all government run up massive deficits that they can't pay, inflate their way out of it, and create runs on the dollar that collapse our economy and destroy any international standing we have?"
At the start of the great depression nations cut expenses as their revenues contracted to minimize their deficits. You put a contractionary policy atop a contracting economy and it will contract even faster. One of the great lessons of the great depression experience is the realisation that increased budget deficits must be weathered in order to prevent the further deterioration of the economy. I am stunned how people consistently argue that policies which have been proven disastrous are appropriate. Whats more maintaining funding levels, in this context I'm not talking about increasing funding rather simply maintaining it, will have no significant inflationary impact, but if it did a higher rate of short run inflation is a small price to pay to prevent economic apocalypse.
How does putting downward pressure on a contracting economy increase your international standing? The United States is almost entirely out of respect at the moment and its respect is falling at a rapid pace. Economic collapse will put a nail in the coffin and in my opinion collapse is the only outcome from contracting a contracting economy. But only time will tell.
Right, because FDR's New Deal was such a contractionary program. Look at all the good it did (aka lengthening the Great Depression by years).
Creating inflation during times of depression is only okay if you cut back during times of plenty, which we didn't (Negative inflation-adjusted interest rates during the 2000's anyone?). You can't inflate during times of prosperity, and then inflate more during down-turns.
I have no clue what I'm talking about hey? Such things can only happen if there is no alternative? Well indeed that is true, but when you say to a poor family here take your voucher and get some education what alternatives do they have. Pathetic school A or abysmal school B. There is no effective alternatives available to these people. Indeed it is the government which has allowed this situation to develop. You ever heard of market failure?
I should've addressed this up there, but whatever.
Markets would create choice. If the only choices in the are were schools A and B, entrepreneur C would go "Hey look, I can make a massive profit by creating decent school C." In fact, the worse the schools in the area, the easier it is to attract students at low cost and make huge profits, the more schools will come in to compete.
Government monopolies destroy choice. The only choice in a government-run school system is to go to the school in the area, regardless of whether it's good, decent, horrible, or worse. It's not like a market system where it's self-correcting; instead of a battle of the fittest where only the schools that best serve the consumer at the lowest cost survive we get a system where inefficiency is rewarded and innovation and improvement are largely ignored.
Ever hear of government failure? Either way, any positive externality would be accounted for by the fact that the government is still subsidizing education, just not controlling it directly. And I don't see any negative externalities either.
"Inflation is a monetary phenomenon". Wrong. Have you ever heard of stagflation? 'Normal' inflation is a monetary phenomenon yes but it is far from the end of the story. The rising cost of oil increases inflation regardless of any monetary impact this is stagflation and it is affecting us right now. For decades economists believed stagflation impossible, ahh the wisdom of economists.
I admit that I oversimplified it. But I have to note that only Keynesians thought that stagflation was impossible, and Keynes was an idiot who put economic thinking back decades. He's only popular because FDR liked him because his theories validated FDR's retarded government programs. And interestingly enough, Friedman predicted stagflation.
I basically said that boosting the supply side of the economy is the key to prosperity and higher wages. You then say oh your wrong what we need to do is boost the supply side of the economy. Please. Of course productivity is important, this is largely why a good education system is so important. But productivity achieved by paying your workers 50c an hour is the wrong way to go about it. This is effectively what Friedman advocates, the man said many correct things, but he is largely delusional. They live in a fantasy world of economic models which simply do not hold true in the real world. And they use confusing maths and economic jargon to stifle genuine debate. Germany is a good example of how productivity can be immense yet the public sector large. American workers are the most 'productive' on the planet, and look what they have to show for it, the lowest standard of living in the western world.
Right, Americans have the lowest standard of living in the western world. I'd like to see some data on that. Not only do we have more disposable income that almost any country, but we also don't have to wait in 3-month lines to get into hospitals. Gotta love that 12% German unemployment (is that it currently? I know it's up past 10). And you gotta love how American income per household is still one of the highest in the world.
I think you're missing out of something called competition for labor. If every company is paying $1 wages, it's in every individual company's interest to charge $2 in order to get the best available talent. This continues up to productivity as long as there isn't an external factor affecting supply (like rampant immigration). Labor is fundamentally a product, and is driven by the same supply and demand forces that any other product is. And just as any product's price will approach marginal cost (or as close as information dispersion and ease of transition will let it), wages will approach marginal productivity.
I never said that we need to boost the supply said (or I might've, but I don't believe it). We need to let the market find the stable equilibria. The government doesn't need to do anything, because almost anything the government does will distort the equilibria and bring on future price corrections.
And if you've ever actually read lots of Friedman's work, it's very readable and understandable. Sure he has a bunch of work directed at the professional economist and backed up by mathematical models, but he also has a bunch of work directed at the layman, relatively easy readings filled with logic and reason.
You are advocating policies that have been tried and have failed. And now we have come full circle, these policies were spawned in the United States and now they have returned to the land of their creation. The current economic downturn is no coincidence rather it is a continence of a long and depressing tale of economic vandalism.
To risk beating a dead horse, these policies have not been tried, no matter how much people want to think that they have. Though I do have to say over world history, I'd like you to find an economic system that has worked better than relatively free capitalism.
And Friedman and his fellow Chicagoans who tried to mold South American economies were retarded. Their fundamental failure was that the institutions and culture needed for market economies to thrive didn't exist and couldn't be created on a whim.
And yes, I agree that it is the result of a "long and depression tale of economic vandalism". That vandalism has been the increasingly large role of government in the economy and it's desire to "do good" without looking at the consequences or worrying about the money it's spending.
People suggest that the United States is too large to collapse many economies have done over the last 50 years (almost every single one had Friendman's economists behind it). The size of the United States makes collapse less likely but there is only so much beating any economic system can take and right now American economists are brutalizing their economy with a hatchet I doubt it can take much more punishment.
Let's look at the two probably biggest economic collapses in the last 50 years. The Soviet Union and Communist China. Because these were so free-market and directed by Friedman, obviously state intervention and control are the only answers.
At the end of the day only time will tell, but I remind you that the Bush administration has followed the policies you advocate and I will let the consequences speak for themselves.
Not at all, and the "Bush administration" didn't do anything. "Administrations" aren't actors, and either way, Bush didn't control much of this, much was by the fed or previous administrations/Congress (though he might've enabled it).
The consequences are from disastrous management by the federal reserve, bad government mandates on home ownership, and a good bit of overzealous government intervention and regulation. This bubble would've never happened if the government hadn't caused it to happen.
What I get from you is that you're a pretty hardcore Keynesian that also believes that the government is perfect. Except that you're a classical Keynesian, which has been discredited time after time, and you haven't read up much on public choice theory. Either way, I won't be responding to you again, as it simply isn't worth my time or effort anymore. You're economic education is... lacking to say the least. And either way, this discussion has gotten way off-topic.
I will respond to your response however why don't you detail your plan for the economy rather than criticize mine?
Why don't you please tell me at which point I advocated any of the policies you said I advocated, and tell me how exactly deficit spending and job creation will do a better job of revitalizing the economy than injecting capital into banks. Do you not understand how credit works?
On October 07 2008 15:45 Choros wrote: One point I will make regarding this debate is that it is in the nature of economic debates that two economists will debate each other, both will leave believing they have won, and convinced the other is totally mad. It is only the impact that these policies have which can conclusively prove who is correct and who is not. I believe that the failure of the policies you advocate has already begun and has been progressing for some time now. In 12 to 16 months it will be more clear we will probably conclusively know just how bad it will get. At that time I expect I will be saying 'I told you so', but for now all we have are debates without any conclusive result.
None of the policies that I advocate have been put into practice. The people who are saying that this crisis is a result of laissez faire and a failure of markets are retards, this crisis is a result of absolutely stupid monetary policy and government mandates/interference. Laissez-faire has never existed.
It is true that a market based education system has never been tried, in my opinion this has more to do with the fact that only the United States are insane enough to consider such a diabolical and fundamentally flawed system. But I concede that such ideas are relatively new so it is not surprising that they are untried, but no other country would even consider suggesting such policies as the public outcry would be immense. Everything good about our education system was created in the public sector, if it aint broke don't fix it.
The American Education system however is broke, but the fundamental reason for this is the neglect of the public system and consistently deteriorating funding levels. Will a voucher system work? Only time will tell, but I have supreme confidence it will fail. ... Microeconomics is the study of firms, because firms are profit maximising entities we can predict how they will act under certain conditions. If you do not have a genuine competitive market situation then you will have a monopoly or an oligopoly (among others). Under those conditions firms produce inferior product at a higher price. A voucher system effectively creates a monopolistic situation as the individuals have no buyer power. Rich people do have buyer power, but they already go to private schools so they do not count.
The US education system is a government imposed monopoly. Monopolies are inefficient (by your own admission). Therefore, the government-run education systems must be inefficient, because they are just monopolies with little to no incentives to increase quality or decrease costs.
A voucher system with for-profit schools would be absolutely the best following microeconomic principles. People will be able to choose from different schools competing for students. Therefore, people will flock to the absolute best schools in the area, and if there aren't any good schools in the area, someone will see a chance to make a lot of money and will come found one. I don't see how you see this as anything close to monopolistic, and I especially don't see how you think this is more monopolistic than government schools.
Either way, how about we do this. Set up a voucher system alongside the current government schools. Give vouchers to students who request to go to private schools that are worth the same amount the government pays per student. Let people decide whether they want to go to private or public schools, and either way the government will be footing the bill (and the same bill). Let private schools keep any and all profits they make off the vouchers.
And rather that giving individuals no buying power, it gives everyone the same buying power (depending on implementation). By the way, your argument about deteriorating funding is an absolute joke, funding per student in the US is astronomical, has been growing at an astonishing rate, and is much higher than pretty much all other countries.
"So you'd rather all government run up massive deficits that they can't pay, inflate their way out of it, and create runs on the dollar that collapse our economy and destroy any international standing we have?"
At the start of the great depression nations cut expenses as their revenues contracted to minimize their deficits. You put a contractionary policy atop a contracting economy and it will contract even faster. One of the great lessons of the great depression experience is the realisation that increased budget deficits must be weathered in order to prevent the further deterioration of the economy. I am stunned how people consistently argue that policies which have been proven disastrous are appropriate. Whats more maintaining funding levels, in this context I'm not talking about increasing funding rather simply maintaining it, will have no significant inflationary impact, but if it did a higher rate of short run inflation is a small price to pay to prevent economic apocalypse.
How does putting downward pressure on a contracting economy increase your international standing? The United States is almost entirely out of respect at the moment and its respect is falling at a rapid pace. Economic collapse will put a nail in the coffin and in my opinion collapse is the only outcome from contracting a contracting economy. But only time will tell.
Right, because FDR's New Deal was such a contractionary program. Look at all the good it did (aka lengthening the Great Depression by years).
Creating inflation during times of depression is only okay if you cut back during times of plenty, which we didn't (Negative inflation-adjusted interest rates during the 2000's anyone?). You can't inflate during times of prosperity, and then inflate more during down-turns.
I have no clue what I'm talking about hey? Such things can only happen if there is no alternative? Well indeed that is true, but when you say to a poor family here take your voucher and get some education what alternatives do they have. Pathetic school A or abysmal school B. There is no effective alternatives available to these people. Indeed it is the government which has allowed this situation to develop. You ever heard of market failure?
I should've addressed this up there, but whatever.
Markets would create choice. If the only choices in the are were schools A and B, entrepreneur C would go "Hey look, I can make a massive profit by creating decent school C." In fact, the worse the schools in the area, the easier it is to attract students at low cost and make huge profits, the more schools will come in to compete.
Government monopolies destroy choice. The only choice in a government-run school system is to go to the school in the area, regardless of whether it's good, decent, horrible, or worse. It's not like a market system where it's self-correcting; instead of a battle of the fittest where only the schools that best serve the consumer at the lowest cost survive we get a system where inefficiency is rewarded and innovation and improvement are largely ignored.
Ever hear of government failure? Either way, any positive externality would be accounted for by the fact that the government is still subsidizing education, just not controlling it directly. And I don't see any negative externalities either.
"Inflation is a monetary phenomenon". Wrong. Have you ever heard of stagflation? 'Normal' inflation is a monetary phenomenon yes but it is far from the end of the story. The rising cost of oil increases inflation regardless of any monetary impact this is stagflation and it is affecting us right now. For decades economists believed stagflation impossible, ahh the wisdom of economists.
I admit that I oversimplified it. But I have to note that only Keynesians thought that stagflation was impossible, and Keynes was an idiot who put economic thinking back decades. He's only popular because FDR liked him because his theories validated FDR's retarded government programs. And interestingly enough, Friedman predicted stagflation.
I basically said that boosting the supply side of the economy is the key to prosperity and higher wages. You then say oh your wrong what we need to do is boost the supply side of the economy. Please. Of course productivity is important, this is largely why a good education system is so important. But productivity achieved by paying your workers 50c an hour is the wrong way to go about it. This is effectively what Friedman advocates, the man said many correct things, but he is largely delusional. They live in a fantasy world of economic models which simply do not hold true in the real world. And they use confusing maths and economic jargon to stifle genuine debate. Germany is a good example of how productivity can be immense yet the public sector large. American workers are the most 'productive' on the planet, and look what they have to show for it, the lowest standard of living in the western world.
Right, Americans have the lowest standard of living in the western world. I'd like to see some data on that. Not only do we have more disposable income that almost any country, but we also don't have to wait in 3-month lines to get into hospitals. Gotta love that 12% German unemployment (is that it currently? I know it's up past 10). And you gotta love how American income per household is still one of the highest in the world.
I think you're missing out of something called competition for labor. If every company is paying $1 wages, it's in every individual company's interest to charge $2 in order to get the best available talent. This continues up to productivity as long as there isn't an external factor affecting supply (like rampant immigration). Labor is fundamentally a product, and is driven by the same supply and demand forces that any other product is. And just as any product's price will approach marginal cost (or as close as information dispersion and ease of transition will let it), wages will approach marginal productivity.
I never said that we need to boost the supply said (or I might've, but I don't believe it). We need to let the market find the stable equilibria. The government doesn't need to do anything, because almost anything the government does will distort the equilibria and bring on future price corrections.
And if you've ever actually read lots of Friedman's work, it's very readable and understandable. Sure he has a bunch of work directed at the professional economist and backed up by mathematical models, but he also has a bunch of work directed at the layman, relatively easy readings filled with logic and reason.
You are advocating policies that have been tried and have failed. And now we have come full circle, these policies were spawned in the United States and now they have returned to the land of their creation. The current economic downturn is no coincidence rather it is a continence of a long and depressing tale of economic vandalism.
To risk beating a dead horse, these policies have not been tried, no matter how much people want to think that they have. Though I do have to say over world history, I'd like you to find an economic system that has worked better than relatively free capitalism.
And Friedman and his fellow Chicagoans who tried to mold South American economies were retarded. Their fundamental failure was that the institutions and culture needed for market economies to thrive didn't exist and couldn't be created on a whim.
And yes, I agree that it is the result of a "long and depression tale of economic vandalism". That vandalism has been the increasingly large role of government in the economy and it's desire to "do good" without looking at the consequences or worrying about the money it's spending.
People suggest that the United States is too large to collapse many economies have done over the last 50 years (almost every single one had Friendman's economists behind it). The size of the United States makes collapse less likely but there is only so much beating any economic system can take and right now American economists are brutalizing their economy with a hatchet I doubt it can take much more punishment.
Let's look at the two probably biggest economic collapses in the last 50 years. The Soviet Union and Communist China. Because these were so free-market and directed by Friedman, obviously state intervention and control are the only answers.
At the end of the day only time will tell, but I remind you that the Bush administration has followed the policies you advocate and I will let the consequences speak for themselves.
Not at all, and the "Bush administration" didn't do anything. "Administrations" aren't actors, and either way, Bush didn't control much of this, much was by the fed or previous administrations/Congress (though he might've enabled it).
The consequences are from disastrous management by the federal reserve, bad government mandates on home ownership, and a good bit of overzealous government intervention and regulation. This bubble would've never happened if the government hadn't caused it to happen.
What I get from you is that you're a pretty hardcore Keynesian that also believes that the government is perfect. Except that you're a classical Keynesian, which has been discredited time after time, and you haven't read up much on public choice theory. Either way, I won't be responding to you again, as it simply isn't worth my time or effort anymore. You're economic education is... lacking to say the least. And either way, this discussion has gotten way off-topic.
I will respond to your response however why don't you detail your plan for the economy rather than criticize mine?
Why don't you please tell me at which point I advocated any of the policies you said I advocated, and tell me how exactly deficit spending and job creation will do a better job of revitalizing the economy than injecting capital into banks. Do you not understand how credit works?
I understand how credit works, and I understand that when you already have unsustainable levels of debt the notion that the economy should be resuscitated using borrowings thus increasing your levels of debt is simple stupidity. It the the reliance upon expansionary monetary policy, increasing debt time and time again which has gotten the United States into this mess to a large extent, and monetary policy simply cannot get them out of this one. The levels of debt are too high and consumer confidence too low for people to seriously consider increasing their levels of debt any higher. And even if they did it would only postpone the problem and it would become even worse. Thus providing real economic stimulus through government spending is the ONLY option left available at this point, the state of the deficit creates serious problems in financing fiscal expansion but these problems can be dealt with.
The reason I asked you to detail your plan is so that i can know for sure if you do advocate these policies. When I said this previously it based off the assumption that you agree with the policies advocated by the McCain campaign, or Ron Paul's brand of economic management basically the economic right. My criticisms are based upon arguments against these policies in a broad sence. If you detail what you think should be done at present I will be better able to respond to that, right now i'm not sure what you do believe should be done with any real accuracy.
I will explain how job creation and deficit spending can resuscitate the economy however, now I have said that it is better than creating 'liquidity' or attempting to encourage debt spending earlier in this post. Job creation and deficit spending physically place money into the economic system which begins to filter up and begins to multiply, people get more money in the jobs there in and spend more, the level of unemployment falls which increases revenues from taxation and decreases social security cost but most importantly again it puts money in the economy where its needed. And this will put upward pressure on the stock market. The impact on demand of encouraging credit and through fiscal stimulus are similar, however fiscal stimulus does not increase upon an already unsustainable level of private sector debt which is destroying the economy.
The Federal deficit is out of control however but if you take back the Bush tax cuts and reduce defense spending by around 200billion dollars and you will not reduce the capacity of the defense forces because then though the Bush administration has poured much more than 200billion per year extra into defense the capacity of the military has declined. It is ridiculous and the levels of waste and corruption (i.e Halliburton) which are to blame. You can also remove these tax cuts and actually increase the levels of investment as the government will invest it even though under the current economic environment a positive return can not be guaranteed, the private sector cannot invest significantly in such an environment. Thus you can get about 650 billion extra dollars to throw around, and boy does the economy need it. The United States can have a quite decent balance sheet its just a matter of getting rid of the real waste, in defense, and in diabolical tax cuts to the rich which serve no real economic benefit. They have nifty buzz words and economic jingo to make them seem like good policies but in fact they are horrible policies which damage the economy and only benefit the rich. If the rich were truly wise even they would oppose them as it undermines the sustainability of the economic system they need just as much as everyone else.
On October 07 2008 15:45 Choros wrote: One point I will make regarding this debate is that it is in the nature of economic debates that two economists will debate each other, both will leave believing they have won, and convinced the other is totally mad. It is only the impact that these policies have which can conclusively prove who is correct and who is not. I believe that the failure of the policies you advocate has already begun and has been progressing for some time now. In 12 to 16 months it will be more clear we will probably conclusively know just how bad it will get. At that time I expect I will be saying 'I told you so', but for now all we have are debates without any conclusive result.
None of the policies that I advocate have been put into practice. The people who are saying that this crisis is a result of laissez faire and a failure of markets are retards, this crisis is a result of absolutely stupid monetary policy and government mandates/interference. Laissez-faire has never existed.
It is true that a market based education system has never been tried, in my opinion this has more to do with the fact that only the United States are insane enough to consider such a diabolical and fundamentally flawed system. But I concede that such ideas are relatively new so it is not surprising that they are untried, but no other country would even consider suggesting such policies as the public outcry would be immense. Everything good about our education system was created in the public sector, if it aint broke don't fix it.
The American Education system however is broke, but the fundamental reason for this is the neglect of the public system and consistently deteriorating funding levels. Will a voucher system work? Only time will tell, but I have supreme confidence it will fail. ... Microeconomics is the study of firms, because firms are profit maximising entities we can predict how they will act under certain conditions. If you do not have a genuine competitive market situation then you will have a monopoly or an oligopoly (among others). Under those conditions firms produce inferior product at a higher price. A voucher system effectively creates a monopolistic situation as the individuals have no buyer power. Rich people do have buyer power, but they already go to private schools so they do not count.
The US education system is a government imposed monopoly. Monopolies are inefficient (by your own admission). Therefore, the government-run education systems must be inefficient, because they are just monopolies with little to no incentives to increase quality or decrease costs.
A voucher system with for-profit schools would be absolutely the best following microeconomic principles. People will be able to choose from different schools competing for students. Therefore, people will flock to the absolute best schools in the area, and if there aren't any good schools in the area, someone will see a chance to make a lot of money and will come found one. I don't see how you see this as anything close to monopolistic, and I especially don't see how you think this is more monopolistic than government schools.
Either way, how about we do this. Set up a voucher system alongside the current government schools. Give vouchers to students who request to go to private schools that are worth the same amount the government pays per student. Let people decide whether they want to go to private or public schools, and either way the government will be footing the bill (and the same bill). Let private schools keep any and all profits they make off the vouchers.
And rather that giving individuals no buying power, it gives everyone the same buying power (depending on implementation). By the way, your argument about deteriorating funding is an absolute joke, funding per student in the US is astronomical, has been growing at an astonishing rate, and is much higher than pretty much all other countries.
"So you'd rather all government run up massive deficits that they can't pay, inflate their way out of it, and create runs on the dollar that collapse our economy and destroy any international standing we have?"
At the start of the great depression nations cut expenses as their revenues contracted to minimize their deficits. You put a contractionary policy atop a contracting economy and it will contract even faster. One of the great lessons of the great depression experience is the realisation that increased budget deficits must be weathered in order to prevent the further deterioration of the economy. I am stunned how people consistently argue that policies which have been proven disastrous are appropriate. Whats more maintaining funding levels, in this context I'm not talking about increasing funding rather simply maintaining it, will have no significant inflationary impact, but if it did a higher rate of short run inflation is a small price to pay to prevent economic apocalypse.
How does putting downward pressure on a contracting economy increase your international standing? The United States is almost entirely out of respect at the moment and its respect is falling at a rapid pace. Economic collapse will put a nail in the coffin and in my opinion collapse is the only outcome from contracting a contracting economy. But only time will tell.
Right, because FDR's New Deal was such a contractionary program. Look at all the good it did (aka lengthening the Great Depression by years).
Creating inflation during times of depression is only okay if you cut back during times of plenty, which we didn't (Negative inflation-adjusted interest rates during the 2000's anyone?). You can't inflate during times of prosperity, and then inflate more during down-turns.
I have no clue what I'm talking about hey? Such things can only happen if there is no alternative? Well indeed that is true, but when you say to a poor family here take your voucher and get some education what alternatives do they have. Pathetic school A or abysmal school B. There is no effective alternatives available to these people. Indeed it is the government which has allowed this situation to develop. You ever heard of market failure?
I should've addressed this up there, but whatever.
Markets would create choice. If the only choices in the are were schools A and B, entrepreneur C would go "Hey look, I can make a massive profit by creating decent school C." In fact, the worse the schools in the area, the easier it is to attract students at low cost and make huge profits, the more schools will come in to compete.
Government monopolies destroy choice. The only choice in a government-run school system is to go to the school in the area, regardless of whether it's good, decent, horrible, or worse. It's not like a market system where it's self-correcting; instead of a battle of the fittest where only the schools that best serve the consumer at the lowest cost survive we get a system where inefficiency is rewarded and innovation and improvement are largely ignored.
Ever hear of government failure? Either way, any positive externality would be accounted for by the fact that the government is still subsidizing education, just not controlling it directly. And I don't see any negative externalities either.
"Inflation is a monetary phenomenon". Wrong. Have you ever heard of stagflation? 'Normal' inflation is a monetary phenomenon yes but it is far from the end of the story. The rising cost of oil increases inflation regardless of any monetary impact this is stagflation and it is affecting us right now. For decades economists believed stagflation impossible, ahh the wisdom of economists.
I admit that I oversimplified it. But I have to note that only Keynesians thought that stagflation was impossible, and Keynes was an idiot who put economic thinking back decades. He's only popular because FDR liked him because his theories validated FDR's retarded government programs. And interestingly enough, Friedman predicted stagflation.
I basically said that boosting the supply side of the economy is the key to prosperity and higher wages. You then say oh your wrong what we need to do is boost the supply side of the economy. Please. Of course productivity is important, this is largely why a good education system is so important. But productivity achieved by paying your workers 50c an hour is the wrong way to go about it. This is effectively what Friedman advocates, the man said many correct things, but he is largely delusional. They live in a fantasy world of economic models which simply do not hold true in the real world. And they use confusing maths and economic jargon to stifle genuine debate. Germany is a good example of how productivity can be immense yet the public sector large. American workers are the most 'productive' on the planet, and look what they have to show for it, the lowest standard of living in the western world.
Right, Americans have the lowest standard of living in the western world. I'd like to see some data on that. Not only do we have more disposable income that almost any country, but we also don't have to wait in 3-month lines to get into hospitals. Gotta love that 12% German unemployment (is that it currently? I know it's up past 10). And you gotta love how American income per household is still one of the highest in the world.
I think you're missing out of something called competition for labor. If every company is paying $1 wages, it's in every individual company's interest to charge $2 in order to get the best available talent. This continues up to productivity as long as there isn't an external factor affecting supply (like rampant immigration). Labor is fundamentally a product, and is driven by the same supply and demand forces that any other product is. And just as any product's price will approach marginal cost (or as close as information dispersion and ease of transition will let it), wages will approach marginal productivity.
I never said that we need to boost the supply said (or I might've, but I don't believe it). We need to let the market find the stable equilibria. The government doesn't need to do anything, because almost anything the government does will distort the equilibria and bring on future price corrections.
And if you've ever actually read lots of Friedman's work, it's very readable and understandable. Sure he has a bunch of work directed at the professional economist and backed up by mathematical models, but he also has a bunch of work directed at the layman, relatively easy readings filled with logic and reason.
You are advocating policies that have been tried and have failed. And now we have come full circle, these policies were spawned in the United States and now they have returned to the land of their creation. The current economic downturn is no coincidence rather it is a continence of a long and depressing tale of economic vandalism.
To risk beating a dead horse, these policies have not been tried, no matter how much people want to think that they have. Though I do have to say over world history, I'd like you to find an economic system that has worked better than relatively free capitalism.
And Friedman and his fellow Chicagoans who tried to mold South American economies were retarded. Their fundamental failure was that the institutions and culture needed for market economies to thrive didn't exist and couldn't be created on a whim.
And yes, I agree that it is the result of a "long and depression tale of economic vandalism". That vandalism has been the increasingly large role of government in the economy and it's desire to "do good" without looking at the consequences or worrying about the money it's spending.
People suggest that the United States is too large to collapse many economies have done over the last 50 years (almost every single one had Friendman's economists behind it). The size of the United States makes collapse less likely but there is only so much beating any economic system can take and right now American economists are brutalizing their economy with a hatchet I doubt it can take much more punishment.
Let's look at the two probably biggest economic collapses in the last 50 years. The Soviet Union and Communist China. Because these were so free-market and directed by Friedman, obviously state intervention and control are the only answers.
At the end of the day only time will tell, but I remind you that the Bush administration has followed the policies you advocate and I will let the consequences speak for themselves.
Not at all, and the "Bush administration" didn't do anything. "Administrations" aren't actors, and either way, Bush didn't control much of this, much was by the fed or previous administrations/Congress (though he might've enabled it).
The consequences are from disastrous management by the federal reserve, bad government mandates on home ownership, and a good bit of overzealous government intervention and regulation. This bubble would've never happened if the government hadn't caused it to happen.
What I get from you is that you're a pretty hardcore Keynesian that also believes that the government is perfect. Except that you're a classical Keynesian, which has been discredited time after time, and you haven't read up much on public choice theory. Either way, I won't be responding to you again, as it simply isn't worth my time or effort anymore. You're economic education is... lacking to say the least. And either way, this discussion has gotten way off-topic.
I will respond to your response however why don't you detail your plan for the economy rather than criticize mine?
Why don't you please tell me at which point I advocated any of the policies you said I advocated, and tell me how exactly deficit spending and job creation will do a better job of revitalizing the economy than injecting capital into banks. Do you not understand how credit works?
I understand how credit works, and I understand that when you already have unsustainable levels of debt the notion that the economy should be resuscitated using borrowings thus increasing your levels of debt is simple stupidity. It the the reliance upon expansionary monetary policy, increasing debt time and time again which has gotten the United States into this mess to a large extent, and monetary policy simply cannot get them out of this one. The levels of debt are too high and consumer confidence too low for people to seriously consider increasing their levels of debt any higher. And even if they did it would only postpone the problem and it would become even worse. Thus providing real economic stimulus through government spending is the ONLY option left available at this point, the state of the deficit creates serious problems in financing fiscal expansion but these problems can be dealt with.
Here we go again with the "all our problems are caused by the federal reserve and fractional reserve banking etc." Business cycles will always be a part of economic history. Admittedly, low fed rates contributed to the current crisis. Coupled (and i repeat, COUPLED) with the moral hazard enabled by federal deregulation and the secondary mortgage market, that was the cause of the housing bubble. But expansionary monetary policy in this case (both the bailout and today's rate cut) is a short run solution that works by staving off further losses. You work under the fallacy that market corrections are perfectly accurate. The more businesses we allow to fail, the less risk investors are willing to take, to the point that aversion to investment falls beneath the actual risk in the market presently. That in turn becomes a self-fulfilling prophecy where the lack of capital creates more risk, causing less investment. It's been noted that the bailouts do not even begin to cover the total value of the losses. Part of the reason behind the bailout and the rate cut is because these make headlines and restore confidence. This is key.
Stimulus does not repair this problem as effectively because an injection of capital from the ground up will a.) require exponentially more cash for enough of it to get to the right places because when consumers don't hoard, it's being spent everywhere, not targeted at businesses that need it the most b.) it happens over time. meanwhile, the crisis gets worse c.) for these reasons, it does not repair confidence. Also, how is economic stimulus NOT an increase in the money supply, except through different sources? The long run effect is the same. Your arguments against debt and for stimulus are self contradictory.
To put it more simply, the key problem is hoarding and targeting. The current fed solution is a sophisticated package that will ensure the money gets where it needs the fastest.
The reason I asked you to detail your plan is so that i can know for sure if you do advocate these policies. When I said this previously it based off the assumption that you agree with the policies advocated by the McCain campaign, or Ron Paul's brand of economic management basically the economic right. My criticisms are based upon arguments against these policies in a broad sence. If you detail what you think should be done at present I will be better able to respond to that, right now i'm not sure what you do believe should be done with any real accuracy.
No, no, no. By assuming I endorsed these policies you completely ignored my arguments, but whatever now. I feel what needs to be done at present is what is being done: a.) injections of capital to banks and businesses b.) as part of that capital injection, take the bad mortgage assets off the hands of banks, allowing them to restore stability to their balance sheets.
I will explain how job creation and deficit spending can resuscitate the economy however, now I have said that it is better than creating 'liquidity' or attempting to encourage debt spending earlier in this post. Job creation and deficit spending physically place money into the economic system which begins to filter up and begins to multiply, people get more money in the jobs there in and spend more, the level of unemployment falls which increases revenues from taxation and decreases social security cost but most importantly again it puts money in the economy where its needed. And this will put upward pressure on the stock market. The impact on demand of encouraging credit and through fiscal stimulus are similar, however fiscal stimulus does not increase upon an already unsustainable level of private sector debt which is destroying the economy.
i think we are in agreement here except that I believe propping up credit is more effective, and is now as hazardous as you claim. However:
I stand in the middle of McCain's tax policies and yours, but my view is that where we can increase incentives for capital to enter the states at minimum cost elsewhere, we should do so. Otherwise, we cease to be competitive in the world market for investor capital. Hong Kong, which is #1 in the index of economic freedom, is an excellent empirical example of how low government intervention has generated unbelievably rapid growth (7.5%). Admittedly, these policies tends to create large income equality, which is the drawback. A simple survey of the CIA World Factbook in relation with the index of economic freedom's rankings, in particular their ranking of "freedom from government (ie low capital gains taxes etc)" will find that low intervention -> more growth. (China has a 90% rating in that category, although a 50% rating overall) Which pretty much refutes your claim that trickle up is equally effective for growth.
The Federal deficit is out of control however but if you take back the Bush tax cuts and reduce defense spending by around 200billion dollars and you will not reduce the capacity of the defense forces because then though the Bush administration has poured much more than 200billion per year extra into defense the capacity of the military has declined. It is ridiculous and the levels of waste and corruption (i.e Halliburton) which are to blame. You can also remove these tax cuts and actually increase the levels of investment as the government will invest it even though under the current economic environment a positive return can not be guaranteed, the private sector cannot invest significantly in such an environment. Thus you can get about 650 billion extra dollars to throw around, and boy does the economy need it. The United States can have a quite decent balance sheet its just a matter of getting rid of the real waste, in defense, and in diabolical tax cuts to the rich which serve no real economic benefit. They have nifty buzz words and economic jingo to make them seem like good policies but in fact they are horrible policies which damage the economy and only benefit the rich. If the rich were truly wise even they would oppose them as it undermines the sustainability of the economic system they need just as much as everyone else.
The federal deficit is 5% of GDP, compared with 60% in Germany and similar numbers across Europe.
worthwhile (and easy and quick) read about the causes of the problem. casts a more diverse view than what's been mentioned here
regarding the above post i forgot to mention:
we are in the middle of a market correction w/r/t bad debt. at the end of it, enough debt will have defaulted that even borrowers in otherwise good standing will have foreclosed. the market, has overcorrected, which is what i meant that market corrections are not perfect. this is the argument i've been making for much of this thread. a temporary expansionary policy is required to bring the credit market to a reasonable level. we cannot put ourselves in more "debt slavery" when we much of that debt has been defaulted on.
On October 07 2008 15:45 Choros wrote: One point I will make regarding this debate is that it is in the nature of economic debates that two economists will debate each other, both will leave believing they have won, and convinced the other is totally mad. It is only the impact that these policies have which can conclusively prove who is correct and who is not. I believe that the failure of the policies you advocate has already begun and has been progressing for some time now. In 12 to 16 months it will be more clear we will probably conclusively know just how bad it will get. At that time I expect I will be saying 'I told you so', but for now all we have are debates without any conclusive result.
None of the policies that I advocate have been put into practice. The people who are saying that this crisis is a result of laissez faire and a failure of markets are retards, this crisis is a result of absolutely stupid monetary policy and government mandates/interference. Laissez-faire has never existed.
It is true that a market based education system has never been tried, in my opinion this has more to do with the fact that only the United States are insane enough to consider such a diabolical and fundamentally flawed system. But I concede that such ideas are relatively new so it is not surprising that they are untried, but no other country would even consider suggesting such policies as the public outcry would be immense. Everything good about our education system was created in the public sector, if it aint broke don't fix it.
The American Education system however is broke, but the fundamental reason for this is the neglect of the public system and consistently deteriorating funding levels. Will a voucher system work? Only time will tell, but I have supreme confidence it will fail. ... Microeconomics is the study of firms, because firms are profit maximising entities we can predict how they will act under certain conditions. If you do not have a genuine competitive market situation then you will have a monopoly or an oligopoly (among others). Under those conditions firms produce inferior product at a higher price. A voucher system effectively creates a monopolistic situation as the individuals have no buyer power. Rich people do have buyer power, but they already go to private schools so they do not count.
The US education system is a government imposed monopoly. Monopolies are inefficient (by your own admission). Therefore, the government-run education systems must be inefficient, because they are just monopolies with little to no incentives to increase quality or decrease costs.
A voucher system with for-profit schools would be absolutely the best following microeconomic principles. People will be able to choose from different schools competing for students. Therefore, people will flock to the absolute best schools in the area, and if there aren't any good schools in the area, someone will see a chance to make a lot of money and will come found one. I don't see how you see this as anything close to monopolistic, and I especially don't see how you think this is more monopolistic than government schools.
Either way, how about we do this. Set up a voucher system alongside the current government schools. Give vouchers to students who request to go to private schools that are worth the same amount the government pays per student. Let people decide whether they want to go to private or public schools, and either way the government will be footing the bill (and the same bill). Let private schools keep any and all profits they make off the vouchers.
And rather that giving individuals no buying power, it gives everyone the same buying power (depending on implementation). By the way, your argument about deteriorating funding is an absolute joke, funding per student in the US is astronomical, has been growing at an astonishing rate, and is much higher than pretty much all other countries.
"So you'd rather all government run up massive deficits that they can't pay, inflate their way out of it, and create runs on the dollar that collapse our economy and destroy any international standing we have?"
At the start of the great depression nations cut expenses as their revenues contracted to minimize their deficits. You put a contractionary policy atop a contracting economy and it will contract even faster. One of the great lessons of the great depression experience is the realisation that increased budget deficits must be weathered in order to prevent the further deterioration of the economy. I am stunned how people consistently argue that policies which have been proven disastrous are appropriate. Whats more maintaining funding levels, in this context I'm not talking about increasing funding rather simply maintaining it, will have no significant inflationary impact, but if it did a higher rate of short run inflation is a small price to pay to prevent economic apocalypse.
How does putting downward pressure on a contracting economy increase your international standing? The United States is almost entirely out of respect at the moment and its respect is falling at a rapid pace. Economic collapse will put a nail in the coffin and in my opinion collapse is the only outcome from contracting a contracting economy. But only time will tell.
Right, because FDR's New Deal was such a contractionary program. Look at all the good it did (aka lengthening the Great Depression by years).
Creating inflation during times of depression is only okay if you cut back during times of plenty, which we didn't (Negative inflation-adjusted interest rates during the 2000's anyone?). You can't inflate during times of prosperity, and then inflate more during down-turns.
I have no clue what I'm talking about hey? Such things can only happen if there is no alternative? Well indeed that is true, but when you say to a poor family here take your voucher and get some education what alternatives do they have. Pathetic school A or abysmal school B. There is no effective alternatives available to these people. Indeed it is the government which has allowed this situation to develop. You ever heard of market failure?
I should've addressed this up there, but whatever.
Markets would create choice. If the only choices in the are were schools A and B, entrepreneur C would go "Hey look, I can make a massive profit by creating decent school C." In fact, the worse the schools in the area, the easier it is to attract students at low cost and make huge profits, the more schools will come in to compete.
Government monopolies destroy choice. The only choice in a government-run school system is to go to the school in the area, regardless of whether it's good, decent, horrible, or worse. It's not like a market system where it's self-correcting; instead of a battle of the fittest where only the schools that best serve the consumer at the lowest cost survive we get a system where inefficiency is rewarded and innovation and improvement are largely ignored.
Ever hear of government failure? Either way, any positive externality would be accounted for by the fact that the government is still subsidizing education, just not controlling it directly. And I don't see any negative externalities either.
"Inflation is a monetary phenomenon". Wrong. Have you ever heard of stagflation? 'Normal' inflation is a monetary phenomenon yes but it is far from the end of the story. The rising cost of oil increases inflation regardless of any monetary impact this is stagflation and it is affecting us right now. For decades economists believed stagflation impossible, ahh the wisdom of economists.
I admit that I oversimplified it. But I have to note that only Keynesians thought that stagflation was impossible, and Keynes was an idiot who put economic thinking back decades. He's only popular because FDR liked him because his theories validated FDR's retarded government programs. And interestingly enough, Friedman predicted stagflation.
I basically said that boosting the supply side of the economy is the key to prosperity and higher wages. You then say oh your wrong what we need to do is boost the supply side of the economy. Please. Of course productivity is important, this is largely why a good education system is so important. But productivity achieved by paying your workers 50c an hour is the wrong way to go about it. This is effectively what Friedman advocates, the man said many correct things, but he is largely delusional. They live in a fantasy world of economic models which simply do not hold true in the real world. And they use confusing maths and economic jargon to stifle genuine debate. Germany is a good example of how productivity can be immense yet the public sector large. American workers are the most 'productive' on the planet, and look what they have to show for it, the lowest standard of living in the western world.
Right, Americans have the lowest standard of living in the western world. I'd like to see some data on that. Not only do we have more disposable income that almost any country, but we also don't have to wait in 3-month lines to get into hospitals. Gotta love that 12% German unemployment (is that it currently? I know it's up past 10). And you gotta love how American income per household is still one of the highest in the world.
I think you're missing out of something called competition for labor. If every company is paying $1 wages, it's in every individual company's interest to charge $2 in order to get the best available talent. This continues up to productivity as long as there isn't an external factor affecting supply (like rampant immigration). Labor is fundamentally a product, and is driven by the same supply and demand forces that any other product is. And just as any product's price will approach marginal cost (or as close as information dispersion and ease of transition will let it), wages will approach marginal productivity.
I never said that we need to boost the supply said (or I might've, but I don't believe it). We need to let the market find the stable equilibria. The government doesn't need to do anything, because almost anything the government does will distort the equilibria and bring on future price corrections.
And if you've ever actually read lots of Friedman's work, it's very readable and understandable. Sure he has a bunch of work directed at the professional economist and backed up by mathematical models, but he also has a bunch of work directed at the layman, relatively easy readings filled with logic and reason.
You are advocating policies that have been tried and have failed. And now we have come full circle, these policies were spawned in the United States and now they have returned to the land of their creation. The current economic downturn is no coincidence rather it is a continence of a long and depressing tale of economic vandalism.
To risk beating a dead horse, these policies have not been tried, no matter how much people want to think that they have. Though I do have to say over world history, I'd like you to find an economic system that has worked better than relatively free capitalism.
And Friedman and his fellow Chicagoans who tried to mold South American economies were retarded. Their fundamental failure was that the institutions and culture needed for market economies to thrive didn't exist and couldn't be created on a whim.
And yes, I agree that it is the result of a "long and depression tale of economic vandalism". That vandalism has been the increasingly large role of government in the economy and it's desire to "do good" without looking at the consequences or worrying about the money it's spending.
People suggest that the United States is too large to collapse many economies have done over the last 50 years (almost every single one had Friendman's economists behind it). The size of the United States makes collapse less likely but there is only so much beating any economic system can take and right now American economists are brutalizing their economy with a hatchet I doubt it can take much more punishment.
Let's look at the two probably biggest economic collapses in the last 50 years. The Soviet Union and Communist China. Because these were so free-market and directed by Friedman, obviously state intervention and control are the only answers.
At the end of the day only time will tell, but I remind you that the Bush administration has followed the policies you advocate and I will let the consequences speak for themselves.
Not at all, and the "Bush administration" didn't do anything. "Administrations" aren't actors, and either way, Bush didn't control much of this, much was by the fed or previous administrations/Congress (though he might've enabled it).
The consequences are from disastrous management by the federal reserve, bad government mandates on home ownership, and a good bit of overzealous government intervention and regulation. This bubble would've never happened if the government hadn't caused it to happen.
What I get from you is that you're a pretty hardcore Keynesian that also believes that the government is perfect. Except that you're a classical Keynesian, which has been discredited time after time, and you haven't read up much on public choice theory. Either way, I won't be responding to you again, as it simply isn't worth my time or effort anymore. You're economic education is... lacking to say the least. And either way, this discussion has gotten way off-topic.
I will respond to your response however why don't you detail your plan for the economy rather than criticize mine?
Why don't you please tell me at which point I advocated any of the policies you said I advocated, and tell me how exactly deficit spending and job creation will do a better job of revitalizing the economy than injecting capital into banks. Do you not understand how credit works?
I understand how credit works, and I understand that when you already have unsustainable levels of debt the notion that the economy should be resuscitated using borrowings thus increasing your levels of debt is simple stupidity. It the the reliance upon expansionary monetary policy, increasing debt time and time again which has gotten the United States into this mess to a large extent, and monetary policy simply cannot get them out of this one. The levels of debt are too high and consumer confidence too low for people to seriously consider increasing their levels of debt any higher. And even if they did it would only postpone the problem and it would become even worse. Thus providing real economic stimulus through government spending is the ONLY option left available at this point, the state of the deficit creates serious problems in financing fiscal expansion but these problems can be dealt with.
Here we go again with the "all our problems are caused by the federal reserve and fractional reserve banking etc."
Well actually ilm not criticising the federal reserve, and I think the fractional reserve banking system is irrelevant in this context. What I mean to say is that as a consequence of poor macro economic policies a long run decline in real (i.e not funded through debt) demand has occurred. The business cycle plays its part but by applying expansionary monetary policy to speed up it does nothing to fix the underlying problem but it effectively covers it up. If you look at a graph of interest rates over the course of 20 odd years they go up and down but there is a downward trend as every time you apply expansionary monetary policy the level of debt rises meaning you need a lower interest rate next time round to have the same impact, thus over successive rounds the rate gets slowly lower and the debt bubble grows ever larger. You will inevitably get to a point where you cannot increase your debt any further and this is the point the United States MAY be at today. This is basically why I believe fiscal policy is the only option.
I don't criticize the federal reserve because they ultimately are not at fault. They are a simplistic entity who basically just sits there and changes monetary policy. They have virtually no freedom of action it is the structure of the system its self which is at fault.
expansionary monetary policy in this case (both the bailout and today's rate cut) is a short run solution that works by staving off further losses.
Indeed this is the case but only as a short run solution and only assuming that increased borrowing can even occur. Japan has a cash rate of 0% during their recession in the late 90's sounds unbelievable but is true. Under dire circumstances monetary policy may not work.
The more businesses we allow to fail, the less risk investors are willing to take, to the point that aversion to investment falls beneath the actual risk in the market presently. That in turn becomes a self-fulfilling prophecy where the lack of capital creates more risk, causing less investment. It's been noted that the bailouts do not even begin to cover the total value of the losses. Part of the reason behind the bailout and the rate cut is because these make headlines and restore confidence. This is key.
Indeed it is but confidence can only take you so far, and as you note it may not be within our physical capacity to actually deal with this problem effectively using monetary policy. Good long run policies today can save a whole world of hurt in the long term and make this nothing more than a painful but short memory. Expansionary monetary policy may help in the short run and I do not object to trying it although debt must be lowered in the long run.
Stimulus does not repair this problem as effectively because an injection of capital from the ground up will a.) require exponentially more cash for enough of it to get to the right places because when consumers don't hoard, it's being spent everywhere, not targeted at businesses that need it the most
It will not require exponentially more spending for example increasing education funding can be a set figure and increasing welfare payments will actually decline as the unemployment rate falls. Although it is possible to apply fiscal policy more like a scalpel, as apposed to the monetary policy hammer, this doesn't really matter in this case as this is a general problem and generalised stimulus should be sufficient.
b.) it happens over time. meanwhile, the crisis gets worse
On this point for one thing we better hope is that our short run policies can stop the crisis getting worse, but the crisis will continue without end in sight unless the long run policies I advocate are implemented. There is significant delay even if we decided to do this today it would take months to get the budget in order and months more before the money is spend, then perhaps a month before you feel the impact. On the current time line I would not expect genuine fiscal stimuls until assuming Obama is elected, McCain advocated freezing spending an incredibly stupid policy, It will be 16 month at the earliest before we feel the impact. Could this be too long, we had better hope for the best on that count.
c.) for these reasons, it does not repair confidence.
I think it a solid long term economic policy the likes of which I advocate it will increase confidence far more than shambolic attempts to fix the short run problem.
Also, how is economic stimulus NOT an increase in the money supply, except through different sources?
It is exactly that, in fact far more of 'my' money will actually become 'real' money and thus its inflationary impact will be greater but inflation is not what we need to be concerned with at the moment. But also if the demand side of the economy is contracting then firms levels of stocks increase. And right now they are increasing quickly if you stimulate demand back up to where it was at before then it will not prove too inflationary. Price are set by supply = demand. Inflation will only result if you increase demand above it previous level this is not an issue at present.
Your arguments against debt and for stimulus are self contradictory.
Well I pointed out that cutting wasteful spending is important because the deficit is a serious problem which must be dealt with but if you have two options, either increase public sector debt, or private sector debt, then the public sector is your better option as it can lend on longer term loans at lower interest rates plus you have far lower levels of risk overall and a greater capacity to meet repayments. Stimulus no.1 debt reduction no.2. We wont get anywhere without the stimulus first.
To put it more simply, the key problem is hoarding and targeting. The current fed solution is a sophisticated package that will ensure the money gets where it needs the fastest.
The key problem is hoarding in terms of the money lenders yes but it is not the problem in terms of demand in the economy which is the source of this problem, the demand contraction happened first, the poor grew poorer quickly and defaulted on their sub prime mortgages and then the financial markets got hit which then sped up the whole process rapidly and stole the headlines. As consumers have a very low propensity to save the multiplier effect of my brand of stimulation is made greater. What will happen from this fed solution we cannot predict, what would happen if we didn't do it we cannot know either but it is possible that this solution will not work but will prove so costly it undermines the capacity of the state to carry out fiscal stimulus.
The reason I asked you to detail your plan is so that i can know for sure if you do advocate these policies. When I said this previously it based off the assumption that you agree with the policies advocated by the McCain campaign, or Ron Paul's brand of economic management basically the economic right. My criticisms are based upon arguments against these policies in a broad sence. If you detail what you think should be done at present I will be better able to respond to that, right now i'm not sure what you do believe should be done with any real accuracy.
No, no, no. By assuming I endorsed these policies you completely ignored my arguments, but whatever now. I feel what needs to be done at present is what is being done: a.) injections of capital to banks and businesses b.) as part of that capital injection, take the bad mortgage assets off the hands of banks, allowing them to restore stability to their balance sheets.
This is all fine but I was talking about long run economic policies, small government vs big government etc.
I will explain how job creation and deficit spending can resuscitate the economy however, now I have said that it is better than creating 'liquidity' or attempting to encourage debt spending earlier in this post. Job creation and deficit spending physically place money into the economic system which begins to filter up and begins to multiply, people get more money in the jobs there in and spend more, the level of unemployment falls which increases revenues from taxation and decreases social security cost but most importantly again it puts money in the economy where its needed. And this will put upward pressure on the stock market. The impact on demand of encouraging credit and through fiscal stimulus are similar, however fiscal stimulus does not increase upon an already unsustainable level of private sector debt which is destroying the economy.
i think we are in agreement here except that I believe propping up credit is more effective, and is now as hazardous as you claim. However:
I stand in the middle of McCain's tax policies and yours, but my view is that where we can increase incentives for capital to enter the states at minimum cost elsewhere, we should do so. Otherwise, we cease to be competitive in the world market for investor capital. Hong Kong, which is #1 in the index of economic freedom, is an excellent empirical example of how low government intervention has generated unbelievably rapid growth (7.5%). Admittedly, these policies tends to create large income equality, which is the drawback. A simple survey of the CIA World Factbook in relation with the index of economic freedom's rankings, in particular their ranking of "freedom from government (ie low capital gains taxes etc)" will find that low intervention -> more growth. (China has a 90% rating in that category, although a 50% rating overall) Which pretty much refutes your claim that trickle up is equally effective for growth.
Absolutely it is true that nations can grow enourmously under private investment. Similar success stories exist for Public sector investment also but this income equality issue is key. If income inequality is really bad then it you can have your growth index's looking great, your gdp and gdp per capita looking good too, but the real level of consumption in the economy is far lower as what people buy changes with income. The poorer you are the most benefit is achieved per dollar. The capacity of the economy to provide a good life to the people is lower as well. Income inequality is an incredibly important issue and if the United States equality was better today this whole problem may not have occurred in the first place. I remind you that sub prime loans are simply lending to the poor. They grew too poor and the system became unsustainable.
ok u just got this up as i was editing my last post
anyway
i think we have gotten to the point in this debate where my experience tells me we are pretty much rehashing the same points, so ill keep my response shorter tomorrow and focus on what us forensicators call a closing rebuttal.
i may also think i owe you an apology. i'll consider that for a few.
however why don't you detail your plan for the economy rather than criticize mine?
I'll suggest a reading of Man, Economy, and State. It's pretty much a 1500 page detail of such a plan. In discussion we draw on that base to make arguments against specific instances of public policy, but a complete reading of that book should provide an insight into the logical framework that drives that criticism.
Ill try and have a look through this but its soooo long.
On October 09 2008 15:33 ahrara_ wrote: ok u just got this up as i was editing my last post
anyway
i think we have gotten to the point in this debate where my experience tells me we are pretty much rehashing the same points, so ill keep my response shorter tomorrow and focus on what us forensicators call a closing rebuttal.
i may also think i owe you an apology. i'll consider that for a few.
You don't need to apologize I just came in with sensational statements and I was too lazy to go into what is really a long explanation. But it is relieving to see that it is possible to actually have a genuine debate/discussion about what is a rather heated and controversial issue.
I understand how credit works, and I understand that when you already have unsustainable levels of debt the notion that the economy...
Everybody likes to state that we have unsustainable levels of debt. It is said so often that it has become a cliche and soundbite. However, like a lot of cliches and sound bites, its not obviously correct and may be flat out wrong.
Debt should ONLY be measured with regard to total income.
Example: The Jones' and the Smith's both have $200,000 dollars worth of debt. Therefore they are both holding unsustainable levels of debt.
FALSE. Because, while the Smith's family income is only $36,000, the family income of the Jones' is $1 million dollars. Obviously one family has sustainable debt with no problem.
So when comparing debt, you should only talk about debt/income ratio. That give you more accurate information.
So here is the information on the US (GDP is total income):
As you can see, all measured levels of debt/GDP ratio up to 2004 were lower than at any time during the 90's. Also note how we did not have nay problem pulling out of the post WWII debt. Our problem is much smaller now than it was in the 50's.
Savio, your info is 4 years old (january 31 of 2005 the most modern). Obama used a number $10 trillion in the debates talking about debt, up from $5 trillion when Bush took charge.
Also back in the 40s the government was lending from it's citizens when it was in war: people worked for the governmental debt not cash. Right now USA has huge amount of foreign debt and huge deficit of trade account. Also the world was lying in ruins after the world war so USA was so much ahead in production capasities it could get away with any debt. Also the nation was much more younger than it is now when babyboomers start retiring.
On October 10 2008 04:11 a-game wrote: dow is below 9000 right now
LIBOR had a big jump yesterday
we're all gonna die etc...
Edit: jesus down 600 points right now...
that's it, i don't want to play anymore
the market has lost somethign like 1/3 of its value in just over two weeks
shit is hitting the fan...
my prof's home is getting foreclosed on, and i keep hearing stories about people losing their life savings or money saved for their kid's education, etc. etc.
people really have to realize just how much the economy affects everybody's life. most kids are sheltered from it until you're on your own but then you get out on your own and that's when you feel the squeeze.
The list of countries with higher debt/GDP ratios are (among many others):
Japan, Italy, Belgium, Israel, Norway, Canada, France, Germany and 19 others.
That information comes from the CIA factbook and I doubt its accuracy by a wide margin. At least Canada's data I'm familiar with - our public debt peaked in the mid/late 90s and has been dropping ever since. It sits currently at CAD$457bn, which compared to our GDP, at about CAD$1.35 trillion, gives debt per GDP at 33.8%, not the 64.2% the CIA factbook (and wikipedia) uses. Compare now to the US figure of ~$10 trillion debt (they just broke the debt clock in New York today - not enough numbers after rolling over 10 trillion!) compared with a GDP of about $13 trillion, and you get about 77% debt per GDP. Checking numbers helps.
Can we not get into the kind of debate where we bitch about each other's sources? Or at least, if you're going to provide an alternative that you claim is more authoritative than the CIA World Factbook, cite something?
Another interesting article on the debate between mixed socialism and mixed capitalism (they're obviously the same thing, but I'm terming it that way to highlight the leanings of Europe vs. the US.)
I understand how credit works, and I understand that when you already have unsustainable levels of debt the notion that the economy...
Everybody likes to state that we have unsustainable levels of debt. It is said so often that it has become a cliche and soundbite. However, like a lot of cliches and sound bites, its not obviously correct and may be flat out wrong.
Debt should ONLY be measured with regard to total income.
Example: The Jones' and the Smith's both have $200,000 dollars worth of debt. Therefore they are both holding unsustainable levels of debt.
FALSE. Because, while the Smith's family income is only $36,000, the family income of the Jones' is $1 million dollars. Obviously one family has sustainable debt with no problem.
So when comparing debt, you should only talk about debt/income ratio. That give you more accurate information.
So here is the information on the US (GDP is total income):
As you can see, all measured levels of debt/GDP ratio up to 2004 were lower than at any time during the 90's. Also note how we did not have nay problem pulling out of the post WWII debt. Our problem is much smaller now than it was in the 50's.
The list of countries with higher debt/GDP ratios are (among many others):
Japan, Italy, Belgium, Israel, Norway, Canada, France, Germany and 19 others.
The levels of debt may be sustainable at present it would appear so but its possible we could increase it further but continual increase of that debt will inevitably make it unsustainable one day and the 'come down' will be greater. The level of private sector debt in the United States is slightly higher than it was right before the great depression which is worrying but not by definition a catastrophe. The main point is that we simply cannot be complacent about the levels of debt in our economy as we have been so carelessly in the past and attempting to solve this problem by increasing debt even more will not be sufficient and will probably prove counter productive. Measuring debt relative to GDP is a relatively good measure but it fails to take into account the distribution of debt and the distribution of wealth, it can create misleading conclusions. The true nature of the debt bubble will make itself felt but just because nations have been able to sustain high debt 5 or 30 years ago it does not mean that can they continue to do so in the future. Private sector debt is what counts and while we should look at public sector debt increasing American debt will inevitably increase considerably to deal with this problem, but in my opinion any notion of increasing private sector debt further as a solution is stupidity.
On October 10 2008 10:02 Jibba wrote: Another interesting article on the debate between mixed socialism and mixed capitalism (they're obviously the same thing, but I'm terming it that way to highlight the leanings of Europe vs. the US.)
Do we have any Swedish or German econ majors here?
I would like to see the perspective European economists take on this as well. I pay close attention to interviews etc but I don't get to hear much from anyone other than Aussies and American's.
But he's talking about federal debt. Which is a seperate issue, and, there is no distribution of debt and wealth since there's only one party holding debt
2. The bailout is a half measure at best and will not be effective to the extent originally intended. The markets have already responded to the plan (negatively).
3. A more effective "bailout" would be for the US government to capitalize the financial institutions directly instead of stubbornly hanging onto their hopelessly juvenile idealogical obsession with "free market" mechanisms. How does buying such dilapidated securities in the context of the current global meltdown have a hope in hell of convincing financial institutions to free up liquidity into the wider market? I doubt this will jump-start lending at all. Apart from the grotesque effect of most rewarding those institutions with the greatest exposure to the toxic securities (i.e. the entities that are least deserving of a lifeline, the very institutions that the market has determined should be wiped from the commercial gene pool), most financial institutions, having won a reprieve from their misfortunes by the good grace of the US Government, will undoubtedly be, over the short/mid term at least, conservative in their lending practices. By the time those lenders begin lending like their former swashbuckling selves again, there may not be much of a business community left to lend to.
4. If Paulson wants a faster, more effective fix to the credit crisis, the Fed needs to start taking equity positions in those financial institutions that are best equipped to survive (leaving the rest to sink). This means picking winners and losers (which, by the way, those idealogically tunnel-visioned morons at Treasury hate to do). This gives the government some measure of control over the recovery and gives taxpayers an upside commensurate with their risk.
By the way, ahrara, great lead post and follow up discussion.
Your reasoning and conclusions are generally too textbook (I assume you are still in school) and I do not believe you are applying your information correctly (the reason why very few economists are actually successful at making money to the degree proportionate to their knowledge of the field), but it's clear you're ahead of the curve on this subject.
On October 10 2008 16:40 mensrea wrote: 4. If Paulson wants a faster, more effective fix to the credit crisis, the Fed needs to start taking equity positions in those financial institutions that are best equipped to survive (leaving the rest to sink). This means picking winners and losers (which, by the way, those idealogically tunnel-visioned morons at Treasury hate to do). This gives the government some measure of control over the recovery and gives taxpayers an upside commensurate with their risk.
This plan in combination with expansionary fiscal policy to stimulate the real economy I am reasonably confident would be successful at achieving the best outcomes and as fast possible, which may not be very fast at all.
On October 10 2008 09:28 ahrara_ wrote: Can we not get into the kind of debate where we bitch about each other's sources? Or at least, if you're going to provide an alternative that you claim is more authoritative than the CIA World Factbook, cite something?
If you were referring to my post, it's publicly available financial data, simply manipulated with elementary school arithmetic. It didn't seem like the sort of thing one cites. At any rate, public debt figures are generally published on a government's website. A cursory search would bring you here :
Here it shows net-debt/GDP, which is a different figure, but chart 1.8A shows Canada well ahead of the US and other European countries. Anyway, I was just making the point that those figures could be mistaken and I was under the impression that I showed quite clearly why - it wasn't a random, unjustified slam of someone's sources. It was just a correction I felt should have been made.
On October 10 2008 16:50 mensrea wrote: By the way, ahrara, great lead post and follow up discussion.
Your reasoning and conclusions are generally too textbook (I assume you are still in school) and I do not believe you are applying your information correctly (the reason why very few economists are actually successful at making money to the degree proportionate to their knowledge of the field), but it's clear you're ahead of the curve on this subject.
that's completely fair criticism. and i would tell anybody the same. my knowledge of the crisis far surpasses my knowledge of general economic theory. i'm more of a current events geek than an econ geek. i'm not an expert but i do know what's going on. just don't cite me, don't quote me, but use this as a platform to help you understand the basics.
On October 10 2008 06:55 jgad wrote: you get about 77% debt per GDP. Checking numbers helps.
I'm pretty sure, I looked but couldn't quickly find it so I'm just going from memory, but 60% debt to GDP is regarded as economically unsustainable. That said many countries have been able to sustain a higher level of debt for fairly long periods but this just highlights that allowing a significant blow out in public sector debt may not be an option.
I have some time on my hands and feel like talking economics so I will reply to this post, this is not particularly relevant to the financial crisis but is more a description / debate regarding competing contemporary economic paradigms and ideas.
On October 08 2008 08:03 theonemephisto wrote: None of the policies that I advocate have been put into practice.
If the policies you advocate are market deregulation, free trade, and a small Government philosophy all these policies have been implemented almost in full by the Bush administration, along with several other nations in the past and to an extent the developed world generally today. As far as i can tell this is effectively what you advocate and these policies have not achieved much success but have experienced significant failures.
The people who are saying that this crisis is a result of laissez faire and a failure of markets are retards, this crisis is a result of absolutely stupid monetary policy and government mandates/interference.
Stupid monetary policy have had a a hand to play in this but this crisis was caused by a concerted contractionary impact of laissez faire policies which have forces monetary policy to attempt to fix this failure. De-unionisation and free trade has put downward pressure on the wages of workers, thus reducing the level of demand in the economy, this lower real demand has been substituted by debt spending (through monetary policy action) which has contributed to the debt bubble, meanwhile the underlying problem has grown worse. Debt spending creates the illusion of subsistence. A small government philosophy has cut spending on welfare, education etc and has sucked money out of the real economy without replacement. This will inevitably lead to recession which intern will impact the stock market. Because the stock market has been taking incredible risks it was hit hard by this economic downturn.
Laissez-faire has never existed
It has existed in the past, during the industrial revolution Laissez-faire was a reality, and it was through the blood (literally) of workers fighting for their rights that this system was overturned. It contributed to the most appalling working conditions imaginable (which are even worse than those in China and other sweatshop nations today). The majority of the population enjoyed a terrible standard of living.
The US education system is a government imposed monopoly.
This is false, the amount of private schools all over the place is a testament to this. The only time a public education system will genuinely be an imposed monopoly is if it provides quality education at no cost, people thus have no reason to spend money on a private institution and they cannot compete. I would hardly call this 'imposed'. The fact is that if a public education monopoly does become a reality is would most likely be a great thing for the nation and the economy.
Monopolies are inefficient (by your own admission). Therefore, the government-run education systems must be inefficient, because they are just monopolies with little to no incentives to increase quality or decrease costs.
Monopolies are inefficient yes but measures can be taken to minimise that inefficiency. The type of efficiency gained by forcing individuals to go into an education system in which they have no buyer power is actually socially counter productive. Private firms increase profits (efficiency) by decreasing the quality of service under the circumstances which would exist in practice i.e limited or no buyer power. By making sweeping judgments saying the private sector is always more efficient is an oversimplification which leads to negative outcomes. This is also symbolic of how such woeful paradigms are created. You start with a preconception which is reasonable, and say therefore this, where that 'this' is irrational and immoral. Unjustified preconceptions have had and continue to have tragic consequences.
The public sector will have a greater incentive to increase quality, because they have the Government and society telling them to do so, and you then hire competent people to make this a reality. It is the lack of buyer power at the lower ends of the wage scale (which is what this debate is all about as the rich already go to quality private schools) that created incentives to actually reduce quality.
A voucher system with for-profit schools would be absolutely the best following microeconomic principles. People will be able to choose from different schools competing for students. Therefore, people will flock to the absolute best schools in the area, and if there aren't any good schools in the area, someone will see a chance to make a lot of money and will come found one.
Well I have already described how buyer power is a game changer here, when profit maximization is achieved by decreasing quality then its a bad thing, there is not a lot of money to be made by increasing service quality. People flock to the best schools overcrowding them and degrading their efficiency whilst the other schools die out, decreasing the amount of real choice and allowing overall quality to decrease. By putting it all in the private sector you generate a monopoly only you change it from public sector to the private and thus you loose all power to actually create good outcomes in a monopolistic market situation.
Either way, how about we do this. Set up a voucher system alongside the current government schools. Give vouchers to students who request to go to private schools that are worth the same amount the government pays per student. Let people decide whether they want to go to private or public schools, and either way the government will be footing the bill (and the same bill). Let private schools keep any and all profits they make off the vouchers.
If you can create genuine free market situation then this could work. I would wager everyone would ditch the private schools and still go government because it will have higher quality services provided its funded well enough.If people have the option to not go private that will force the private to provide high quality services. However this is not a feasible outcome in reality. You cannot effectively create the number of options required for a free market scenario in any circumstance other than in metropolis's. This is the only time the market is structured in such a way it can provide good outcomes.
At the end of the day the government is footing the bill for vouchers or for public schools, the difference is that by providing vouchers government money is carted off as private profits. This is yet another example of transferring public wealth into the hands of the few, it is socially and economically destructive and although some people can provide economic mumbo jumbo to justify their claims we should not be so naive as to continually benefit these individuals at a cost to society and with economic outcomes so dire it may be simply catastrophic.
Your argument about deteriorating funding is an absolute joke, funding per student in the US is astronomical, has been growing at an astonishing rate, and is much higher than pretty much all other countries.
That explains why the United States ranks appallingly against other nations all of whome have the public sector as the basis for their educational system. This explains the dilapidated state of schools across the country because there is not enough funding to provide for routine maintenance. Fudged statistics often deny what is a clear reality, I would encourage people to look beyond the figures. But that said I doubt the figures you mention actually are real anyway but they are probably the consequence of the rich receiving cash by the truck load whilst everyone else gets jack, average statistics still make the level of funding appear good when clearly it is not allowing self interested people to pursue their agenda.
Creating inflation during times of depression is only okay if you cut back during times of plenty, which we didn't (Negative inflation-adjusted interest rates during the 2000's anyone?). You can't inflate during times of prosperity, and then inflate more during down-turns.
This is basically describing the economic paradigm which has generated such incredibly bad economic outcomes. This concept that spending money = inflation is an over simplification. Spending money can be inflationary, it can even be deflationary. It depends on the capacity of the supply side to provide what your buying. The key is to improve your supply side and this cannot be done effectively by any means other than those which are regarded as 'inflationary' by your reasoning. Inflation during down times is the only option. Spending wisely during the boom times is the key to ensuring that a significant downturn does not occur again in the future whilst ensuring long term prosperity in a sustainable manner. If you cut back during the boom times you may generate another down turn stronger than the business cycle would acting in isolation. This is especially true is the boom time is longer allowing that degredation through underfunding to become even more significant. Artificially increasing the boom through debt again has made this impact even worse.
Markets would create choice. If the only choices in the are were schools A and B, entrepreneur C would go "Hey look, I can make a massive profit by creating decent school C." In fact, the worse the schools in the area, the easier it is to attract students at low cost and make huge profits, the more schools will come in to compete.
Under the system you advocate the amount of money entering the system remains the same regardless of higher quality. There is no incentive and the market share is not sufficient particularly given start up costs for Mr. C to actually carry out this plan. The market structure of education is such that a free market solution which provides sufficient outcomes is unfeasible.
Government monopolies destroy choice. The only choice in a government-run school system is to go to the school in the area, regardless of whether it's good, decent, horrible, or worse.
Under free market the number of choices remain the same, the Public however through things like a vote can effect the quality of the services they enjoy without the need for market pressure which simply will not exist under this structure.
Ever hear of government failure?
Government failure exists and just like market failure it is rectified through competent policy action, the possibility of its existence is not justification for the abandonment of the public sector rather it is a message to the public sector should be wise in their actions.
Keynes was an idiot who put economic thinking back decades.
Keynes brought economic thought into the modern realm and his policies achieved miraculous economic outcomes across dozens of countries including the United States over the period 1940 to around 1960. His great failure was that the tools he advocated i.e fiscal policy, was so ridiculously effective that people got drunk off it and took it too excess. Also they ignored inflation which is unwise. People realised that they could artificially decrease the unemployment rate considerably and did so to such an extent it exceeded the supply side of the economy's ability to provide all this new stuff people were demaind which lead to round after round of perpetual inflation building. The moral of the Keynes story is that his policies are incredibly effective but do not ignore inflation and do not go to excess. Keynesian economics is in my opinion the key to good quality of life for all.
It was Friedman who put economic thinking not back decades but an entire century. Forget all that you have learnt from economics over the last hundred years, completely disregard Keynsianism and the Public sector instead only manage the short run using interest rates and let the market do everything else. This is Friedman economics in a nutshell. An overly simplistic system which has allowed long run problems generate over time whilst band aiding the symptoms so the problems can grow steadily worse. It has directly contributed to the failure of policy today. Infact it is here that in my opinion all the blame should be heaped.
And interestingly enough, Friedman predicted stagflation.
I think this is most interesting because it is Friedman's system of economic management which is conically unable to actually deal with stagflation effectively. Interest rates, Friedman's only tool, not only do nothing to fix the problem but by constraining investment they physically undermine the capacity of firms to adapt and thus the problem will only grows worse. This is the case in the Australian economy over the last 5 or so years, but not so much today.
Right, Americans have the lowest standard of living in the western world. I'd like to see some data on that. Not only do we have more disposable income that almost any country, but we also don't have to wait in 3-month lines to get into hospitals. Gotta love that 12% German unemployment (is that it currently? I know it's up past 10). And you gotta love how American income per household is still one of the highest in the world.
American income per house hold is only the highest if you use measures which completely ignore income inequality. GDP per capita looks great but when the majority of your wealth is in the hands of 1% of the population such a statistic only allows those who have damaged the economic system and society to say 'look how good we are, we have the highest standard of living' whilst they recklessly reduce that standard of living even further. Although I think my statement is basically just saying the obvious the human development index is a more accurate measure of standard of living. On this measure the United States now stands 12th, this is not the lowest in the developed world and I concede my statement is reactionary I stand by it. Because this relatively high measure is inflated beyond the true standard of living due to 1) high GDP per capita which is a woefully misleading statistic, and a long life expectancy. The United States human development index is in steady decline relative to every country in the OECD. This decline which is only relatively recent is the product of free market policies implemented to excess whilst almost everything that is good to say about the standard of living is the legacy of a big government past. Germany's unemployment may be high, but their high quality of life and economic success are undeniable.
I think you're missing out of something called competition for labor. If every company is paying $1 wages, it's in every individual company's interest to charge $2 in order to get the best available talent. This continues up to productivity as long as there isn't an external factor affecting supply (like rampant immigration). Labor is fundamentally a product, and is driven by the same supply and demand forces that any other product is. And just as any product's price will approach marginal cost (or as close as information dispersion and ease of transition will let it), wages will approach marginal productivity.
This is true however the point I make is that a total free market system under current conditions will reach equilibrium at a point where workers have terrible standards of living. It is only through intervention to manipulate the market that good outcomes can be achieved, and a loss to efficiency is a small price to pay. Labor competition from Asia ensures downward wages pressure in a liberalised global market. A minimum wage is an effective solution for example, combined with welfare to ensure good life for all without decreasing efficiency so much as to become unsustainable. Any job which cannot pay their workers enough to compete with the minimum wage or with welfare is not good enough for our society and economy is the message I preach. By saying to people that you must work an 80 hour week getting paid hardly anything simply to survive is not good enough and to suggest that they are getting paid their worth is unacceptable.
I never said that we need to boost the supply said (or I might've, but I don't believe it). We need to let the market find the stable equilibria. The government doesn't need to do anything, because almost anything the government does will distort the equilibria and bring on future price corrections.
If you disregard the supply side it is a testament to your incompetence and inability to understand even the basic impact of the concepts you discuss. The free market argument fundamentally involves improving the efficiency of the supply side of the economy.
Government intervention distorts equilibria the key is distorting it in a fashion which benefits society and the economy at the same time and this is perfectly possible. To allow the market to find its own equilibrium can be costly in the extreme and can actually generate long run declines in the levels of demand which in turn can lead to a depression like scenarios as the market corrects downward to its equilibrium level, a level were workers are treated no better than slaves and the levels of demand far lower as the majority of demand is created by the workers.
And if you've ever actually read lots of Friedman's work, it's very readable and understandable. Sure he has a bunch of work directed at the professional economist and backed up by mathematical models, but he also has a bunch of work directed at the layman, relatively easy readings filled with logic and reason.
I don't want to sound sensational but Hitlers work is filled with logic and reason, logic can be used to prove whatever you want the fact is that Friedmans logic ignores important economic impacts, it tends to ignore the long run under the assumption that the market will solve anything. I heartily disagree with Friedmanite economics and believe that we are seeing the failure of those policies right now. Friendman could easily become a dirty word over the next couple of years. Friedman is obsessed with this notion of the science of economics, his model says this thus it is true, and they ignore the multitude of evidence which would indicate they are false. This has lead to a failure of policies of epic proportions.
And yes, I agree that it is the result of a "long and depression tale of economic vandalism". That vandalism has been the increasingly large role of government in the economy and it's desire to "do good" without looking at the consequences or worrying about the money it's spending.
That vanadlism is the private sector ruthlessly undermining what gains were made by the public sector for their own profits at the expense of long term sustainability and at a cost to society.The public sector has screwed up some sure, but the notion that the public sector has grown over the last 30 or so years is a total fallacy, in fact the opposite is true and that has contributed to incredible increases in income inequality, spiraling debt and economic decay.
Let's look at the two probably biggest economic collapses in the last 50 years. The Soviet Union and Communist China. Because these were so free-market and directed by Friedman, obviously state intervention and control are the only answers.
Well I don't see any evidence that the economy of Communist China has collapsed rather they are a success story of a hybrid government and private sector system. The Soviet Union however is a more interesting story. Now the Soviet Union did not collapse because of poor economic policies, we can see some serious deficiencies in their economic model from their experience, most importantly in agriculture which is a sector particularly hit in terms of efficiency due to state intervention.
At the start of the cold war the United States said we will start the cold war and we will win because the Russians will go broke first. They were proven correct. The Soviet Union collapsed because they were forced to maintain a total war economy for a century and they broke under the strain. The United States now follows this same path. Economic policies are more of a distraction manipulated for individual benefit. There are far more examples of free market policies leading to serious economic failures than the public sector.
The consequences are from disastrous management by the federal reserve, bad government mandates on home ownership, and a good bit of overzealous government intervention and regulation. This bubble would've never happened if the government hadn't caused it to happen.
This bubble would never have happened if the government did now allow it to happen by allowing the free market to go excess i.e it is non-intervention to blame not the other way around. The Federal Reserve has screwed up some (but it was forced into this position by the lack of real government level economic policies), I argue this myself, but where has the Bush administration intervened? The fact is that this lack of intervention involves reducing funding across the board on services and this intern has had a massive impact on reducing demand and leading toward recession. At the same time deunionisation and free market policies has put downward pressure on wages pushing toward recession even more.
The fact that the Bush administration has increased spending massively and the deficit has blown out should not confuse people that in actuality the Bush has followed a small government ideology strongly in terms of pure economic policy and in terms of impacts.
What I get from you is that you're a pretty hardcore Keynesian that also believes that the government is perfect. Except that you're a classical Keynesian, which has been discredited time after time, and you haven't read up much on public choice theory.
I am a Keynesian however I am not a classical rather I am reformist. The lessons of the 1970's has proven that there are deficiencies in the Keynesian doctrine of old specifically ignoring inflation is unwise, this is easily solved. Neglect of monetary policy is wrong also. Monetary policy is a terrible instrument it is only useful under specific circumstances and always involves significant collateral damage, but it is appropriate under certain circumstances and should not be ignored. The most important lesson of all is for god sake do not push wages up faster then the ability of supply to meet their new demand, this generates huge inflation. That's basically the end of the story. The total rejection of a largely competent model of management and its replacement by a model which disregards debt as a problem, leading to massive increases in private sector debt through perpetual application of monetary policy and a model which ignores the long run entirely under the mistaken belief the free market will solve everything is a global tragedy of epic proportions the true extent of which is increasingly becoming clear.
Either way, I won't be responding to you again, as it simply isn't worth my time or effort anymore. You're economic education is... lacking to say the least. And either way, this discussion has gotten way off-topic.
I was not going to respond to you because clearly although you are able to operate underneath this paradigm, the paradigm you advocate is critically short sighted and excessively simplistic. It is unclear whether you have the capacity to 'think outside the square' but I personally have serious doubts. I do not believe I can convince those so indoctrinated with distorted logic that it makes people deny that which is right before their eyes.
You go on about Friedman being the problem in your post, but seem to confuse late-life Friedman with the free-market policies he expounded in his younger days. What Friedman said and what he did are very different things. Keynesianism had things which governments found useful, free-markets had elements which governments found useful. The problems, however, were caused by cherry-picking from these two ideologies and trying to mash them together.
The ideas of competition being positive forces in the economy, for example, sounded like a good thing to shoot for - in expectation of achieving the natural conclusions of free-market economics. The problem is that those conclusions fundamentally depend on so much more than just competition. There is an entire framework of free-market economics and if you start taking away elements upon which the theory depends, then the results will not be those predicted. Likewise, the intense academic challenge of attempting to manage an entire economy seemed daunting, if not outright impossible. Kennedey-era politicians learned first-hand how utterly impossible it was to attempt to control wages and prices through direct industry intervention. Friedman's ideas gave them hope to revive the Keynesian ideal while letting the so-called invisible hand do the hard work for them. But it all failed because it fundamentally rested on an un-sound amalgam of two mutually incompatible theories. You either get totalitarianism and functional Keynes, or you get a manifestly impotent government and a liquid, functional private market. You can't have your cake and eat it too, so to speak.
Keynes fundamentally rests on so-called violent transactions - a permissiveness which makes exceptions to the idea that every individual's belongings and labour should be protected from expropriation by a third party. When you start making rules that say "stealing is wrong, except..." then you leave the door open to exploitation of that "...except" part. No longer are there clear lines between what is right and what is wrong - what is allowed and what is not, but now special groups of people are, in a sense, above the law. They have the right, and even a mandate, to forcibly move real wealth from one party to another. This is what Keynes is all about and there is nothing that can change that. When you try to combine rules like this into a free market, you end up with some players having a fundamental advantage over others. In this case, it was policies rooted in Keynes' theories which gave certain parties very substantial insulation from risk. In a free-market, there is no insulation - every party is responsible for the consequences of their own actions and investments (or malinvestments, as the case may be). Keynes depends on central control to work. Free markets depend on a lack of central control to work. They cannot both operate at once.
This is why people are pushing for more regulation - Keynes needs infinite regulation. In every circumstance and with every change in the ingredients of society, one needs be eternally prescient and must continually make explicit rules about what specific things may and may not be done with elements of the economy. Failure to predict the eventualities of all shifts in the economy result in catastrophe, for the planners upon whom Keynesianism depends have failed - and the consequences are felt by all. It's a perpetual game of trying to be omniscient without fail, and it cannot succeed. So, perhaps you can blame Friedman, but you can't blame free market economics. So long as we insist upon having a centrally controlled currency base and interest rates, there are no free markets - there are only cartoons of free markets. And it is this exact deviation from the free-market ideal which has provided the lubrication for the current crisis. No cheap money? No bad investments - period. Economic problems do not go away, but they become localised, and manageable. To re-word an oft cited phrase of popular propaganda, on the other hand; global solutions produce global problems.
I complain about Friedman for the sake of blame alone. Although I disagree with him in a few important way. I actually don't know of any difference between late life and early life Friedman but the point here is that it is free market policies which I blame really believe are at fault.
You comment about Government and this is a factor I feel is very important. In Australia at least it may have been different in other nations but Government here advocated damaging policies underfunding services despite having sufficient funds avaliable to supply sufficiently, along with mass privatisation etc your general free market ideologues who have caused such damage in the United States along with others had there way with the Australian economy causing various problems. They used their presumed economic supremacy in combination with pseudo economics such that real debate does not extent to the top of the ladder all in the name of 'economic concervatism'. Politicians then gave all the power over to reserve banks not because this is appropriate but because they do not really understand economics, and they certainly do not want to manage the economy, or take up responsibility. And their short sighted economics implies that the reserve bank alone is sufficient. This has is a systemic failure of the western system This has also led to the stagnation of effective economic reform on some important structural levels I'm talking about the role of the reserve bank, the way governments spend money and earn it etc. (and I know that free market people do want to reform this part of the economy but this is through ideology not through an open search for better outcomes) the fundamental way economies are managed.
Politicians are generally lawyers not economists. This has created a situation where its like an unspoken law, for god sake don't talk about real economics. None feel comfortable, they like to think normal people cant understand it anyway which I disagree with, they will not engage on an Issue there not comfortable with.
You suggest that both policies cannot operate at once. However I argue that the opposite is true if you have a total Keynesian or total control policies all the negative impacts and inefficiencies it generates combine to fundamentally undermine your economic system. At the same time total free market trends toward income inequality and a degradation of the system at its very foundations the poor and middle class, this undermines your economy such to render it unsustainable at any reasonable level. The solution is not only a combination of both these policies actively attempting to cherry pick what is good and what is not, to ask where government should invest and where it should not where to regulate and deregulated, but to do so in a concerted and wise fashion which fundamentally acknowledges that economics never ceases to throw new problems at you. Some are similar to the past and can be dealt with in a similar way. Some have never been seen before and require new solutions.
Statistics like inflation among others are symptoms the key is to look for the cause. This is the understanding we do not have, this is the understanding which has been taken from us as a consequence of a political system which institutionalise incompetence, something all of us in the west could agree on.
Keynesian solved the problems of his day, Friedman in turn solved the problem's of his. We have failed to realise the need for continued adaption.
I commented that I am a reformist Keynsian well this is not the best accurate description. I am really a developmental economists. These policies which effectively say that we must use the goverment to strengthen institutions and the private sector when appropriate to strengthen the economy over all are the key to development. In development economics you are taught the 'need to go beyond simple economics'. I would effectively take this doctrine back to the developed world.
Having a large public sector which has multiple enterprises who generate profits as a normal company would can theoretically (and in practice in places like Singapore and to an extent China) generate enough revenues for Government that you have welfare state expenditure levels along with lox taxes to boot. That is what I call having your cake and eating it too. And this is a terrible element of economists I may regard as Friedmanite going around mass pritatising all our assets even though the public say no.
Economic problems do not go away they become manageable yes, we should be striving for a day all our problems are managed but we should never claim victory and walk off the battlefield the way so many politicians did during the 1990's and early 2000's.
We ignored inflation and it screwed us in the 60-70's we did not take the real message that we should do our up most to ignore nothing. They have been voices pointing out the problems we have developed, in time to fix them quite simply but their calls fell on def ears. This is something which is easy to solve just by having 'popular economics' incorporate it into the very fabric of their economic paradigm and this is something which is not so easy necessarily come to think of it. I think of good economic managers sorta like the guy in the birds nest on ships, always searching for problems on the horizon.
The nature of the real problem denies international boundaries as it is that with is endemic throughout the west. That said it is not universal, there are many well run economies in places that are not what you would expect, Venezuela runs there economy much better than the United States in my opinion. The return of understanding and even wisdom itsself will give us the solutions to our problems, those solutions are already out there its just a matter of listening.
The task now however is not to find the solution but to take clear deceive steps in the right direction, this is in contrast to politicians here who say we have to get things right before we act. Problems are at times localised (in cause and/or solution) but other times are expansive beyond comprehension in scope. Oil is a serious problem which effects us all and only a systemic solution can save the global economy and most economies generally. Australia is one of the lucky few who can be self sufficient if the worst does arise on this count but that is a whole other story.
"Keynes was an idiot who put economic thinking back decades."
This is a statement apparently made by some clown here named theonemephisto, presumably while heavily inebriated or under influence of poorly prescribed medication.
Why do school-age children, armed only with an incomplete education, zero real-world experience and a bloated sense of self-worth continue to believe they can sputter utter nonsense in this Forum with impunity?
Yo fuckhead, in case your 7th grade home economics teacher forgot to mention to you, Keynes is the consensus greatest economist of the 20th century and arguably in history. Even caricatures like Friedman would admit this.
No one has ever claimed, least of all Keynes himself that he is somehow infallible (he was known for his intellectual honesty, revising his ideas frequently when confronted with compelling contrary evidence). But whatever your convictions are about the man's theories, dismissing them as the product of an "idiot" (it has been said of Keynes that he is the greatest mind ever to come out of Cambridge University) can only be taken as a poor joke and call into question your mental competence (in the colloquial sense of the term, not the legal sense).
Stop talking about things you are not qualified to talk about. Stop talking about politics and economics. You have no idea what politics and economics are about - not a clue. Keep your half-baked thoughts and comically nonsensical assertions to yourselves or at least have the good sense to inflict them on only those who are professionally trained to handle them (i.e. your teachers). School is meant to quarantine your ideas from the real world to minimize the damage you might inadvertently cause to the general public. Come back and say your piece if you've lived life in the real world, been a leader of men, taken responsibility for a family and held a steady job of consequence (pizza delivery and waiting on tables to make extra coin to buy that new Wii game do not count).
Has anyone taken a look at the cost of CDS premiums on supposedly triple "A" rated companies like GE? It's ridiculous.
Forget MBSes - they're old news now. The next wave of bankruptcies will be triggered by these instruments. It's an appalling situation - there are 8 times more of these outstanding than the face value of the corporate debt market for the entire planet. Pure insanity. What were the regulators in the West thinking?
On October 12 2008 05:34 mensrea wrote: Back on topic:
Has anyone taken a look at the cost of CDS premiums on supposedly triple "A" rated companies like GE? It's ridiculous.
Forget MBSes - they're old news now. The next wave of bankruptcies will be triggered by these instruments. It's an appalling situation - there are 8 times more of these outstanding than the face value of the corporate debt market for the entire planet. Pure insanity. What were the regulators in the West thinking?
They were probably too caught up in the rapidly increasing value of their share portfolios during the boom side of this debacle. Regulators in the United States operate under the misguided conception that the market should be left alone and the rest of the west just followed their lead I suppose.
I have heard people complaining about the much higher cost of borrowing but some specific figures would be nice if you have them on hand?
Why do school age children, armed only with an incomplete education, zero real-world experience and a bloated sense of self-worth continue to believe they can sputter utter nonsense in this Forum with impunity? Stop talking about things you are not qualified to talk about. You have no idea, not a clue. Keep your half-baked thoughts and comically nonsensical assertions to yourselves or at least have the good sense to inflict them on only those who are professionally trained to handle them. School is meant to quarantine your ideas from the real world to minimize the damage you might inadvertently cause to the general public. Come back and say your piece if you've lived life in the real world, been a leader of men, taken responsibility for a family and held a steady job of consequence. - mensrea '08
I broke a rib laughing reading that. I just had to crop/paste/edit that for my convenience too; the best part in red of course. I am keeping the quote in toto.
On October 12 2008 05:34 mensrea wrote: Back on topic:
Has anyone taken a look at the cost of CDS premiums on supposedly triple "A" rated companies like GE? It's ridiculous.
Forget MBSes - they're old news now. The next wave of bankruptcies will be triggered by these instruments. It's an appalling situation - there are 8 times more of these outstanding than the face value of the corporate debt market for the entire planet. Pure insanity. What were the regulators in the West thinking?
I have heard people complaining about the much higher cost of borrowing but some specific figures would be nice if you have them on hand?
Well, CDS premiums technically reflect something different from borrowing costs (although obviously there is strong correlation). It's a direct measure of the market's view of a company's odds of defaulting on its debt. If you must know, GE's rates for a 2-year swap are currently hovering at 530 basis points (I use "currently" loosely since I haven't checked in several days - a lifetime during these turbulent times). Compare this to what they were prior to mid-Sept. (when, if you recall, the shit really started hitting the proverbial fan) when they were in the 85 - 90 basis points range. For GE Capital (GE's money train), I'm told it's even worse, although I do not have figures for them. Do the math and think about who it is we're talking about - this is GE, one of perhaps five or six companies in the world with a perfect triple A credit rating.
I do not know what GE's borrowing costs are today. I do know that GE's cost of capital used to be in the low 7% range which is about as low as you can get as far as financial companies go (yes, GE is technically categorized as a financial company, despite it's diversified portfolio of businesses, thanks to GE Capital). I do not have exact figures, but I'm sure that is easily 50 basis points or more better than another "gold" standard, Berkshire Hathaway. But, as the saying goes (these days nearly literally true), "that was yesterday". It doesn't take a genius to know either. Recall that GE recently raised $3 billion from Buffet in exchange for an equity stake. The interest that got issued were in the form of preferred shares at something like 10% coupon. That's very expensive capital (as equity usually is compared to debt). Now GE has announced it is issuing new common stock in the low 20s. Not only is this more expensive capital, but the price is ridiculously low compared to past valuations (check out GE's historicals on their stock buy-back program for the past several years and compare and you'll see what I mean). My guess is their cost of borrowing must be through the roof if they're raising capital this way.
I think the question now given that is exactly how well firms will fare without being able to borrow much and with difficulty raising credit by other traditional means like issuing shares.
Firms who deal in the real world as opposed to financial institutions should be able to provide investment based off their revenues alone one would think, but of course an economy in recession throws that in doubt. And the way they are behaving would suggest they have no confidence in their ability to do this.
On October 11 2008 21:51 Choros wrote: You comment about Government and this is a factor I feel is very important. In Australia at least it may have been different in other nations but Government here advocated damaging policies underfunding services despite having sufficient funds avaliable to supply sufficiently, along with mass privatisation etc your general free market ideologues who have caused such damage in the United States along with others had there way with the Australian economy causing various problems.
Bush and the neocons are *not* free market proponents.. they espouse "small government" rhetoric and yet the state has more power than ever.
At the same time total free market trends toward income inequality and a degradation of the system at its very foundations the poor and middle class, this undermines your economy such to render it unsustainable at any reasonable level.
Sure there will be income inequality.. people were not created equal, do not have the same abilities, intellect, talent, etc, and this will be reflected in their income. However I disagree that laissez-faire degrades itself so as to be unsustainable.
Statistics like inflation among others are symptoms the key is to look for the cause. This is the understanding we do not have, this is the understanding which has been taken from us as a consequence of a political system which institutionalise incompetence, something all of us in the west could agree on.
The cause of inflation is the Federal Reserve pumping giant amounts of cash into the economy through money printing and borrowing from foreign governments. Although the Austrian Business Cycle theory was solidified decades ago, it explains the causes and symptoms of this current crisis well.
Keynesian solved the problems of his day, Friedman in turn solved the problem's of his. We have failed to realise the need for continued adaption.
What problem did Keynes solve (asking genuinely, I haven't studied him in entirety)?
Having a large public sector which has multiple enterprises who generate profits as a normal company would can theoretically (and in practice in places like Singapore and to an extent China) generate enough revenues for Government that you have welfare state expenditure levels along with lox taxes to boot. That is what I call having your cake and eating it too. And this is a terrible element of economists I may regard as Friedmanite going around mass pritatising all our assets even though the public say no.
The problem with gov spending is that the money has to come from somewhere (the private sector); this is of course taken through taxes which will necessarily result in deadweight loss. Government can not spend more efficiently than the private sector.
It's a sign of the shallowness of this Forum that a topic that should be consuming every intelligent citizen of all Western industrial societies should find itself embedded far down the list of subjects under current discussion.
Arguably the biggest economic crisis since the Great Depression, costing trillions of dollars and affecting billions of lives, is being resoundingly beaten in attention and recent traffic by the magnificent likes of "The Girl in the Window", "TL Clothes!!!", "Who would you go gay for?", "Tasteless this is your mother", and the always relevant "Females talking during movie's critical moments".
There are a few topics that I suppose one could reason is justified in garnering some modicum of interest ahead of the current economic crisis (e.g. "2008 US Presidential Election" and "Canadian Election, Eh?"), but I am nevertheless disappointed to find that the prurience of our users ("105 years old virgin") appears to trump good sense and maturity once again.
Back on topic (sorta):
1. The US Treasury has now basically capitulated and admitted it got it wrong the first time around by announcing its intention to take direct equity stakes in major financial institutions. About fucking time. Not always easy though to look yourself in the mirror and acknowledge your own madness.
2. I hope those fan-boys who have been ga-ga over the "genius" of Alan Greenspan have finally woken up to the reality of his ideology driven incompetence - something many professional economists of reasonable merit have known for over a decade.
3. I forgot to mention one more way to a faster economic recovery (apart from the direct re-capitalization of the major banks I had previously advocated and which the US government is now taking steps to implement - see point #1 above) - war.
I've always said that the US is a country whose social and economic well-being is dependent on its involvement in a foreign (god forbid it should happen on US soil!) military campaign at least once every decade. Let's see, when was the last one ... whoops, looks like it's almost that time of the decade again.
Ah, well. At least the US doesn't have to go about making stuff up to pick a fight this time like it's usually forced to do. Just need to escalate the pretty little conflagration it started in Iraq and/or Afghanistan.
Raytheon would be a good stock play about now, I think.
On October 15 2008 12:55 mensrea wrote: 2. I hope those fan-boys who have been ga-ga over the "genius" of Alan Greenspan have finally woken up to the reality of his ideology driven incompetence - something many professional economists of reasonable merit have known for over a decade.
Can you explain this in more detail?
3. I forgot to mention one more way to a faster economic recovery (apart from the direct re-capitalization of the major banks I had previously advocated and which the US government is now taking steps to implement - see point #1 above) - war.
I've always said that the US is a country whose social and economic well-being is dependent on its involvement in a foreign (god forbid it should happen on US soil!) military campaign at least once every decade. Let's see, when was the last one ... whoops, looks like it's almost that time of the decade again.
You advocate war... for economic reasons? How does war help the economy? Would that make you a proponent of Bush and McCain?
2. I hope those fan-boys who have been ga-ga over the "genius" of Alan Greenspan have finally woken up to the reality of his ideology driven incompetence - something many professional economists of reasonable merit have known for over a decade.
Can you explain this in more detail?
I think I can. Basically what he did was directed monetary policy in other words change interest rates. He basically kept interest rates too low for too long. This basically meant that at the time the economy looked like it was doing well, and everyone was praising his performance, but it encouraged debt to grow out of control creating a lot of problems. Some may also accuse him of being inflationary in his policies.
3. I forgot to mention one more way to a faster economic recovery (apart from the direct re-capitalization of the major banks I had previously advocated and which the US government is now taking steps to implement - see point #1 above) - war.
I've always said that the US is a country whose social and economic well-being is dependent on its involvement in a foreign (god forbid it should happen on US soil!) military campaign at least once every decade. Let's see, when was the last one ... whoops, looks like it's almost that time of the decade again.
You advocate war... for economic reasons? How does war help the economy? Would that make you a proponent of Bush and McCain?
Just trying to find out where you're coming from.
I will point out that although traditionally war is economically beneficial the United States has been pouring money into war with no economic benefit whatsoever because of the privatisation of war spending is remarkable inefficient and wasteful, its basically carted off as corporate profits. This is not hiring many people etc as you traditionally have.
An interesting note is that when the great depression happened the stock market crashes, then recovered much of what it lost before crashing again. If history is to repeat we will see stocks rise for the next few months in general before crashing again in perhaps march.
It is looking like we wont even have a recovery though.
You comment about Government and this is a factor I feel is very important. In Australia at least it may have been different in other nations but Government here advocated damaging policies underfunding services despite having sufficient funds avaliable to supply sufficiently, along with mass privatisation etc your general free market ideologues who have caused such damage in the United States along with others had there way with the Australian economy causing various problems.
Bush and the neocons are *not* free market proponents.. they espouse "small government" rhetoric and yet the state has more power than ever.
Well this is wrong, now this is something which you hear often arguing for a small government move int he future. The reason this is wrong is that although government spending and the deficit have increased where has this money gone? Defense spending, and massive corporate tax cuts. Heath care, education and welfare (etc) has experienced decreased funding in real terms. This is the impact of a small government philosophy we are feeling today.
At the same time total free market trends toward income inequality and a degradation of the system at its very foundations the poor and middle class, this undermines your economy such to render it unsustainable at any reasonable level.
Sure there will be income inequality.. people were not created equal, do not have the same abilities, intellect, talent, etc, and this will be reflected in their income. However I disagree that laissez-faire degrades itself so as to be unsustainable.
There will always be income inequality its just a matter of too much, as you agree. South Korea is an example of great increases in GDP whilst maintaining reasonable income equality.
Statistics like inflation among others are symptoms the key is to look for the cause. This is the understanding we do not have, this is the understanding which has been taken from us as a consequence of a political system which institutionalise incompetence, something all of us in the west could agree on.
The cause of inflation is the Federal Reserve pumping giant amounts of cash into the economy through money printing and borrowing from foreign governments. Although the Austrian Business Cycle theory was solidified decades ago, it explains the causes and symptoms of this current crisis well.
On the inflation point I disagree, now massively increasing the money supply will increase inflation, and was probably responsible in part to the decreasing value of the dollar especially. I argue that the main cause of inflation we have been experiencing recently has oil as its cause the price of oil affects the price of everything in the economy and I don't need to tell people about its rising cost (though not lately).
Using monetary policy as the primary tool of management makes it auto decrease rates to stimulate economy during busts this overtime creates an ever increasing level of debt. The last time we relied upon monetary policy to run our economy was in the 1920's. At the time there was a decade of sustained growth, there was much congratulations and people believing that the business cycle has been rendered obsolete and we had solved economics. The same things we have experienced over the last decade and for much the same reason. The success of monetary policy is illusionary this would appear to be a lesson we need to learn twice and I believe the most important cause of all this. Friedman actually argued against the system we have today and I agree with his comments, something I only recently discovered.
Keynesian solved the problems of his day, Friedman in turn solved the problem's of his. We have failed to realise the need for continued adaption.
What problem did Keynes solve (asking genuinely, I haven't studied him in entirety)?
Keynes was basically doing his thing during the great depression. He discovered that increased government spending on nation building projects and just in general stimulated 'Aggregate demand' which in turn increases employment raises incomes etc. He argued the governments and economic management should focus completely on maintaining aggregate demand. This allowed countries to recover from the great depression and contributed to the strong economic growth in the post war period.
Having a large public sector which has multiple enterprises who generate profits as a normal company would can theoretically (and in practice in places like Singapore and to an extent China) generate enough revenues for Government that you have welfare state expenditure levels along with lox taxes to boot. That is what I call having your cake and eating it too. And this is a terrible element of economists I may regard as Friedmanite going around mass pritatising all our assets even though the public say no.
The problem with gov spending is that the money has to come from somewhere (the private sector); this is of course taken through taxes which will necessarily result in deadweight loss. Government can not spend more efficiently than the private sector.
The government can spend more efficiently that the private sector can. You have waste generate as private firms horde revenues out of fear as it happening now but this is not important. The Public sector is more efficient some times because it can provide services which the private sector cannot provide effectively thus generating positive externalities which is the extra efficiency i'm talking about. Education is an example, it creates higher quality labor at the bottom and middle end of the scale where it is most important to improve it and also creates jobs and stimulate demand. Thus is improves labor force productivity and flexibility enabling the private sector to further increase their efficiency. The public sector also has strategic direction far broader and on a far more important level in the long term (and medium). Soldiers in an army can win only through that strategic guidance at the highest levels, if soldiers only did what was best for themselves the war cannot be won. Some soldiers or money must be used in a way which may appear 'wasteful', but it serves a greater purpose.The public sector thus generates incredible 'efficiency' by doing things like expansive infrastructure upgrades and building renewable energy plants etc.
The argument that I make is that the public sector should compete in the open market and try to generate revenue, it should do this by hiring good CEO's etc instructing them to operate as a private firm but ensuring it is not monopolistic, sometimes your businesses will fail sometimes they will succeed. Thus you can have welfare state levels of expenditures and the benefits that entails without infringing and diminishing the private sector, rather assisting it and also capturing some of its wealth for Government use in 'strategic ways' which increase the total efficiency of your economy. I am convinced this can be achieved if you aspire to it and have a little bit of luck.
On October 15 2008 12:55 mensrea wrote: 2. I hope those fan-boys who have been ga-ga over the "genius" of Alan Greenspan have finally woken up to the reality of his ideology driven incompetence - something many professional economists of reasonable merit have known for over a decade.
3. I forgot to mention one more way to a faster economic recovery (apart from the direct re-capitalization of the major banks I had previously advocated and which the US government is now taking steps to implement - see point #1 above) - war.
I've always said that the US is a country whose social and economic well-being is dependent on its involvement in a foreign (god forbid it should happen on US soil!) military campaign at least once every decade. Let's see, when was the last one ... whoops, looks like it's almost that time of the decade again.
You advocate war... for economic reasons? How does war help the economy? Would that make you a proponent of Bush and McCain?
Just trying to find out where you're coming from.
I'm pretty sure he's not saying we should start a war. Just that it means we might??
On October 15 2008 12:55 mensrea wrote: 2. I hope those fan-boys who have been ga-ga over the "genius" of Alan Greenspan have finally woken up to the reality of his ideology driven incompetence - something many professional economists of reasonable merit have known for over a decade.
Can you explain this in more detail?
3. I forgot to mention one more way to a faster economic recovery (apart from the direct re-capitalization of the major banks I had previously advocated and which the US government is now taking steps to implement - see point #1 above) - war.
I've always said that the US is a country whose social and economic well-being is dependent on its involvement in a foreign (god forbid it should happen on US soil!) military campaign at least once every decade. Let's see, when was the last one ... whoops, looks like it's almost that time of the decade again.
You advocate war... for economic reasons? How does war help the economy? Would that make you a proponent of Bush and McCain?
Just trying to find out where you're coming from.
I'm pretty sure he's not saying we should start a war. Just that it means we might??
This is something which is in my opinion a real prospect under a McCain presidency. He will probably be the most hawkish president (if elected) in a century (taken from this academic who has done psychoanalysis based of his book and his rhetoric etc its really quite interesting). McCain is a military man not an economist, war is a traditional economic remedy, i.e war is good for business. Should the economy continue to deteriorate war would become oh so tempting for them not only because they think its good for the economy but because it is a good distraction.
The Falkland's war happened basically because the Argentine economy was royally fucked and Thatcher in Britain was doing appallingly in the polls. The Argentinians started the war and people stopped calling for their leaders to be thrown out and rallied around the flag, the same was true in Britain. To the victor goes the spoils the Argentine leaders lost their power and Thatcher won the election. I don't think this would happen now because the army would just say no.
Economic data rarely inspire poetic thoughts. But as I was contemplating the latest set of numbers, I realized that I had William Butler Yeats running through my head: “Turning and turning in the widening gyre / The falcon cannot hear the falconer; / Things fall apart; the center cannot hold.”
The widening gyre, in this case, would be the feedback loops (so much for poetry) causing the financial crisis to spin ever further out of control. The hapless falconer would, I guess, be Henry Paulson, the Treasury secretary.
And the gyre continues to widen in new and scary ways. Even as Mr. Paulson and his counterparts in other countries moved to rescue the banks, fresh disasters mounted on other fronts.
Some of these disasters were more or less anticipated. Economists have wondered for some time why hedge funds weren’t suffering more amid the financial carnage. They need wonder no longer: investors are pulling their money out of these funds, forcing fund managers to raise cash with fire sales of stocks and other assets.
The really shocking thing, however, is the way the crisis is spreading to emerging markets — countries like Russia, Korea and Brazil.
These countries were at the core of the last global financial crisis, in the late 1990s (which seemed like a big deal at the time, but was a day at the beach compared with what we’re going through now). They responded to that experience by building up huge war chests of dollars and euros, which were supposed to protect them in the event of any future emergency. And not long ago everyone was talking about “decoupling,” the supposed ability of emerging market economies to keep growing even if the United States fell into recession. “Decoupling is no myth,” The Economist assured its readers back in March. “Indeed, it may yet save the world economy.”
That was then. Now the emerging markets are in big trouble. In fact, says Stephen Jen, the chief currency economist at Morgan Stanley, the “hard landing” in emerging markets may become the “second epicenter” of the global crisis. (U.S. financial markets were the first.)
What happened? In the 1990s, emerging market governments were vulnerable because they had made a habit of borrowing abroad; when the inflow of dollars dried up, they were pushed to the brink. Since then they have been careful to borrow mainly in domestic markets, while building up lots of dollar reserves. But all their caution was undone by the private sector’s obliviousness to risk.
In Russia, for example, banks and corporations rushed to borrow abroad, because dollar interest rates were lower than ruble rates. So while the Russian government was accumulating an impressive hoard of foreign exchange, Russian corporations and banks were running up equally impressive foreign debts. Now their credit lines have been cut off, and they’re in desperate straits.
Needless to say, the existing troubles in the banking system, plus the new troubles at hedge funds and in emerging markets, are all mutually reinforcing. Bad news begets bad news, and the circle of pain just keeps getting wider.
Meanwhile, U.S. policy makers are still balking when it comes to doing what’s necessary to contain the crisis.
It was good news when Mr. Paulson finally agreed to funnel capital into the banking system in return for partial ownership. But last week Joe Nocera of The Times pointed out a key weakness in the U.S. Treasury’s bank rescue plan: it contains no safeguards against the possibility that banks will simply sit on the money. “Unlike the British government, which is mandating lending requirements in return for capital injections, our government seems afraid to do anything except plead.” And sure enough, the banks seem to be hoarding the cash.
There’s also bizarre stuff going on with regard to the mortgage market. I thought that the whole point of the federal takeover of Fannie Mae and Freddie Mac, the lending agencies, was to remove fears about their solvency and thereby lower mortgage rates. But top officials have made a point of denying that Fannie and Freddie debt is backed by the “full faith and credit” of the U.S. government — and as a result, markets are still treating the agencies’ debt as a risky asset, driving mortgage rates up at a time when they should be going down.
What’s happening, I suspect, is that the Bush administration’s anti-government ideology still stands in the way of effective action. Events have forced Mr. Paulson into a partial nationalization of the financial system — but he refuses to use the power that comes with ownership.
Whatever the reasons for the continuing weakness of policy, the situation is manifestly not coming under control. Things continue to fall apart.
i was just reading this article and i was wondering, where exactly is all this national debt coming from? is it from the iraq + afghanistan wars, along with the bailout money or what? and how can it be repaid when obama is going for a middle class tax cut? it doesnt seem like repealing the bush tax cuts will be enough
We've always had debt, but its been particularly exacerbated by $700B bailout, $350B stimulus package, $100-200B bailing out AIG/Citi/Bear Stearns/Lehman's/etc, $600B proposed budget (this is about what the budget is normally), and Obama's proposed rebuilding projects ($400B). Obama has also said he isn't going to immediately undo bush's tax cuts and is in fact probably going to cut taxes himself (which is probably a good idea). Thing is about debt for a country that is as reputable and stable as the US is that we can accumulate a ton of it without the massive inflation/payback skepticism that comes with such large debt. Because of this, we really only have to worry about making our interest payments. For example, if you buy a 5% T-bill, you'll expect to get back $1050 a year from now. The US government really only has to worry about paying out that $50 in interest because they can re-issue more bonds to cover up the $1000. On the books, this creates a largely exaggerated sense of national debt because the $1000 is added to our debt, but really, the only important factor is paying the $50 interest now. In an unending time scheme that we live in, paying the debt in the future doesn't really matter so long as you can grow and make interest payments now.
but even if we only make the interest payments, wouldnt we still have the original amount still left to pay? it seems like a rather short-sighted solution to a long-term problem
On January 12 2009 16:37 gchan wrote: We've always had debt, but its been particularly exacerbated by $700B bailout, $350B stimulus package, $100-200B bailing out AIG/Citi/Bear Stearns/Lehman's/etc, $600B proposed budget (this is about what the budget is normally), and Obama's proposed rebuilding projects ($400B). Obama has also said he isn't going to immediately undo bush's tax cuts and is in fact probably going to cut taxes himself (which is probably a good idea). Thing is about debt for a country that is as reputable and stable as the US is that we can accumulate a ton of it without the massive inflation/payback skepticism that comes with such large debt. Because of this, we really only have to worry about making our interest payments. For example, if you buy a 5% T-bill, you'll expect to get back $1050 a year from now. The US government really only has to worry about paying out that $50 in interest because they can re-issue more bonds to cover up the $1000. On the books, this creates a largely exaggerated sense of national debt because the $1000 is added to our debt, but really, the only important factor is paying the $50 interest now. In an unending time scheme that we live in, paying the debt in the future doesn't really matter so long as you can grow and make interest payments now.
ish0wstopper, thats the point in an unending time scheme. The original amount can just be perpetually carried forward by future issuing of bonds as long as you can make the interest payments. Of course the more debt you carry, the more interest you're going to have to pay, but thats why if you invest your debt to create growth, this will offset excessive interest accumulation as % of GDP.
The problems that exist in the economy are the consequence of economic policy which has existed for about 30 years. These underlying deficiencies precipitated expansionary monetary policy to make up the difference. In practice this means that fiscal policy was contractionary over a long period (starting in the 1980's) which placed the burden onto monetary policy to sustain the economy instead. American monetary policy has been expansionary for 20 years now (more like 18) the consequence being perpetually increasing debt.
Regulations were cut to sustain the unsustainable for longer.
In 2007 private debt got so high that it could increase no longer and people noticed all the 'junk' on the books leading to a crisis in confidence but most importantly this artificial expansionary force sustaining the economy vanished effectively placing the economy into free fall. In January 08 the first round of stimulus was carried out and this helped stem the tide, though at that time the recession was continuing to accelerate. By June the fiscal stimulus money was all but spent and ofcourse the situation continued to deteriorate.
It is not at all surprising that the economic statistics continue to show bad results but the truth is that the problems are worse than even the statistics show because of things like under employment which are not factored in.
Economic crisis > Financial crisis not Financial crisis > Economic crisis. The level of economic decline is evidence of this.
Don't worry about public sector debt at the moment, people say America has the most debt in its history and its all terrible but by relative measure in 1950 America had twice the amount of public debt than it has today and this turned out not to be an issue even though people at the time were crying the sky is falling in.
In my opinion the economy can be saved but forget the financial sector you must carry out minimum $1 Trillion real stimulus this year alone going into the economy and another round next year as well. Obama said he will do this but my guess is that they will not do enough because there constantly are these Republicans pushing them to do less.
I don't really see this stimulus plan as a good idea either. I mean, there's really only three areas he can turn to for revenue right? A) Taxes, 1 TRILLION dollars worth? Forget that. Especially since he promised tax cuts? B) Borrow from foreign lenders. Unlikely, everyone else is tanking just as bad. C) The most likely option, print more of it. Which devalues the dollar, which screws it up for everyone living here AND screws over foreign investors who invested in the dollar.
I could be missing something but I just don't see how Obama is going to be pulling miracles out of his ass. As long as he doesn't tank things further, I'm fine with him. (I have a job and it lets me live somewhat comfortably. =P)
He didn't promise tax cuts for everyone, and it's not even for certain that the "promised" ones will go through because they usually don't. Part of the problem with the stimulus package is that we want people to buy new TVs and cars with the check and instead they're paying bills and saving it, which is actually the prudent thing to do under normal circumstances.
Credit cards are next to burst and unfortunately they're probably going to have to nationalize more companies. Of course ultra-right wing people like gwho/crabapple would rather see an showcase of survival of the fittest and watch the banks go under but that simply cannot happen. Watch what happens to capitalism and the modern economy when we're no longer operating with credit.
Oh, and you're all fucked if the car companies go under. The myth is that it'll only affect American car companies, but it'll cause costs and prices to go up for Toyota/Honda/Hyundai as well, and it'll increase costs of essentially all businesses involving transportation, as well as slow research of "green" technology to a crawl.
On January 27 2009 13:32 KissBlade wrote: I don't really see this stimulus plan as a good idea either. I mean, there's really only three areas he can turn to for revenue right? A) Taxes, 1 TRILLION dollars worth? Forget that. Especially since he promised tax cuts? B) Borrow from foreign lenders. Unlikely, everyone else is tanking just as bad. C) The most likely option, print more of it. Which devalues the dollar, which screws it up for everyone living here AND screws over foreign investors who invested in the dollar.
You're right, the stimulus isn't a good plan. However, it is the best plan. At least trucks will still on the road delivering food, even if that food costs a lot.
I could be missing something but I just don't see how Obama is going to be pulling miracles out of his ass. As long as he doesn't tank things further, I'm fine with him. (I have a job and it lets me live somewhat comfortably. =P)
You know what they say, when your neighbor loses his job, it is a recession. When you lose your job it is a depression.
The stimulus is a good plan in my opinion. Where is the money coming from the answer ofcourse is printing more of it. It has the risk of devaluing the dollar but in practice it wont atleast in the short term because people aren't spending enough money so the amount of money in circulation is actually shrinking so increased money supply from Govt spending will still have less money flowing around then there was say 2 years ago so it wont be an issue until people stop hording their money when the immediate crisis is over.
Obama could pull something out I mean the most likely outcome is failure imo but what happens in the economy other than natural disasters is the product of policy. Policy caused it and policy can fix it.
If the car companies go under than thats pretty much GG.
Edit: Oh yeah tax cuts are bad they shouldnt be dont ATM. Tax hikes mostly cannot be done but the Bush tax cuts can be counter acted with out any negative economic affect, this would get the government something like 300 billion in the pocket.
Don't worry about public sector debt at the moment, people say America has the most debt in its history and its all terrible but by relative measure in 1950 America had twice the amount of public debt than it has today and this turned out not to be an issue even though people at the time were crying the sky is falling in.
In 1950 America's public debt was backed by the nation possessing half the world's manufacturing capacity and being the foremost creditor nation. There's nothing substantial to back American debt today. High debt levels can be maintained on the premise that the nation will eventually be able to repay it through its savings. Does anyone see America in that scenario for the next decade or two?
The stimulus is a good plan in my opinion. Where is the money coming from the answer ofcourse is printing more of it. It has the risk of devaluing the dollar but in practice it wont atleast in the short term because people aren't spending enough money so the amount of money in circulation is actually shrinking so increased money supply from Govt spending will still have less money flowing around then there was say 2 years ago so it wont be an issue until people stop hording their money when the immediate crisis is over.
Money in circulation isn't shrinking, quite the contrary. It's expanding at unprecedented rates. Drying up credit is a signal to people that they are overspending, and need to recreate credit through saving. Saving, not printing, is the historically viable way to create credit, which is only possible if consumers retrench, and reduce their consumption.
The trend of overspending in the last decade was created by the appreciation of price bubbles, which created the illusion of economic growth, while that value was not backed by increased productive capacity. The sooner we discard the illusion that such trends are sustainable the sooner our recovery will be. The notion that debt is capable of creating wealth is completely fallicious in the long-term, and only works as a short-term expedient, and given the long-term pressures on debt and inflation, even that is a questionable expedient.
Postscript:
Expansion of the Monetary Base during the present recession (the total of physical money circulating in the economy)
Expansion of the MZM (the total value of immediately redeemable assets)
I also don't understand why the demise of Ford and GM would be such a catastrophe. If Ford and GM are forced into bankrupcy, their assets would be sold off and reorganized. Many people would lose their jobs, but the auto industry would be able to start with a clean slate, and not be forced into corporate welfare for the next God knows how many years.
Failed companies should die. You can demonize survival of the fittest all you want. For competition to work, failure have to die. The skilled workforce isn't disappearing. It will reorganize.
On January 27 2009 22:17 MoltkeWarding wrote: I also don't understand why the demise of Ford and GM would be such a catastrophe. If Ford and GM are forced into bankrupcy, their assets would be sold off and reorganized. Many people would lose their jobs, but the auto industry would be able to start with a clean slate, and not be forced into corporate welfare for the next God knows how many years.
On January 27 2009 22:17 MoltkeWarding wrote: I also don't understand why the demise of Ford and GM would be such a catastrophe. If Ford and GM are forced into bankrupcy, their assets would be sold off and reorganized. Many people would lose their jobs, but the auto industry would be able to start with a clean slate, and not be forced into corporate welfare for the next God knows how many years.
There would be no more American factured cars.
Biggest lie ever. Plenty of "foreign" companies have huge manufacturing programs in the US, while the "Big 3" have many factories and production facilities in other countries.
On January 27 2009 22:17 MoltkeWarding wrote: I also don't understand why the demise of Ford and GM would be such a catastrophe. If Ford and GM are forced into bankrupcy, their assets would be sold off and reorganized. Many people would lose their jobs, but the auto industry would be able to start with a clean slate, and not be forced into corporate welfare for the next God knows how many years.
There would be no more American factured cars.
Biggest lie ever. Plenty of "foreign" companies have huge manufacturing programs in the US, while the "Big 3" have many factories and production facilities in other countries.
I mean "American" brand, decision making and technology dude. I know that all those firms have factories abroad -.-
On January 27 2009 22:17 MoltkeWarding wrote: I also don't understand why the demise of Ford and GM would be such a catastrophe. If Ford and GM are forced into bankrupcy, their assets would be sold off and reorganized. Many people would lose their jobs, but the auto industry would be able to start with a clean slate, and not be forced into corporate welfare for the next God knows how many years.
There would be no more American factured cars.
Biggest lie ever. Plenty of "foreign" companies have huge manufacturing programs in the US, while the "Big 3" have many factories and production facilities in other countries.
They're paying US employees but the profits are still being held an invested into another country. Ford and GM are doing well in Europe and Asia, but America is still the market they depend on.
It's a widespread problem because Ford and GM are not isolated companies. Many of their part suppliers and other ancillary companies are shared by other companies, but still depend on their existence. When those companies die, Toyota and Honda will have to start importing parts and their own resource pool will shrink dramatically, so their American prices will go up. Toyota and Honda, who btw are protected enormously by the Japanese government, do not want to see them fail either.
When vehicles like semi-trailers or even post office trucks need repairs and specialized parts, there will be a very limited supply and long wait list to receive them. American research firms and universities that are specializing in alternative energy are going to lose boatloads of money, because the auto industry is really the catalyst behind their growth. GM has 20 billion dollars in assets, but it doesn't mean there's actually a market for them, and with the state that banking is in right now, you can't assume the industry will just re-start itself.
The current estimates for job loss are only for those working at the companies and their main suppliers. If you extend it to all the industries indirectly connected to the auto industry, the total job losses will be much greater, and it'll be white collar and blue collar. The reach is really quite absurd. When the company working on new methods of light diffusion and damage resistance for windshields starts losing money, you'll see it in the price of your Oakleys.
On January 27 2009 22:17 MoltkeWarding wrote: I also don't understand why the demise of Ford and GM would be such a catastrophe. If Ford and GM are forced into bankrupcy, their assets would be sold off and reorganized. Many people would lose their jobs, but the auto industry would be able to start with a clean slate, and not be forced into corporate welfare for the next God knows how many years.
There would be no more American factured cars.
Biggest lie ever. Plenty of "foreign" companies have huge manufacturing programs in the US, while the "Big 3" have many factories and production facilities in other countries.
I mean "American" brand, decision making and technology dude. I know that all those firms have factories abroad -.-
Anyway i don't care, i'm not American.
What do you think would've happened if the French government let Peugeot fail?
On January 27 2009 22:17 MoltkeWarding wrote: I also don't understand why the demise of Ford and GM would be such a catastrophe. If Ford and GM are forced into bankrupcy, their assets would be sold off and reorganized. Many people would lose their jobs, but the auto industry would be able to start with a clean slate, and not be forced into corporate welfare for the next God knows how many years.
There would be no more American factured cars.
Biggest lie ever. Plenty of "foreign" companies have huge manufacturing programs in the US, while the "Big 3" have many factories and production facilities in other countries.
They're paying US employees but the profits are still being held an invested into another country. Ford and GM are doing well in Europe and Asia, but America is still the market they depend on.
I don't really think it's a problem that the profits are "going to another country". The companies are still obviously investing in America (not right now, but no on is investing in anything), buying plant, equipment, and capital to be used here by American workers.
It's a widespread problem because Ford and GM are not isolated companies. Many of their part suppliers and other ancillary companies are shared by other companies, but still depend on their existence. When those companies die, Toyota and Honda will have to start importing parts and their own resource pool will shrink dramatically, so their American prices will go up. Toyota and Honda, who btw are protected enormously by the Japanese government, do not want to see them fail either.
When vehicles like semi-trailers or even post office trucks need repairs and specialized parts, there will be a very limited supply and long wait list to receive them. American research firms and universities that are specializing in alternative energy are going to lose boatloads of money, because the auto industry is really the catalyst behind their growth. GM has 20 billion dollars in assets, but it doesn't mean there's actually a market for them, and with the state that banking is in right now, you can't assume the industry will just re-start itself.
The current estimates for job loss are only for those working at the companies and their main suppliers. If you extend it to all the industries indirectly connected to the auto industry, the total job losses will be much greater, and it'll be white collar and blue collar. The reach is really quite absurd. When the company working on new methods of light diffusion and damage resistance for windshields starts losing money, you'll see it in the price of your Oakleys.
Yes it's complicated, yes it'll hurt, but no, that doesn't mean that US car companies (or any company or individual) should be protected from the consequences of it's actions. The car companies made some dumb decisions and deserve to take hits, to either be forced to reorganize, sell-off, shrink, or something. The main question in my mind is not about whether they should fail, but when, as we can all agree that we would rather see the kind of restructuring that needs to take place in the auto industry take place during slightly nicer times.
This means that we're probably going to need to give them some sort of a second chance, but I don't believe that we can just assume that they're "too big to fail" and work from there.
It's not even an economic question really, it's a moral one. If I run a business and my business is losing money, do I have a right to take your money to keep my business afloat. Of course I don't, but people treat government as this holy entity that is not subject to the same moral and legal constraints as the rest of society.
That said, the stimulus plan is going to be a disaster economically as well.
Failed companies should die. You can demonize survival of the fittest all you want. For competition to work, failure have to die. The skilled workforce isn't disappearing. It will reorganize.
The british car industry was sold out long ago, but they still produce some fine cars. That this solution wouldn´t work in France seems clear. But the americans always propagated the free market .
On January 27 2009 22:17 MoltkeWarding wrote: I also don't understand why the demise of Ford and GM would be such a catastrophe. If Ford and GM are forced into bankrupcy, their assets would be sold off and reorganized. Many people would lose their jobs, but the auto industry would be able to start with a clean slate, and not be forced into corporate welfare for the next God knows how many years.
There would be no more American factured cars.
Biggest lie ever. Plenty of "foreign" companies have huge manufacturing programs in the US, while the "Big 3" have many factories and production facilities in other countries.
I mean "American" brand, decision making and technology dude. I know that all those firms have factories abroad -.-
Anyway i don't care, i'm not American.
What do you think would've happened if the French government let Peugeot fail?
Well the governement never helped Peugeot with huge refunds like yours did with Ford and Gm.
They had to cut on jobs through the 80's and the 90's ( after the merging with Citroën and Chrysler-Europe ) and to relocate their factories abroad ( mostly Eastern Europe ) to get new markets and a better productivity but there are still some factories in France + all the test and design centers.
Moreover Renault and PSA ( Peugeot + Citroën ) had really good results until recently ( the situation has deteriored for 2 years ) and Renault managed to merge successfully with Nissan. They also have manufactured several "classic" models like the 205, 206 ( most solds model in Europe with the "golf" i guess ) so they are definitly EV+ for GPD. Without those firms our balance of trade would be way worse ( it is already quite bad lol ) and we would have to buy more foreign cars ( actually around 50% of the cars in France are made by Renault or PSA ) + the foreign manufacturers don't have their factories here except for Toyota so this means less jobs.
However the shares price, results and expectations have collapsed since the beginning of the crisis. I don't really know what will happen ( probably cuts on jobs again ), but they are still in a way better situation than GM.
edit: i think that people often forget that "government help" can be seen as an investment for the future. I don't really know if it is worth all those billions though.
On January 27 2009 22:17 MoltkeWarding wrote: I also don't understand why the demise of Ford and GM would be such a catastrophe. If Ford and GM are forced into bankrupcy, their assets would be sold off and reorganized. Many people would lose their jobs, but the auto industry would be able to start with a clean slate, and not be forced into corporate welfare for the next God knows how many years.
There would be no more American factured cars.
Biggest lie ever. Plenty of "foreign" companies have huge manufacturing programs in the US, while the "Big 3" have many factories and production facilities in other countries.
They're paying US employees but the profits are still being held an invested into another country. Ford and GM are doing well in Europe and Asia, but America is still the market they depend on.
I don't really think it's a problem that the profits are "going to another country". The companies are still obviously investing in America (not right now, but no on is investing in anything), buying plant, equipment, and capital to be used here by American workers.
It's a widespread problem because Ford and GM are not isolated companies. Many of their part suppliers and other ancillary companies are shared by other companies, but still depend on their existence. When those companies die, Toyota and Honda will have to start importing parts and their own resource pool will shrink dramatically, so their American prices will go up. Toyota and Honda, who btw are protected enormously by the Japanese government, do not want to see them fail either.
When vehicles like semi-trailers or even post office trucks need repairs and specialized parts, there will be a very limited supply and long wait list to receive them. American research firms and universities that are specializing in alternative energy are going to lose boatloads of money, because the auto industry is really the catalyst behind their growth. GM has 20 billion dollars in assets, but it doesn't mean there's actually a market for them, and with the state that banking is in right now, you can't assume the industry will just re-start itself.
The current estimates for job loss are only for those working at the companies and their main suppliers. If you extend it to all the industries indirectly connected to the auto industry, the total job losses will be much greater, and it'll be white collar and blue collar. The reach is really quite absurd. When the company working on new methods of light diffusion and damage resistance for windshields starts losing money, you'll see it in the price of your Oakleys.
Yes it's complicated, yes it'll hurt, but no, that doesn't mean that US car companies (or any company or individual) should be protected from the consequences of it's actions. The car companies made some dumb decisions and deserve to take hits, to either be forced to reorganize, sell-off, shrink, or something. The main question in my mind is not about whether they should fail, but when, as we can all agree that we would rather see the kind of restructuring that needs to take place in the auto industry take place during slightly nicer times.
This means that we're probably going to need to give them some sort of a second chance, but I don't believe that we can just assume that they're "too big to fail" and work from there.
It's not just 5+ million jobs you're sacrificing, it's decades worth of prosperity for the sake of a liberalism ideal. This isn't Atlas Shrugged.
It's a problem that the money is held elsewhere because they can simply leave the market when it becomes too costly. When Japanese heavy industries start to fail (which they are, Nippon Steel just announced a massive production decrease) the companies will begin to contract and they won't be contracting towards the US. Free market? Yes, but the free market is a theory that isn't executed anywhere. Not in the US and not in Japan. Toyota and Honda offer excellent cars at an extremely competitive price in the US, meanwhile non-Japanese cars face enormous premiums on Nippon. Senators in Kentucky and Alabama hate the bailout because they want Toyota to do well in their states, but they don't realize they're going to get fucked if those companies go down as well.
Ford and GM go down -> Most domestic suppliers go out of business -> Toyota/Honda face massive supply shortage, and either cut production further (cutting more jobs) or start importing parts -> supply importation drives prices up and sales to go down, which means they'll halt expansion and probably remove domestic production since they'd be importing so many of the parts anyways, and it makes more sense to just import the car.
Plants that make diesel trucks are already starting to close, Honda just announced it's cutting production in US/Japan, Toyota is about to start cutting jobs in the US/Britain, Mitsubishi is suspending its plants in Illinois.
This is a classic example of why Congress has abysmal approval ratings. Everyone loves their own congressmen and women, they just hate the rest of them. How many tens of billions of dollars have been given towards agriculture subsidies for Iowa, Oklahoma, etc. in the past decade? My bet is it's over 100 billion.
On January 28 2009 02:48 Jibba wrote: It's not just 5+ million jobs you're sacrificing, it's decades worth of prosperity for the sake of a liberalism ideal. This isn't Atlas Shrugged.
It's a problem that the money is held elsewhere because they can simply leave the market when it becomes too costly. When Japanese heavy industries start to fail (which they are, Nippon Steel just announced a massive production decrease) the companies will begin to contract and they won't be contracting towards the US. Free market? Yes, but the free market is a theory that isn't executed anywhere. Not in the US and not in Japan. Toyota and Honda offer excellent cars at an extremely competitive price in the US, meanwhile non-Japanese cars face enormous premiums on Nippon. Senators in Kentucky and Alabama hate the bailout because they want Toyota to do well in their states, but they don't realize they're going to get fucked if those companies go down as well.
Ford and GM go down -> Most domestic suppliers go out of business -> Toyota/Honda face massive supply shortage, and either cut production further (cutting more jobs) or start importing parts -> supply importation drives prices up and sales to go down, which means they'll halt expansion and probably remove domestic production since they'd be importing so many of the parts anyways, and it makes more sense to just import the car.
Plants that make diesel trucks are already starting to close, Honda just announced it's cutting production in US/Japan, Toyota is about to start cutting jobs in the US/Britain, Mitsubishi is suspending its plants in Illinois.
No prosperity is being sacrificed, it's for the good of the economy and of society as a whole for government (i.e the taxpayer) to not bail out these companies. Yes jobs will be lost and that's unfortunate, but their jobs are being cut for a reason. People don't want to buy cars right now; it isn't fair to force people to prop up failing companies. Bailing them out won't increase demand for cars, it just allows unproductive companies to leech off society when society is demonstrating through consumer choice that they don't want to buy from these businesses.
It's no different than when a restaurant goes out of business. If a restaurant is failing should the government bail them out? Afterall, if it goes under then everyone who worked there will lose their job. And of course no one likes to see people lose their jobs, but the restaurant is going out of business because people don't want to eat there. It doesn't make any moral or economic sense to take money from people so that this restaurant which is losing money can stay in business.
You might argue that a big company like Ford or GM going under would be alot more devastating to the economy since so many jobs are at stake, but economic principles do not change based on numbers.
Failing business are the consumers way of saying that the resources invested in such a business could be more effeciently allocated elsewhere.
Guys, if the big 3 go bankrupt, they aren't liquiding all their assets--they'e going into chapter 11 restructuring. The car companies will be around for quite a long time after that, and they still will make more cars. The main difference is that they will have legal obligation to actually turn around their infrastructure to make a profit. Not a bad situation in the long term, but yes, in the short term, jobs will be lost and car workers will lose a lot of their benefits.
And Choros, you're equating expansionary monetary policy with no substantive growth. Thats simply not the case. The world is shifting to a much more complex economy where manufacturing, for a lot of countries, isn't the primary source of growth and services become the primary export. Expansionary monetary policy and the laxing of a lot of outdated restrictions both created and resulted from this trend. I mean you could argue that services really have no value, but look at the difference 30 years ago and today. You have access to the open market with the click of a mouse, you actually have customer support when you have an issue with your big screen/computer/whatever, you pay your bills by logging into an online account, and so on. The expansion of services available is a direct result of the increased liquidity created from expansionary monetary policy. The world has come to a point where people's preferences change a lot faster than the government/fed can adapt to it, so why not let cold hard cash do the speaking for the people?
On January 28 2009 02:48 Jibba wrote: It's not just 5+ million jobs you're sacrificing, it's decades worth of prosperity for the sake of a liberalism ideal. This isn't Atlas Shrugged.
It's a problem that the money is held elsewhere because they can simply leave the market when it becomes too costly. When Japanese heavy industries start to fail (which they are, Nippon Steel just announced a massive production decrease) the companies will begin to contract and they won't be contracting towards the US. Free market? Yes, but the free market is a theory that isn't executed anywhere. Not in the US and not in Japan. Toyota and Honda offer excellent cars at an extremely competitive price in the US, meanwhile non-Japanese cars face enormous premiums on Nippon. Senators in Kentucky and Alabama hate the bailout because they want Toyota to do well in their states, but they don't realize they're going to get fucked if those companies go down as well.
Ford and GM go down -> Most domestic suppliers go out of business -> Toyota/Honda face massive supply shortage, and either cut production further (cutting more jobs) or start importing parts -> supply importation drives prices up and sales to go down, which means they'll halt expansion and probably remove domestic production since they'd be importing so many of the parts anyways, and it makes more sense to just import the car.
Plants that make diesel trucks are already starting to close, Honda just announced it's cutting production in US/Japan, Toyota is about to start cutting jobs in the US/Britain, Mitsubishi is suspending its plants in Illinois.
You might argue that a big company like Ford or GM going under would be alot more devastating to the economy since so many jobs are at stake, but economic principles do not change based on numbers.
That's where you're wrong. It is possible to be too big to fail. I know it dashes the dreams of libertarians everywhere, but it can't happen and it's not going to happen. This isn't a new dilemma, the problem arose in the 1980s and some would say in the 1950s as well. We've never let it happen and we probably never will.
Don't worry about public sector debt at the moment, people say America has the most debt in its history and its all terrible but by relative measure in 1950 America had twice the amount of public debt than it has today and this turned out not to be an issue even though people at the time were crying the sky is falling in.
In 1950 America's public debt was backed by the nation possessing half the world's manufacturing capacity and being the foremost creditor nation. There's nothing substantial to back American debt today. High debt levels can be maintained on the premise that the nation will eventually be able to repay it through its savings. Does anyone see America in that scenario for the next decade or two?
The stimulus is a good plan in my opinion. Where is the money coming from the answer ofcourse is printing more of it. It has the risk of devaluing the dollar but in practice it wont atleast in the short term because people aren't spending enough money so the amount of money in circulation is actually shrinking so increased money supply from Govt spending will still have less money flowing around then there was say 2 years ago so it wont be an issue until people stop hording their money when the immediate crisis is over.
Money in circulation isn't shrinking, quite the contrary. It's expanding at unprecedented rates. Drying up credit is a signal to people that they are overspending, and need to recreate credit through saving. Saving, not printing, is the historically viable way to create credit, which is only possible if consumers retrench, and reduce their consumption.
This is irrelevant when banks aren't lending. I'm actually not sure how these numbers are related, but there is plenty of evidence that companies are having tremendous difficulty rolling over debt. Drying up credit can also be caused by pessimistic short term expectations that have nothing to do with the fundamentals of the economy. People do not invest according to the productive capacity of an economy, but on its actual rate of production. It seems to me that supply side theories largely dismiss the psychological factor. In fact, what the US is suffering from right now is a self-fulfilling speculative attack whose effects are very real, even if the basis of its growth has been largely unaffected. The market can't be counted on to recover on its own because these expectations seem to usher in a new mindset that functionally lowers the equilibrium point. So long as these expectations persist, credit will remain slow. Savings are useless if banks aren't willing to lend in the first place. While I believe such a policy is appropriate where business confidence is high and the only restriction to growth is limited capital, in this instance, a resurgence in demand must occur first if we want to move those savings where it's needed most.
On January 28 2009 02:48 Jibba wrote: It's not just 5+ million jobs you're sacrificing, it's decades worth of prosperity for the sake of a liberalism ideal. This isn't Atlas Shrugged.
It's a problem that the money is held elsewhere because they can simply leave the market when it becomes too costly. When Japanese heavy industries start to fail (which they are, Nippon Steel just announced a massive production decrease) the companies will begin to contract and they won't be contracting towards the US. Free market? Yes, but the free market is a theory that isn't executed anywhere. Not in the US and not in Japan. Toyota and Honda offer excellent cars at an extremely competitive price in the US, meanwhile non-Japanese cars face enormous premiums on Nippon. Senators in Kentucky and Alabama hate the bailout because they want Toyota to do well in their states, but they don't realize they're going to get fucked if those companies go down as well.
Ford and GM go down -> Most domestic suppliers go out of business -> Toyota/Honda face massive supply shortage, and either cut production further (cutting more jobs) or start importing parts -> supply importation drives prices up and sales to go down, which means they'll halt expansion and probably remove domestic production since they'd be importing so many of the parts anyways, and it makes more sense to just import the car.
Plants that make diesel trucks are already starting to close, Honda just announced it's cutting production in US/Japan, Toyota is about to start cutting jobs in the US/Britain, Mitsubishi is suspending its plants in Illinois.
You might argue that a big company like Ford or GM going under would be alot more devastating to the economy since so many jobs are at stake, but economic principles do not change based on numbers.
That's where you're wrong. It is possible to be too big to fail. I know it dashes the dreams of libertarians everywhere, but it can't happen and it's not going to happen. This isn't a new dilemma, the problem arose in the 1980s and some would say in the 1950s as well. We've never let it happen and we probably never will.
I don't agree here. While the car industry and its suppliers do constitute a significant portion of American GDP, their collapse would be contained within the industry itself. Unlike with Lehman brothers, few other sectors of the economy are dependent on its survival. This may not have been true decades ago when the American economy was largely driven by manufacturing, but the service sector has far outpaced manufacturing by now. The only other scenario in which the loss of the car industry could significantly hurt the broader economy is if the financial sector had a lot of money placed in car companies, which doesn't seem to be the case. Anyway, any money they would've lost on these companies has probably been lost already.
Edit: (I always seem to have more to say after I post :\)
And you're ignoring the fact that in the long run, the cost for parts will reach equilibrium and any effect the collapse of the American auto industry has on foreign manufacturers will disappear. In fact, the money that was going into the auto industry before will now go somewhere more efficient, fueling long term growth. Finally, the collapse of the American industry creates opportunities for more foreign manufacturers to sell here, lowering prices because of competition.
On January 28 2009 02:48 Jibba wrote: It's not just 5+ million jobs you're sacrificing, it's decades worth of prosperity for the sake of a liberalism ideal. This isn't Atlas Shrugged.
It's a problem that the money is held elsewhere because they can simply leave the market when it becomes too costly. When Japanese heavy industries start to fail (which they are, Nippon Steel just announced a massive production decrease) the companies will begin to contract and they won't be contracting towards the US. Free market? Yes, but the free market is a theory that isn't executed anywhere. Not in the US and not in Japan. Toyota and Honda offer excellent cars at an extremely competitive price in the US, meanwhile non-Japanese cars face enormous premiums on Nippon. Senators in Kentucky and Alabama hate the bailout because they want Toyota to do well in their states, but they don't realize they're going to get fucked if those companies go down as well.
Ford and GM go down -> Most domestic suppliers go out of business -> Toyota/Honda face massive supply shortage, and either cut production further (cutting more jobs) or start importing parts -> supply importation drives prices up and sales to go down, which means they'll halt expansion and probably remove domestic production since they'd be importing so many of the parts anyways, and it makes more sense to just import the car.
Plants that make diesel trucks are already starting to close, Honda just announced it's cutting production in US/Japan, Toyota is about to start cutting jobs in the US/Britain, Mitsubishi is suspending its plants in Illinois.
No prosperity is being sacrificed, it's for the good of the economy and of society as a whole for government (i.e the taxpayer) to not bail out these companies. Yes jobs will be lost and that's unfortunate, but their jobs are being cut for a reason. People don't want to buy cars right now; it isn't fair to force people to prop up failing companies. Bailing them out won't increase demand for cars, it just allows unproductive companies to leech off society when society is demonstrating through consumer choice that they don't want to buy from these businesses.
It's no different than when a restaurant goes out of business. If a restaurant is failing should the government bail them out? Afterall, if it goes under then everyone who worked there will lose their job. And of course no one likes to see people lose their jobs, but the restaurant is going out of business because people don't want to eat there. It doesn't make any moral or economic sense to take money from people so that this restaurant which is losing money can stay in business.
You might argue that a big company like Ford or GM going under would be alot more devastating to the economy since so many jobs are at stake, but economic principles do not change based on numbers.
Failing business are the consumers way of saying that the resources invested in such a business could be more effeciently allocated elsewhere.
I largely agree with you but I do think we have to seriously consider the short term cost of letting the Big 3 fail. The social safety net in America just isn't very effective. For many of the employees at these companies, retraining just isn't an option. And while in America it's comparatively easier to move from an economically depressed area like Michigan to somewhere more prosperous, this isn't an option for many due to economic and personal reasons. If we're going to just allow industries this size to collapse, it's important to bolster our ability to assist the unemployed in finding new jobs.
Also, Chapter 11 is no guarantee that the reorganized company is going to be effective. And it doesn't change the fact that thousands of jobs will be lost still.
It seems to me that supply side theories largely dismiss the psychological factor. In fact, what the US is suffering from right now is a self-fulfilling speculative attack whose effects are very real, even if the basis of its growth has been largely unaffected.
Actually, supply side does account for the psychological factor with the Lucas-Phelps-Friendman Supply curve. It's in the expected price E[P] component. The "psychological factor" is basically how well off individuals believe the economy and themselves will be in the future--thats E[P]. More specific to today in finance, this is witnessed by the CCAPM. Most of what is expected in the future of stock prices is already incorporated into today's prices. Thats why you don't see the insane volatility of last October nowadays.
In 1950 America's public debt was backed by the nation possessing half the world's manufacturing capacity and being the foremost creditor nation. There's nothing substantial to back American debt today. High debt levels can be maintained on the premise that the nation will eventually be able to repay it through its savings. Does anyone see America in that scenario for the next decade or two?
Well Americas public debt was not an issue because of the economic growth in the 50's 60's and 70's which reduced the quantity of debt relative to GDP. And yes this growth mainly came through manufacturing. It is true that the deindustralistation of the United States is a serious problem but there are simply no other options at this point than to invest at the federal level to try to get the economy ticking again in the short term but also you must carry out some more serious and diverse policies in the longer term to deal with this issue.
If the United States play their cards right they could theoretically generate genuine (i.e tangible production rather than illusionary things like artificially inflated housing prices) economic growth in the future and this can balance against and pay down the debt being created today. Look at Japan who has been borrowing like crazy for a decade, you can borrow even when there are no savings. (even though it is counter-intuitive)
Money in circulation isn't shrinking, quite the contrary. It's expanding at unprecedented rates.
You miss understand the issue. You are right that we are experiencing the most expansionary monetary policy in history, but is this money circulating? Clearly it is not, infact all that 'liquidity' they have been making has not entered the economy at all it is being horded by the banks, the answer to increase money circulating and thus increasing demand is to actually put money into peoples hands and NOT MAKE THEM PAY IT BACK WITH INTEREST. The notion that the economy can be resuscitated by making people start borrowing again is clearly flawed. Public spending is the only viable option to achieve this goal at this point.
Drying up credit is a signal to people that they are overspending, and need to recreate credit through saving. Saving, not printing, is the historically viable way to create credit, which is only possible if consumers retrench, and reduce their consumption.
You are touching on one of the real fundamental deficiencies in the American economy today (and most of the west for that matter). It is not so much that Americans are spending beyond theirs means it is more accurate to say that their means and receded bellow that they are spending. Wages in the United States for almost every worker have had negative growth for a decade now but really wages have been falling since the 1980's but instead of having lower wages people worked longer hours and took on second jobs and also women were forced into the labor force to make ends meet. It got to the point around a decade ago that people could not work any more and wages actually started to fall, the key to fixing the problem is not having people spending less rather it is having people be able to afford the consumption they are currently at.
The trend of overspending in the last decade was created by the appreciation of price bubbles, which created the illusion of economic growth, while that value was not backed by increased productive capacity.
This is an incredibly important piece of the puzzle, why and how have these artificial bubbles been created, well the answer is that they were created to artificially balance out perpetually falling wages and perpetually falling public sector investment in the economy. The United States has had expansionary monetary policy for a decade now trying to sustain the economy artificially above its natural level (a level which was in steady decile) this created huge amounts of private debt hence the financial crisis. The economic crisis is so bad today because the problems have been steadily growing worse whilst these bubbles cover them up.
By the way its not the Federal Reserves fault this happened they simply followed their guidelines. Reaganomics which caused the things I mention generated a Recession leading to the reserve automatically adopting an expansionary posture to counteract it, the problem was that the recession never went away.
wages fall > debt rises > debt becomes unsustainable > bank problems > problems in the economy which already existed rise to the surface > demand collapses > trade stops > jobs lost.
wages fall > debt rises > debt becomes unsustainable > bank problems > problems in the economy which already existed rise to the surface > demand collapses > trade stops > jobs lost.
I was thinking more along the lines of
hungry and angry -> military conscription -> martial law
The pattern I was trying to establish was that with each level, the effects hit closer and closer to home. There will be more of these guys:
wages fall > debt rises > debt becomes unsustainable > bank problems > problems in the economy which already existed rise to the surface > demand collapses > trade stops > jobs lost.
I was thinking more along the lines of
hungry and angry -> military conscription -> martial law
The pattern I was trying to establish was that with each level, the effects hit closer and closer to home. There will be more of these guys:
57,000 jobs lost, 45% trade decrease, another $2 trillion in bank bailouts all in one week.....not easy for these numbers to sink in.
I will tell you what must be done. You must start to hire workers into the public sector in epic proportions I estimate something on the order of one trillion dollars will be the minimum level of increased expenditure. I'm talking about hiring teachers and hiring nurses, you will be killing two birds with one stone, generate demand to deal with the immediate crisis and by helping fix the institutional problems at the same time.
You must also hire tradesmen to do general maintenance etc. Hiring workers by the millions and keeping them hired permanently would do alot to actually fix the problems at the heart of the economy. We are talking about jobs that did exist in the 1970's but were lost due to decreasing government and state expenditure.
Also you must increase unemployment benefits. In the United States there is a 5 year cap for every individual meaning that there are millions of permanently unemployed who basically earn no income, you pay these people money and they will spend it. The gradual reduction in the social security system has definitely played a part in the gradual fall in demand at the heart of the American economic troubles.
Edit: Yes a perpetual acceleration in the downward cycle is exactly what one would expect given the causes of the problems. The reason so many people were shocked at how bad it is is because they presume that it is a financial crisis, there is no way a financial crisis can cause the kind of carnage that has occurred this is the product of serious economic deficiencies. This also means that the recession can only grow worse until the policies I advocate are carried out in full. Tax cuts will do virtually nothing to actually fix the economy (America has been cutting taxes for 30 years has it achieved any economic benefit so far?). Unfortunately the bulk of Obama's rescue plan is tax cuts, I expect this to have very little real impact on the economy other than short (and I mean short) stimulus, but it will physically undermine the capacity of the state to carry out the policies I advocate.
wages fall > debt rises > debt becomes unsustainable > bank problems > problems in the economy which already existed rise to the surface > demand collapses > trade stops > jobs lost.
I was thinking more along the lines of
hungry and angry -> military conscription -> martial law
The pattern I was trying to establish was that with each level, the effects hit closer and closer to home. There will be more of these guys:
57,000 jobs lost, 45% trade decrease, another $2 trillion in bank bailouts all in one week.....not easy for these numbers to sink in.
I will tell you what must be done. You must start to hire workers into the public sector in epic proportions I estimate something on the order of one trillion dollars will be the minimum level of increased expenditure. I'm talking about hiring teachers and hiring nurses, you will be killing two birds with one stone, generate demand to deal with the immediate crisis and by helping fix the institutional problems at the same time. You must also hire tradesmen to do general maintenance etc. Hiring workers by the millions and keeping them hired permanently would do alot to actually fix the problems at the heart of the economy. We are talking about jobs that did exist in the 1970's but were lost due to decreasing government and state expenditure.
Also you must increase unemployment benefits. In the United States there is a 5 year cap for every individual meaning that there are millions of permanently unemployed who basically earn no income, you pay these people money and they will spend it. The gradual reduction in the social security system has definitely played a part in the gradual fall in demand at the heart of the American economic troubles.
Yes, this is the point of military conscription, or as Obama terms it, the "civilian national security force" which must be as powerful and as well funded as the military. The point of this conscription is primarily not to increase military force, it is to act as a welfare program to keep angry students off the streets and doing some type of work.
In 1950 America's public debt was backed by the nation possessing half the world's manufacturing capacity and being the foremost creditor nation. There's nothing substantial to back American debt today. High debt levels can be maintained on the premise that the nation will eventually be able to repay it through its savings. Does anyone see America in that scenario for the next decade or two?
Well Americas public debt was not an issue because of the economic growth in the 50's 60's and 70's which reduced the quantity of debt relative to GDP. And yes this growth mainly came through manufacturing. It is true that the deindustralistation of the United States is a serious problem but there are simply no other options at this point than to invest at the federal level to try to get the economy ticking again in the short term but also you must carry out some more serious and diverse policies in the longer term to deal with this issue.
If the United States play their cards right they could theoretically generate genuine (i.e tangible production rather than illusionary things like artificially inflated housing prices) economic growth in the future and this can balance against and pay down the debt being created today. Look at Japan who has been borrowing like crazy for a decade, you can borrow even when there are no savings. (even though it is counter-intuitive)
I don't see what the problem is with replacing a manufacturing economy with a service economy.
Anyway, I disagree with Moltke that it was simply a strong manufacturing base which made our war debt negligible. In fact, it was our comparative strength worldwide. Competition in the manufacturing sector from places like China and Japan but also in services from India means that the US economy has only so much room left to grow. Much of the productivity gains of the past decade have been due to technological advances which (I assume with no evidence whatsoever) are giving diminishing returns and because of our shift from a manufacturing to a service economy. The US has little room left to grow, and it's difficult to raise taxes.
But there are other reasons why we need to be concerned about the budget deficit. First, the Euro has lately become a gradually more viable alternative to the dollar as a reserve currency. It's demonstrated its stability throughout the current downturn and for a while has actually been rising against the dollar. One reason China invests largely in US bonds is because it's one of the few markets that can absorb the large quantity of demand it has to offer, but the Euro is fast becoming an equally good substitute.
Second, there is absolutely no chance whatsoever of balancing our budget during the next 4 to 8 years. Baby boomers are retiring, and Obama wants to spend more on social services.
I don't know how you can use the example of Japan with a straight face. It seems to me that the crowding out of private investment is one of the reasons their economy is in such shitters.
The point being, if the US wants to avoid having spending cuts/inflation forced upon it, we have to weigh the real benefits of something like the stimulus package with the long term risk of debt default.
This is an incredibly important piece of the puzzle, why and how have these artificial bubbles been created, well the answer is that they were created to artificially balance out perpetually falling wages and perpetually falling public sector investment in the economy. The United States has had expansionary monetary policy for a decade now trying to sustain the economy artificially above its natural level (a level which was in steady decile) this created huge amounts of private debt hence the financial crisis. The economic crisis is so bad today because the problems have been steadily growing worse whilst these bubbles cover them up.
I don't understand this. You're going to have to explain this to me. I would assume that lower wages (if that's a fact, I don't know) would be due to increasing global competition.
wages fall > debt rises > debt becomes unsustainable > bank problems > problems in the economy which already existed rise to the surface > demand collapses > trade stops > jobs lost.
I was thinking more along the lines of
hungry and angry -> military conscription -> martial law
The pattern I was trying to establish was that with each level, the effects hit closer and closer to home. There will be more of these guys:
57,000 jobs lost, 45% trade decrease, another $2 trillion in bank bailouts all in one week.....not easy for these numbers to sink in.
I will tell you what must be done. You must start to hire workers into the public sector in epic proportions I estimate something on the order of one trillion dollars will be the minimum level of increased expenditure. I'm talking about hiring teachers and hiring nurses, you will be killing two birds with one stone, generate demand to deal with the immediate crisis and by helping fix the institutional problems at the same time. You must also hire tradesmen to do general maintenance etc. Hiring workers by the millions and keeping them hired permanently would do alot to actually fix the problems at the heart of the economy. We are talking about jobs that did exist in the 1970's but were lost due to decreasing government and state expenditure.
Also you must increase unemployment benefits. In the United States there is a 5 year cap for every individual meaning that there are millions of permanently unemployed who basically earn no income, you pay these people money and they will spend it. The gradual reduction in the social security system has definitely played a part in the gradual fall in demand at the heart of the American economic troubles.
Yes, this is the point of military conscription, or as Obama terms it, the "civilian national security force" which must be as powerful and as well funded as the military. The point of this conscription is primarily not to increase military force, it is to act as a welfare program to keep angry students off the streets and doing some type of work.
Well this could work but it would require two things to actually achieve what is necessary. 1) The people must remain within the United States and be encouraged to 'buy american 2) You need to keep these people hired permanently to achieve a permanent increase in demand. If you ask me hiring teachers and nurses is much more productive.
In 1950 America's public debt was backed by the nation possessing half the world's manufacturing capacity and being the foremost creditor nation. There's nothing substantial to back American debt today. High debt levels can be maintained on the premise that the nation will eventually be able to repay it through its savings. Does anyone see America in that scenario for the next decade or two?
Well Americas public debt was not an issue because of the economic growth in the 50's 60's and 70's which reduced the quantity of debt relative to GDP. And yes this growth mainly came through manufacturing. It is true that the deindustralistation of the United States is a serious problem but there are simply no other options at this point than to invest at the federal level to try to get the economy ticking again in the short term but also you must carry out some more serious and diverse policies in the longer term to deal with this issue.
If the United States play their cards right they could theoretically generate genuine (i.e tangible production rather than illusionary things like artificially inflated housing prices) economic growth in the future and this can balance against and pay down the debt being created today. Look at Japan who has been borrowing like crazy for a decade, you can borrow even when there are no savings. (even though it is counter-intuitive)[/QUOTE]
I don't see what the problem is with replacing a manufacturing economy with a service economy.
There is nothing wrong with transitioning into a service based economy but if you destroy your education system you will loose productivity and international competitiveness. The real problem though is that the demand does not exist as a consequence of policy to actually purchase the services being provided.
Anyway, I disagree with Moltke that it was simply a strong manufacturing base which made our war debt negligible. In fact, it was our comparative strength worldwide. Competition in the manufacturing sector from places like China and Japan but also in services from India means that the US economy has only so much room left to grow. Much of the productivity gains of the past decade have been due to technological advances which (I assume with no evidence whatsoever) are giving diminishing returns and because of our shift from a manufacturing to a service economy. The US has little room left to grow, and it's difficult to raise taxes.
Well it is certainly an oversimplification to say that it was manufacturing which lead to growth but the point is that it was economic growth that made the debt affordable alot of that growth came from manufacturing but it does not HAVE to come from this sector. Yes growth in the global economy helped increase American growth. The reason productivity is falling is the consequence of a chronic deficiency in public investment, in education, in health and in infrastructure in my opinion, and a service economy is far more vulnerable to this effect.
There are reasons to worry about the budget deficit but the reasons those problems exist is because governments have been constantly cutting its revenue for such a long time placing America in a vulnerable position. You don't need to worry so much about where the money comes from you can literally create it out of this air which they will.
The reason you should not worry about a budget deficit is that provided you are spending that money well by spending more money you create more demand which in turn creates higher revenue. Government spending can be thought of as a productive investment, by spending now you can create revenue in the future. If you do the opposite and cut spending which America has been doing for a long time, then you reduce demand in the economy leading to falling revenues leading to falling spending which leads to falling demand and revenues and so on this is a downward spiral and this is effectively what is happening in America today. You must do the exact opposite you must create an upward spiral.
It is possible that it is no longer within the physical capacity of the Government to achieve this but cutting taxes reduces revenue and can only make matters worse.
wages fall > debt rises > debt becomes unsustainable > bank problems > problems in the economy which already existed rise to the surface > demand collapses > trade stops > jobs lost.
I was thinking more along the lines of
hungry and angry -> military conscription -> martial law
The pattern I was trying to establish was that with each level, the effects hit closer and closer to home. There will be more of these guys:
57,000 jobs lost, 45% trade decrease, another $2 trillion in bank bailouts all in one week.....not easy for these numbers to sink in.
I will tell you what must be done. You must start to hire workers into the public sector in epic proportions I estimate something on the order of one trillion dollars will be the minimum level of increased expenditure. I'm talking about hiring teachers and hiring nurses, you will be killing two birds with one stone, generate demand to deal with the immediate crisis and by helping fix the institutional problems at the same time.
You must also hire tradesmen to do general maintenance etc. Hiring workers by the millions and keeping them hired permanently would do alot to actually fix the problems at the heart of the economy. We are talking about jobs that did exist in the 1970's but were lost due to decreasing government and state expenditure.
Economists say an important determinant of the long-term success of Obama's plan will be the degree to which he is able to follow these principles and prevent short-term stimulus from turning into massive long-term budgetary obligations.
I've said before that I support the stimulus because I see the threat of prolonged economic stagnation as considerably worse and much costlier, but it's also important to recognize the cost of the stimulus. You're talking about locking in inefficient public sector jobs at a time when government debt is going up by 50%, from 40% or so of GDP to 60%. And that's just this year. I'll refer you to my previous post for why the national debt is a serious issue.
Moreover, I don't understand why you insist on government jobs. How is make-work policy that crowds out the private sector going to encourage the growth we'll need to maintain the massive expansion of our debt?
Edit: Yes a perpetual acceleration in the downward cycle is exactly what one would expect given the causes of the problems. The reason so many people were shocked at how bad it is is because they presume that it is a financial crisis, there is no way a financial crisis can cause the kind of carnage that has occurred this is the product of serious economic deficiencies. This also means that the recession can only grow worse until the policies I advocate are carried out in full. Tax cuts will do virtually nothing to actually fix the economy (America has been cutting taxes for 30 years has it achieved any economic benefit so far?). Unfortunately the bulk of Obama's rescue plan is tax cuts, I expect this to have very little real impact on the economy other than short (and I mean short) stimulus, but it will physically undermine the capacity of the state to carry out the policies I advocate.
This is so vague. What are the serious economic deficiencies? Are you arguing that lack of public sector work and a weak social safety net is the cause of our recent economic woes? This despite the fact unemployment was in very reasonable ranges prior to the housing bust? I have never heard of anyone making this argument.
Well it is certainly an oversimplification to say that it was manufacturing which lead to growth but the point is that it was economic growth that made the debt affordable alot of that growth came from manufacturing but it does not HAVE to come from this sector. Yes growth in the global economy helped increase American growth. The reason productivity is falling is the consequence of a chronic deficiency in public investment, in education, in health and in infrastructure in my opinion, and a service economy is far more vulnerable to this effect.
There are reasons to worry about the budget deficit but the reasons those problems exist is because governments have been constantly cutting its revenue for such a long time placing America in a vulnerable position. You don't need to worry so much about where the money comes from you can literally create it out of this air which they will.
The reason you should not worry about a budget deficit is that provided you are spending that money well by spending more money you create more demand which in turn creates higher revenue. Government spending can be thought of as a productive investment, by spending now you can create revenue in the future. If you do the opposite and cut spending which America has been doing for a long time, then you reduce demand in the economy leading to falling revenues leading to falling spending which leads to falling demand and revenues and so on this is a downward spiral and this is effectively what is happening in America today. You must do the exact opposite you must create an upward spiral.
It is possible that it is no longer within the physical capacity of the Government to achieve this but cutting taxes reduces revenue and can only make matters worse.
I just want to focus on the last paragraph since it's getting late over here but:
1.) Inflating away our debt will cause capital to retreat to the alternatives I've specified. If China is smart, they will unpeg their currency and revoke their capital controls so investors can bring their cash to it. The government can't perpetually print money.
2.) You can't assume perpetual growth, even if your theory that public investment will magically produce productivity gains that the private sector has failed to discover. Bad times will come, and eventually the cost of maintaining our debt will grow so great that if we so much as stumble economically, the US will be forced to default or begin inflating money.
3.) You continue to claim that the problem with the economy is a lack of demand, yet we carry an enormous trade deficit. America is THE consumer capital of the world. A nation where your argument carries weight could be China, where the lack of adequate social services, safety nets, and property rights result in a disproportionate reliance on foreign demand.
4.) It is basic economics that government can never handle resources as efficiently as the private sector. In isolated instances, government is required to resolve the free-rider problem, but it is not a magical pill that will induce growth. You are applying your theoretical models all wrong. They may apply to nations where there really is a dearth of savings and a lack of government spending, but in a world where the US is already heavily in debt and in serious decline, diminishing returns kick in and it becomes marginally harmful to increase spending. Once we've recovered from the current downturn, we need to tighten our ship by balancing the budget and encouraging global competitiveness through consolidation and lowering trade barriers.
Well the truth is that policies which do what I advocate investing in education infrastructure etc were extensively carried out during the 50's 60's and 70's and directly led to 'magically' increasing labor force productivity. Most of what is good about our economy today is the active consequence of the hard work of Governments of this era. The most important component of productivity is 'human capital' which basically means a healthy educated work force, its no secret that the health care and education system in the United States is in bad state, it is therefore predictable that falls in productivity will result.
China in my opinion needs to significantly change the way they carry out economic policy but this is because we will no longer buy the amount of consumer goods we have been recently and this will bring growth to a stand still but China is not the point here.
You talk about government spending as if it is 'inflation', and you hear this a lot from American economists 'Inflating our way out of the crisis', well this is a miss understanding inflation is caused when demand exceeds supply. Demand has fallen way below capacity meaning that increased Government spending will not create inflation at all. If the private sector was willing to provide the 'capital' needed for investment than it already would. The private sector has poured money into unproductive investment so they not as omnipotent as many economists would have you believe in fact far from it. It is through public sector investment that you can actually improve the economy at this point. It is not that private investment is bad but you need both.
In response to 2) I do not assume perpetual growth (though many politicians seem too) I advocate increasing incomes such that they meet with supply capacity and have a good standard of living to go with it. Growth will end at such time growth is no longer needed, and were not there yet rather we are moving in the opposite direction.
3) I claim that the problem is lack of demand yet there is a trade deficit etc. The point is where is the demand coming from? In recent times this demand has come through debt, as wages have fallen, debt has risen as a result to make up the difference. I will not increase demand is absolute terms but I will change where the demand comes from, through wages not through debt. This is the only way to sustain a good standard of living permanently.
China will not go down because they don't have social safety nets etc because they never had them to begin with. We used to have it and it brought us up, we have eroded it and that will and is sending us down.
4) It is basic economics that the government can never handle resources as efficiently as the private sector, and this is why we are in such a mess. Mainstream economics gives out a perverse and distorted perception of the economy. They effectively argue that cutting spending on education will improve the quality of your education system, clearly this is nonsense and the consequences are clear for everyone.
The truth is that the Private sector can and does allocate resources more efficiently than the public sector depending on market structure. The Private sector provides consumer goods efficiently it provides agriculture more efficiently etc, but the Private sector simply does not provide investment into some fundamental ways the economy requires. The private sector invests to benefit their own business, the government invests to improve the entire economy.
It is cutting Government spending which has generated diminishing returns, the government invests less and the output in the economy falls, the private sector cannot provide wealth inflows into the economy in the ways that the Government can. Without Government the unemployed create no demand, with Government these people are able to carry on spending and this creates opportunities for the private sector to capitalise upon.
If you get out of the current crisis and then start to cut spending again then you will experience the same crisis all over again because it is the chronic lack of government investment that is at the heart of the problems that exist and the only way to get rid of these problems is to permanently increase government spending, but it is important that you do it in the right way.
The reason wages are falling in my opinion is the consequence of two things, one reduced government demand but most importantly two, regressive wage policies. Deunionisation puts downward pressure on wages, reducing the minimum wage puts downward pressure on wages, it is clear, this downward pressure multiplies in on its self. It is because of deunionisation that wages in America are falling in my opinion. Business owners like the idea of paying their workers less, it reduces costs and increases profits, but when all businesses pay their workers less then all businesses earn less money. It is a self defeating policy that leads to a perpetual downward spiral.
Remember the Public sector does not crowd out the Private sector rather by paying workers their wages it creates opportunities for the Private sector to take advantage of.
This is so vague. What are the serious economic deficiencies? Are you arguing that lack of public sector work and a weak social safety net is the cause of our recent economic woes? This despite the fact unemployment was in very reasonable ranges prior to the housing bust? I have never heard of anyone making this argument.
Well basically this is what I am arguing in combination with regressive wages policy. The reason we have not had bad unemployment rates etc is because of the artificially created debt demand which has counter acted it but it can only do so for a limited time. Really the most impressive thing is that they put this crisis off as long as they did. The levels of debt have been constantly rising ever since Reaganomics lead to economic decay. You have never heard anyone making this argument before becasue sadly so few economists seem to really understand what is happening. But I am not the only economist who is sane.
On January 28 2009 02:48 Jibba wrote: It's not just 5+ million jobs you're sacrificing, it's decades worth of prosperity for the sake of a liberalism ideal. This isn't Atlas Shrugged.
It's a problem that the money is held elsewhere because they can simply leave the market when it becomes too costly. When Japanese heavy industries start to fail (which they are, Nippon Steel just announced a massive production decrease) the companies will begin to contract and they won't be contracting towards the US. Free market? Yes, but the free market is a theory that isn't executed anywhere. Not in the US and not in Japan. Toyota and Honda offer excellent cars at an extremely competitive price in the US, meanwhile non-Japanese cars face enormous premiums on Nippon. Senators in Kentucky and Alabama hate the bailout because they want Toyota to do well in their states, but they don't realize they're going to get fucked if those companies go down as well.
Ford and GM go down -> Most domestic suppliers go out of business -> Toyota/Honda face massive supply shortage, and either cut production further (cutting more jobs) or start importing parts -> supply importation drives prices up and sales to go down, which means they'll halt expansion and probably remove domestic production since they'd be importing so many of the parts anyways, and it makes more sense to just import the car.
Plants that make diesel trucks are already starting to close, Honda just announced it's cutting production in US/Japan, Toyota is about to start cutting jobs in the US/Britain, Mitsubishi is suspending its plants in Illinois.
You might argue that a big company like Ford or GM going under would be alot more devastating to the economy since so many jobs are at stake, but economic principles do not change based on numbers.
That's where you're wrong. It is possible to be too big to fail. I know it dashes the dreams of libertarians everywhere, but it can't happen and it's not going to happen. This isn't a new dilemma, the problem arose in the 1980s and some would say in the 1950s as well. We've never let it happen and we probably never will.
And you're ignoring the fact that in the long run, the cost for parts will reach equilibrium and any effect the collapse of the American auto industry has on foreign manufacturers will disappear. In fact, the money that was going into the auto industry before will now go somewhere more efficient, fueling long term growth. Finally, the collapse of the American industry creates opportunities for more foreign manufacturers to sell here, lowering prices because of competition.
This is so wrong, it's unbelievable. It's not difficult to sell in the US, not like it's difficult to sell in Japan or China or France. Other companies don't sell here because they make substantially worse cars, and trying to meet our standards is a waste of money. By the time Toyota and Honda contract within the US, who is going to be buying new cars?
You, along with most other people in the country, are ignorant of the actual spread of the auto industry. Here's one part: if the big 3 go under, the green revolution in the US is dead. We automatically lose the next stage of big industry/technology to other countries. The transportation industry relies on the same part makers, who are currently receiving upwards of 40% of their business through the big 3.
Not to mention as far as economic stimulus goes, it's far cheaper to retain these jobs than to pump another 1.4 trillion into creating new jobs, which will take a while to happen. The middle class needs to stay afloat, and this is a large part of that.
Not to mention you're ignoring the human side of the problem. The entire fucking state of Michigan is in a full blown depression and Pelosi is fucking us in the ass any way she can, meanwhile every other industry like agriculture (yeah, Iowa and Nebraska have no problem when the government spends 10 billion dollars per year for a decade on retarded ethanol), chemicals, airlines gets plenty of government propping. The big 3 did make shittier cars in the 80s and 90s, but they've also been competing on an unfair playing ground with Toyota and Honda, who not only are protected by the government and are allowed to keep handpuppet unions but also don't have to worry about health insurance and pension so much. This is both a failure of management, and a product of circumstances.
Stop thinking like an economist and start thinking like poli sci. Figure out all the indirect consequences.
On January 28 2009 02:48 Jibba wrote: It's not just 5+ million jobs you're sacrificing, it's decades worth of prosperity for the sake of a liberalism ideal. This isn't Atlas Shrugged.
It's a problem that the money is held elsewhere because they can simply leave the market when it becomes too costly. When Japanese heavy industries start to fail (which they are, Nippon Steel just announced a massive production decrease) the companies will begin to contract and they won't be contracting towards the US. Free market? Yes, but the free market is a theory that isn't executed anywhere. Not in the US and not in Japan. Toyota and Honda offer excellent cars at an extremely competitive price in the US, meanwhile non-Japanese cars face enormous premiums on Nippon. Senators in Kentucky and Alabama hate the bailout because they want Toyota to do well in their states, but they don't realize they're going to get fucked if those companies go down as well.
Ford and GM go down -> Most domestic suppliers go out of business -> Toyota/Honda face massive supply shortage, and either cut production further (cutting more jobs) or start importing parts -> supply importation drives prices up and sales to go down, which means they'll halt expansion and probably remove domestic production since they'd be importing so many of the parts anyways, and it makes more sense to just import the car.
Plants that make diesel trucks are already starting to close, Honda just announced it's cutting production in US/Japan, Toyota is about to start cutting jobs in the US/Britain, Mitsubishi is suspending its plants in Illinois.
No prosperity is being sacrificed, it's for the good of the economy and of society as a whole for government (i.e the taxpayer) to not bail out these companies. Yes jobs will be lost and that's unfortunate, but their jobs are being cut for a reason. People don't want to buy cars right now; it isn't fair to force people to prop up failing companies. Bailing them out won't increase demand for cars, it just allows unproductive companies to leech off society when society is demonstrating through consumer choice that they don't want to buy from these businesses.
It's no different than when a restaurant goes out of business. If a restaurant is failing should the government bail them out? Afterall, if it goes under then everyone who worked there will lose their job. And of course no one likes to see people lose their jobs, but the restaurant is going out of business because people don't want to eat there. It doesn't make any moral or economic sense to take money from people so that this restaurant which is losing money can stay in business.
You might argue that a big company like Ford or GM going under would be alot more devastating to the economy since so many jobs are at stake, but economic principles do not change based on numbers.
Failing business are the consumers way of saying that the resources invested in such a business could be more effeciently allocated elsewhere.
I largely agree with you but I do think we have to seriously consider the short term cost of letting the Big 3 fail. The social safety net in America just isn't very effective. For many of the employees at these companies, retraining just isn't an option. And while in America it's comparatively easier to move from an economically depressed area like Michigan to somewhere more prosperous, this isn't an option for many due to economic and personal reasons. If we're going to just allow industries this size to collapse, it's important to bolster our ability to assist the unemployed in finding new jobs.
I understand that many jobs will be lost, but they are being lost for a reason. The companies these people are employed at are no longer profitable and should be liquidated. It's unfortunate that some people get hurt in the process but we don't live in a world of infinite resources. We live in a world of scarcity and if resources are to be invested in productive sectors of society, they must be taken from somewhere else. As another poster mentioned somehwere, competition works precisely *because* failing business models are allowed to sink.
On January 28 2009 02:48 Jibba wrote: It's not just 5+ million jobs you're sacrificing, it's decades worth of prosperity for the sake of a liberalism ideal. This isn't Atlas Shrugged.
It's a problem that the money is held elsewhere because they can simply leave the market when it becomes too costly. When Japanese heavy industries start to fail (which they are, Nippon Steel just announced a massive production decrease) the companies will begin to contract and they won't be contracting towards the US. Free market? Yes, but the free market is a theory that isn't executed anywhere. Not in the US and not in Japan. Toyota and Honda offer excellent cars at an extremely competitive price in the US, meanwhile non-Japanese cars face enormous premiums on Nippon. Senators in Kentucky and Alabama hate the bailout because they want Toyota to do well in their states, but they don't realize they're going to get fucked if those companies go down as well.
Ford and GM go down -> Most domestic suppliers go out of business -> Toyota/Honda face massive supply shortage, and either cut production further (cutting more jobs) or start importing parts -> supply importation drives prices up and sales to go down, which means they'll halt expansion and probably remove domestic production since they'd be importing so many of the parts anyways, and it makes more sense to just import the car.
Plants that make diesel trucks are already starting to close, Honda just announced it's cutting production in US/Japan, Toyota is about to start cutting jobs in the US/Britain, Mitsubishi is suspending its plants in Illinois.
No prosperity is being sacrificed, it's for the good of the economy and of society as a whole for government (i.e the taxpayer) to not bail out these companies. Yes jobs will be lost and that's unfortunate, but their jobs are being cut for a reason. People don't want to buy cars right now; it isn't fair to force people to prop up failing companies. Bailing them out won't increase demand for cars, it just allows unproductive companies to leech off society when society is demonstrating through consumer choice that they don't want to buy from these businesses.
It's no different than when a restaurant goes out of business. If a restaurant is failing should the government bail them out? Afterall, if it goes under then everyone who worked there will lose their job. And of course no one likes to see people lose their jobs, but the restaurant is going out of business because people don't want to eat there. It doesn't make any moral or economic sense to take money from people so that this restaurant which is losing money can stay in business.
You might argue that a big company like Ford or GM going under would be alot more devastating to the economy since so many jobs are at stake, but economic principles do not change based on numbers.
Failing business are the consumers way of saying that the resources invested in such a business could be more effeciently allocated elsewhere.
I largely agree with you but I do think we have to seriously consider the short term cost of letting the Big 3 fail. The social safety net in America just isn't very effective. For many of the employees at these companies, retraining just isn't an option. And while in America it's comparatively easier to move from an economically depressed area like Michigan to somewhere more prosperous, this isn't an option for many due to economic and personal reasons. If we're going to just allow industries this size to collapse, it's important to bolster our ability to assist the unemployed in finding new jobs.
I understand that many jobs will be lost, but they are being lost for a reason. The companies these people are employed at are no longer profitable and should be liquidated. It's unfortunate that some people get hurt in the process but we don't live in a world of infinite resources. We live in a world of scarcity and if resources are to be invested in productive sectors of society, they must be taken from somewhere else. As another poster mentioned somehwere, competition works precisely *because* failing business models are allowed to sink.
The presumption underlying this argument is that it is impossible for American car companies to compete. The reason they are doing so badly is because they were making fuel guzzling cars and all of a sudden, almost overnight demand for their product collapsed back when oil was at incredible highs. This coupled with the fundamental weakness of the American economy which is certainly the most important market for American made cars has put the car companies suddenly in terrible trouble.
They saw the change in demand patterns for cars but they were reacting not preempting but reactionary so now they have come up with good fuel efficient and electric cars but there is no demand in the current economic environment for this and whats more the price of oil has dropped. Basically they got unlucky, you help them out now and I see every prospect that they will do well in the future.
One important reason people have not mentioned is the fact that if you have a war it is very important that you have existing heavy industry so you can rapidly gear up and increase production, it was because of Ford that America had such a huge economy in world war two to a large extent. You simply cannot assume there will not be war, you must be in a position to engage in total war if needed, this consideration outweighs loss of benefit due to protectionist policies around heavy industry.
Ron Paul is god but this wasnt his best interview, he focused on bashing the mistakes of the past and current administration instead of purposing an interesting solution.
His posture is too defensive like in the final question if he would acept double digits unemployment, he briefly says "better than 20", and then gets into defensive mode "but ask Greenspan what he thinks... bla bla bla".
I mean its good to smear shit over Greenspan and the other douchebags but he shouldnt put all of his speech there imo.
This is irrelevant when banks aren't lending. I'm actually not sure how these numbers are related, but there is plenty of evidence that companies are having tremendous difficulty rolling over debt. Drying up credit can also be caused by pessimistic short term expectations that have nothing to do with the fundamentals of the economy. People do not invest according to the productive capacity of an economy, but on its actual rate of production. It seems to me that supply side theories largely dismiss the psychological factor. In fact, what the US is suffering from right now is a self-fulfilling speculative attack whose effects are very real, even if the basis of its growth has been largely unaffected. The market can't be counted on to recover on its own because these expectations seem to usher in a new mindset that functionally lowers the equilibrium point. So long as these expectations persist, credit will remain slow. Savings are useless if banks aren't willing to lend in the first place. While I believe such a policy is appropriate where business confidence is high and the only restriction to growth is limited capital, in this instance, a resurgence in demand must occur first if we want to move those savings where it's needed most.
There is a psychological side to the market, but it was invested in all the undue optimism of the past few decades. Short-term expectations are of greater consequence in a bull market than a bear market, due to our natural tendency to avoid thinking about bad things, rather than avoiding hope. It was this psychological bubble that maintained housing and stock prices, which was itself in turn caused by easy money and overlending.
You want investors and lenders to be seized with a certain sense of caution, and fear of the consequences of bad decisions. This is incidentally one area where no natural check is placed on government spending and investment. The money the government invests is simply taken out of the hands of individual investors, with the added handicap of a distorted benefit-cost assessment, lobbyist influence and lack of legal checks against corruption and waste.
Maintaining an unrestricted credit flow when the natural mechanisms of overpriced markets force them to contract has the consequence of propping up the bubbles which cannot be maintained in the first price. We want credit to dry up, so prices can come down, unprofitable enterprises forced into bankrupcy and resources freed up for new investsments.
If you think that the American economy has sufficient productive capacity to make long-term profits on psychologically-induced low prices, then get yourself a broker and buy up all these underpriced assets. If you've figured out something that the market hasn't, take advantage of it and get rich. Otherwise, the value isn't there.
On January 28 2009 02:48 Jibba wrote: It's not just 5+ million jobs you're sacrificing, it's decades worth of prosperity for the sake of a liberalism ideal. This isn't Atlas Shrugged.
It's a problem that the money is held elsewhere because they can simply leave the market when it becomes too costly. When Japanese heavy industries start to fail (which they are, Nippon Steel just announced a massive production decrease) the companies will begin to contract and they won't be contracting towards the US. Free market? Yes, but the free market is a theory that isn't executed anywhere. Not in the US and not in Japan. Toyota and Honda offer excellent cars at an extremely competitive price in the US, meanwhile non-Japanese cars face enormous premiums on Nippon. Senators in Kentucky and Alabama hate the bailout because they want Toyota to do well in their states, but they don't realize they're going to get fucked if those companies go down as well.
Ford and GM go down -> Most domestic suppliers go out of business -> Toyota/Honda face massive supply shortage, and either cut production further (cutting more jobs) or start importing parts -> supply importation drives prices up and sales to go down, which means they'll halt expansion and probably remove domestic production since they'd be importing so many of the parts anyways, and it makes more sense to just import the car.
Plants that make diesel trucks are already starting to close, Honda just announced it's cutting production in US/Japan, Toyota is about to start cutting jobs in the US/Britain, Mitsubishi is suspending its plants in Illinois.
No prosperity is being sacrificed, it's for the good of the economy and of society as a whole for government (i.e the taxpayer) to not bail out these companies. Yes jobs will be lost and that's unfortunate, but their jobs are being cut for a reason. People don't want to buy cars right now; it isn't fair to force people to prop up failing companies. Bailing them out won't increase demand for cars, it just allows unproductive companies to leech off society when society is demonstrating through consumer choice that they don't want to buy from these businesses.
It's no different than when a restaurant goes out of business. If a restaurant is failing should the government bail them out? Afterall, if it goes under then everyone who worked there will lose their job. And of course no one likes to see people lose their jobs, but the restaurant is going out of business because people don't want to eat there. It doesn't make any moral or economic sense to take money from people so that this restaurant which is losing money can stay in business.
You might argue that a big company like Ford or GM going under would be alot more devastating to the economy since so many jobs are at stake, but economic principles do not change based on numbers.
Failing business are the consumers way of saying that the resources invested in such a business could be more effeciently allocated elsewhere.
I largely agree with you but I do think we have to seriously consider the short term cost of letting the Big 3 fail. The social safety net in America just isn't very effective. For many of the employees at these companies, retraining just isn't an option. And while in America it's comparatively easier to move from an economically depressed area like Michigan to somewhere more prosperous, this isn't an option for many due to economic and personal reasons. If we're going to just allow industries this size to collapse, it's important to bolster our ability to assist the unemployed in finding new jobs.
I understand that many jobs will be lost, but they are being lost for a reason. The companies these people are employed at are no longer profitable and should be liquidated. It's unfortunate that some people get hurt in the process but we don't live in a world of infinite resources. We live in a world of scarcity and if resources are to be invested in productive sectors of society, they must be taken from somewhere else. As another poster mentioned somehwere, competition works precisely *because* failing business models are allowed to sink.
The presumption underlying this argument is that it is impossible for American car companies to compete.
I don't assume this, and I don't see the relevance of this.
The reason they are doing so badly is because they were making fuel guzzling cars and all of a sudden, almost overnight demand for their product collapsed back when oil was at incredible highs. This coupled with the fundamental weakness of the American economy which is certainly the most important market for American made cars has put the car companies suddenly in terrible trouble.
They saw the change in demand patterns for cars but they were reacting not preempting but reactionary so now they have come up with good fuel efficient and electric cars but there is no demand in the current economic environment for this and whats more the price of oil has dropped.
The reason for their failing is irrelevant. Regardless of the cause, these companies are now in a position where they are spending alot more money (in wages and other factors of production) than they are making. Consumers are not willing to spend the money right now that it takes to keep these companies afloat, and understandably so. Forcing consumers to fork over cash to these companies is not a stable solution and will prolong the recession.
Basically they got unlucky, you help them out now and I see every prospect that they will do well in the future.
Not anytime soon. Given the state of the economy it's likely to be a while before people start buying cars again at a rate that can sustain these companies at their current size. Taking money out of peoples pockets to give to the big manufacturers won't increase demand for cars (Despite the Keynesian gospel that's infiltrated every Macro 101 textbook, creating money out of thin air does NOT "stimulate the economy" in any productive way).
But more importantly, if people believe that these companies can pull through, let them invest their own money and reap the rewards of the risk they take. It's immoral to take money from other people.
One important reason people have not mentioned is the fact that if you have a war it is very important that you have existing heavy industry so you can rapidly gear up and increase production, it was because of Ford that America had such a huge economy in world war two to a large extent. You simply cannot assume there will not be war, you must be in a position to engage in total war if needed, this consideration outweighs loss of benefit due to protectionist policies around heavy industry.
I don't think that if Ford or GM collapse other countries are gonna try and start shit with the US. We have the strongest military in the world. If we need to create more weapons, there are other companies that can do that, and more can arise if there is enough demand for it.
Ron Paul is god but this wasnt his best interview, he focused on bashing the mistakes of the past and current administration instead of purposing an interesting solution.
His solution is the same as it's always been. Abolish the Fed, and get the government out of (what should be) the private sector. And this is what none of the pundits are able to wrap their heads around.. their mindset is that Benevolent Government must take an active role to help see us through the situation; what should the government do.. and RP's answer is that they should do nothing. They should GTFO. Government is only exacerbating the problem.
His posture is too defensive like in the final question if he would acept double digits unemployment, he briefly says "better than 20", and then gets into defensive mode "but ask Greenspan what he thinks... bla bla bla".
I mean its good to smear shit over Greenspan and the other douchebags but he shouldnt put all of his speech there imo.
He could've worded that part better, but his point is that this recession was made inevitable by the expansionary monetary policy of Greenspan (from 2001 to 2004 he cut the federal funds rate from 6.5% to 1%). The recessions is the process of society liquidating off poor investments that seemed lucrative while Greenspan was flooding money into the economy. You can try to push the burst back by propping up failing companies, but that will only make the collapse all the more devestating when it finally does happen. The sooner government stops fucking with the money supply, the sooner the economy can recover.
They have been doing a great program on the bbc when evan davis examines the causes of the global economic recession. I advise all English people to check out bbc iplayer! Finally I understand all the sub prime securities and the inter-bank lending problems!
My two cents is that the stock market needs to calm down...illegalise bonuses for investment bankers et al which go past a certain percent p/a of their wage. Ie they are allowed up to 25% of their salary to be paid as a bonus on top of their normal salary.
It's a big feeding frenzy, the stock market. All the brokers and people involved I've ever met were pasty, slightly chubby, really abrupt talkers, always looking slightly distracted; as if every second they were away from what is basically (from what I can see!) an incredibly addictive money-making mmorpg, they were losing money.
As far as the cash stimulus goes, I guess it doesn't seem like a bad idea, but some pundits in England give other viable ways out. Vince Cable, spokesperson for the treasury of the liberal democrats, has a LOT of useful things to say on the matter. At least the liberals are trying to be vocal about ideas, rather than just scoring points in a puerile and deconstructive manner like the Tories.
I wish we had a liberal government, I'm seriously you guys ><, two of the frontbenchers for the lib dems are like economic geniuses.
England is SCARILY badly placed for the recession. 70% of our 31 million person workforce is in finance. Unless England can somehow pull its socks up, bring out a classic stern british mood and get on with working harder than ever; restoring people's confidence in our country, we are properly fucked and will slip and side right into losing our triple A credit rating and dropping off the financial map.
As Friedman himself admitted, he won on the intelectual level but politicians do not apply his policies and approaches in practice.
It would be all nice to let the banks go under and rebuild the banking system with avoiding intervention but its simply not possible in the real world...
On January 30 2009 02:05 LemOn wrote: Liberals in the UK? Oh please
I know I know I know (: Definitely not in England. As a nation there are just way too many dumb hereditary voters who don't give two shits about the issues, but one can still dream, can't one?! Perhaps a coalition government! Maybe, kinda, maybe?! I mean in PMQ's this week you had two questions from labour MPs that sounded like rallying cries for a war-torn Britain lol!
I was sort of neutral about the stimulus before, but now it is becoming apparent that it is not so much an "economic stimulus bill" as it is a "stimulus for the democratic party".
Obama sold this as "building infrastructure" like roads and what not. Instead,
"Another "stimulus" secret is that some $252 billion is for income-transfer payments -- that is, not investments that arguably help everyone, but cash or benefits to individuals for doing nothing at all. There's $81 billion for Medicaid, $36 billion for expanded unemployment benefits, $20 billion for food stamps, and $83 billion for the earned income credit for people who don't pay income tax. While some of that may be justified to help poorer Americans ride out the recession, they aren't job creators."
"In selling the plan, President Obama has said this bill will make "dramatic investments to revive our flagging economy."...[but] Some $30 billion, or less than 5% of the spending in the bill, is for fixing bridges or other highway projects. There's another $40 billion for broadband and electric grid development, airports and clean water projects that are arguably worthwhile priorities. Add the roughly $20 billion for business tax cuts, and by our estimate only $90 billion out of $825 billion, or about 12 cents of every $1, is for something that can plausibly be considered a growth stimulus. And even many of these projects aren't likely to help the economy immediately. As Peter Orszag, the President's new budget director, told Congress a year ago, "even those [public works] that are 'on the shelf' generally cannot be undertaken quickly enough to provide timely stimulus to the economy.""
--http://online.wsj.com/article/SB123310466514522309.html The whole article is worth a read
Non-infrastructure stimulatory spending:
If that isn't a democratic party wish list that they would want to pass any day under any pretext, then I don't know what is.
Whether or not those are worthwhile projects is a different debate. The questions is, is this being done because it is the best way to stimulate the economy like democrats are telling the public, or is it being done because the democrats have a majority and LONG list of pet projects that they haven't been able to pass for 2 decades due to divided government? If they want to fund pet projects, they should be up front about what it is and not use the public's temporary state of fear to pass things that are misleading (especially if it costs a trillion dollars).
It also appears that most of the spending isn't even scheduled to START until 2011? Whats up with that? Who knows what the situation will be like then or what is needed? This might be only a 2 year recession. If that is the case, then it will be too late for the government to "save the economy"
"The Congressional Budget Office estimates that less than one-fifth of the $50 billion of proposed spending on energy and water would occur by the end of 2010. "
And speaking of total spending, only 1/7 will be in 2009 (the only year we KNOW that we will need a stimulus.) I say they should do a year by year stimulus so that you can adjust to what the current needs are as they change. Think of how different things were 1 year ago.
Wish Senate Republicans and moderate democrats luck in stopping this bill.
Ron Paul is god but this wasnt his best interview, he focused on bashing the mistakes of the past and current administration instead of purposing an interesting solution.
His solution is the same as it's always been. Abolish the Fed, and get the government out of (what should be) the private sector. And this is what none of the pundits are able to wrap their heads around.. their mindset is that Benevolent Government must take an active role to help see us through the situation; what should the government do.. and RP's answer is that they should do nothing. They should GTFO. Government is only exacerbating the problem.
His posture is too defensive like in the final question if he would acept double digits unemployment, he briefly says "better than 20", and then gets into defensive mode "but ask Greenspan what he thinks... bla bla bla".
I mean its good to smear shit over Greenspan and the other douchebags but he shouldnt put all of his speech there imo.
He could've worded that part better, but his point is that this recession was made inevitable by the expansionary monetary policy of Greenspan (from 2001 to 2004 he cut the federal funds rate from 6.5% to 1%). The recessions is the process of society liquidating off poor investments that seemed lucrative while Greenspan was flooding money into the economy. You can try to push the burst back by propping up failing companies, but that will only make the collapse all the more devestating when it finally does happen. The sooner government stops fucking with the money supply, the sooner the economy can recover.
Inevitably this thread gets back to this discussion about the Fed. In short, libertarians seem way too easily able to forget history. Compared with before the inception of the Fed and the loss of the "gold standard", the US has spent about half as much of its time in recession and those recessions have been considerably less severe. I wish I could find the statistics and graphs that demonstrate this, but the only ones I have are on paper. Pick up Krugman's "The Return of Depression Economics", for example.
The Fed is not perfect. In this instance, low interest rates were driven by Greenspan's overestimation of the economy's ability to grow and his insistence on lowering unemployment. But lowering interest rates in the short run DID help to mitigate the impact of the 2000/2001 recession. Fucking with the money supply got us out of the Great Depression, and I don't see a "much worse collapse" coming anytime soon.
I fail to see how government is propping up failing companies. Recessions are not necessarily caused by weak fundamentals. In this instance, it has more to do with expectations. We're suffering from a "self-fulfilling speculative attack" of the kind that struck the Asian economies in the 90's. The fear that the economy will sink has actually enabled the economy to sink. This is a recession driven by margin calls. By restoring these companies and stimulating demand, government helps the economy to restore its original equilibrium and end the game of false expectations.
1) Even the Food Stamps and others work as a job creator. If one believes in Keynes's multiplier than allowing poor people spend money on food will itself boost the economy and create more jobs.
2) As Neo Keynesianism is being fully accepted by the goverment than you are right that the stimulus is needed right now to damped the business cycle (and the crisis seems to be nothing else than another cycle recession, however dramatic).
So basically he needs to throw money on the economy. But why not to take this crisis as a reason to do it in a sense that will not only dampen the cycle by creating jobs and stimulating demand, but also as a platform for future development?
Bridges, Roads and other infrastructure are in desolate state in the US, and big investments haven't been done in decades, so although only part of the stimulus will actually be used for the cure of the crisis, it is still great to do that when looking towards the future.
On January 30 2009 03:18 Savio wrote: I was sort of neutral about the stimulus before, but now it is becoming apparent that it is not so much an "economic stimulus bill" as it is a "stimulus for the democratic party".
Obama sold this as "building infrastructure" like roads and what not. Instead,
"Another "stimulus" secret is that some $252 billion is for income-transfer payments -- that is, not investments that arguably help everyone, but cash or benefits to individuals for doing nothing at all. There's $81 billion for Medicaid, $36 billion for expanded unemployment benefits, $20 billion for food stamps, and $83 billion for the earned income credit for people who don't pay income tax. While some of that may be justified to help poorer Americans ride out the recession, they aren't job creators."
investing in your population is obviously investing in the economy especially given the importance of skilled workers. education and healthcare are not "baww the poor are jacking our moneys" projects. they help keep your workforce ready.
besides, the basic point of the economy is to provide a living for people. the govt should look out for the economic future of the lower middle class.
On January 30 2009 05:04 oneofthem wrote: investing in your population is obviously investing in the economy especially given the importance of skilled workers. education and healthcare are not "baww the poor are jacking our moneys" projects. they help keep your workforce ready.
besides, the basic point of the economy is to provide a living for people. the govt should look out for the economic future of the lower middle class.
If the government is trying to look out for the economic future of the lower middle class, they should stop inefficiently spending money now. The money they spend now is at the cost of future growth.
On January 30 2009 03:58 LemOn wrote: 1) Even the Food Stamps and others work as a job creator. If one believes in Keynes's multiplier than allowing poor people spend money on food will itself boost the economy and create more jobs.
The only difference between giving them food stamps and giving them money is that food stamps is a less efficient way of raising someone's well being (unless you are very liberal and think the government knows what each person needs more than he himself does).
If the government is allright with trying to stimulate the economy through transfer payments (as opposed to infrastructure), then they should just give the money directly to the customer. Anything else can be definitively proven to be inneficient (if I had a blackboard handy and you were here, I would draw it out for you. Essentially since the people don't value $1 worth of food stamps at $1 but rather at something lower like 85 cents, you have a deadweight loss of efficiency due to the government deciding what people want rather than people themselves deciding).
I say if we are gonna spend 800 billion dollar, lets just give it straight to people. Give it to them in equal amounts (that is very progressive since the poor people get the same as rich people without having contributed in the first place). $800 billion is roughly $2,666 per PERSON. That includes children and minors. So a family of 4 would get $10,666. Now the people have that money and if they need it for their mortgage, then they use it on that. If they need it to pay off their car so it doesn't get repossessed, they do that. If what they REALLY need is a new computer or whatever it is, they can choose themselves. And THAT would stimulate the economy while giving maximum benefit to each individual since preferences between people and current needs are so different.
Also, I might add that even though the government has given out a stimulus check before and it didn't have very much effect, recall also that they were giving out tiny amounts. My family of 3 got like 300 dollars or somthing like that. That is too small to have a measurable effect.
I say, if we are going to spend 800 billion dollars, then fine, but lets let people maximize their own utility and get the maximum benefit out of it.
Also I hope nobody comes out with the lame argument "we can't give people money and freedom to choose what to spend it on, or they will just buy a bunch of Chinese goods and stimulate China's economy". That is what people who don't understand economics would want to say due to what I call "misguided common sense". It is NOT true that a trade deficit is bad for your economy. This is because every time you buy an import with American $$$$, that money can only be used by them to either:
1. Buy American goods or 2. Invest in American business
Sure you can exchange it for a ruble, but when you zoom out, every dollar has to eventually come back to an economy that uses the dollar. Its not like the money exchangers are printing rubles and burning dollars when they do an exchange.
So, if a country like the US has an overall trade deficit, then we must have an investment surplus, which has been true for a LONG time. Countries with which we have a trade deficit invest a LOT of money into the US which is a good thing because US consumers do not have a very high savings rate meaning our domestic investments are very low. The US has also always been a very good place for investors to invest so they choose to spend the money they got when they sold their goods to us in investments rather than in American goods.
Now, this is gonna confuse some people because the media is always talking about how our "trade deficit" is growing and that is a "bad thing". But the reason the media talks like this, is that most American's do NOT understand market fundamentals and therefore are relying on their "misguided common" sense which says to them that every time we buy their goods, that money we gave them is lost to us forever and is only spent once and only stimulates their economy. So thats what our media says because people's fear sells newspapers. An article in a newspaper explaining this concept to the people would not sell but one with headlines about growing deficits will.
All a trade deficit means is that from the above 2 choices I listed, foreigners are choosing #2 rather than #1.
"Strong growth economies such as the United States, Australia and Hong Kong run consistent trade deficits, as do poorer growing economies (where heavy investment fuels growth and the trade deficit).
Mature but stagnant economies such as Canada, Japan, and Germany typically run trade surpluses. China also has a trade surplus. A higher savings rate generally corresponds with a trade surplus. Correspondingly, the United States with its negative savings rate consistently has high trade deficits."
Regarding the Fed, I agree with Ahrara. Despite whatever shortcomings it may have, it has a pretty dang good track record (especially in post WW2 time). I would worry much more about fiscal policy--that has not performed as well as monetary policy has.
Here you can see our growth rates and observe the severity of recessions post WWII and before.
On January 30 2009 06:35 Savio wrote: Also I hope nobody comes out with the lame argument "we can't give people money and freedom to choose what to spend it on, or they will just buy a bunch of Chinese goods and stimulate China's economy". That is what people who don't understand economics would want to say due to what I call "misguided common sense". It is NOT true that a trade deficit is bad for your economy. This is because every time you buy an import with American $$$$, that money can only be used by them to either:
1. Buy American goods or 2. Invest in American business
Sure you can exchange it for a ruble, but when you zoom out, every dollar has to eventually come back to an economy that uses the dollar. Its not like the money exchangers are printing rubles and burning dollars when they do an exchange.
So, if a country like the US has an overall trade deficit, then we must have an investment surplus, which has been true for a LONG time. Countries with which we have a trade deficit invest a LOT of money into the US which is a good thing because US consumers do not have a very high savings rate meaning our domestic investments are very low. The US has also always been a very good place for investors to invest so they choose to spend the money they got when they sold their goods to us in investments rather than in American goods.
Now, this is gonna confuse some people because the media is always talking about how our "trade deficit" is growing and that is a "bad thing". But the reason the media talks like this, is that most American's do NOT understand market fundamentals and therefore are relying on their "misguided common" sense which says to them that every time we buy their goods, that money we gave them is lost to us forever and is only spent once and only stimulates their economy. So thats what our media says because people's fear sells newspapers. An article in a newspaper explaining this concept to the people would not sell but one with headlines about growing deficits will.
All a trade deficit means is that from the above 2 choices I listed, foreigners are choosing #2 rather than #1.
Thank you. And I'd just like to add that a trade deficit means that we're getting their goods and in exchange, they're investing in us, buying capital that makes our workers more productive and efficient. Seems like a pretty good deal for us doesn't it?
The only way this is bad is if we run a large trade deficit AND we're seen as a bad place to invest. Then the dollar is just going to drop as the only other way to balance the payments (or we'll hike up tariffs or something equally as stupid).
On January 30 2009 06:22 Savio wrote: I say if we are gonna spend 800 billion dollar, lets just give it straight to people. Give it to them in equal amounts (that is very progressive since the poor people get the same as rich people without having contributed in the first place). $800 billion is roughly $2,666 per PERSON. That includes children and minors. So a family of 4 would get $10,666. Now the people have that money and if they need it for their mortgage, then they use it on that. If they need it to pay off their car so it doesn't get repossessed, they do that. If what they REALLY need is a new computer or whatever it is, they can choose themselves. And THAT would stimulate the economy while giving maximum benefit to each individual since preferences between people and current needs are so different.
Also, I might add that even though the government has given out a stimulus check before and it didn't have very much effect, recall also that they were giving out tiny amounts. My family of 3 got like 300 dollars or somthing like that. That is too small to have a measurable effect.
I say, if we are going to spend 800 billion dollars, then fine, but lets let people maximize their own utility and get the maximum benefit out of it.
Actually, I believe there are even more efficient ways of creating stimulus, mostly through using the tax system to alter the incentives faced by people and businesses. Two of the best ideas that I've heard are:
An investment tax credit. Assuming that you make it clear that it will be temporary, this will do a lot to not only put money into the economy to stimulate demand, but will also encourage capital investment NOW and will help free up money stuck in supersafe investments.
A payroll tax reduction. This will also put money into the economy, but at the same time will reduce the cost of hiring (or not firing) labor, keeping more people in jobs and reducing costs for businesses close to going under.
Lots of things could be done to the tax system that would help. But one good aspect of stimulus checks is that they are FAST. The major complaint against fiscal Keynesian policies, is that the government is too slow to implement them and once implemented, they take to long to cause an effect.
On January 30 2009 06:56 Savio wrote: Lots of things could be done to the tax system that would help. But one good aspect of stimulus checks is that they are FAST. The major complaint against fiscal Keynesian policies, is that the government is too slow to implement them and once implemented, they take to long to cause an effect.
Payroll cuts or investment tax credits are not only just as fast, but they also do more that just blindly stimulate demand, they provide additional incentives to hire and invest by reducing their costs, two things that we need desperately right now.
I mean, I think that straight checks would be hugely better than the current monstrosity that is going through (and will probably pass) Congress, but I think that there are also more targeted measures you can take than just giving people money.
On January 30 2009 05:04 oneofthem wrote: investing in your population is obviously investing in the economy especially given the importance of skilled workers. education and healthcare are not "baww the poor are jacking our moneys" projects. they help keep your workforce ready.
besides, the basic point of the economy is to provide a living for people. the govt should look out for the economic future of the lower middle class.
If the government is trying to look out for the economic future of the lower middle class, they should stop inefficiently spending money now. The money they spend now is at the cost of future growth.
no. the problem is that a large segment of the us population is not equipped with skills to get growth jobs. real wage for these people will not rise, and their traditional sources of employment are not doing well. you have to invest in education, and guarantee an income level that is sufficient to justify getting their kids to go to school instead of having them enter the work force early and unprepared.
On January 30 2009 05:04 oneofthem wrote: investing in your population is obviously investing in the economy especially given the importance of skilled workers. education and healthcare are not "baww the poor are jacking our moneys" projects. they help keep your workforce ready.
besides, the basic point of the economy is to provide a living for people. the govt should look out for the economic future of the lower middle class.
If the government is trying to look out for the economic future of the lower middle class, they should stop inefficiently spending money now. The money they spend now is at the cost of future growth.
no. the problem is that a large segment of the us population is not equipped with skills to get growth jobs. real wage for these people will not rise, and their traditional sources of employment are not doing well. you have to invest in education, and guarantee an income level that is sufficient to justify getting their kids to go to school instead of having them enter the work force early and unprepared.
I don't think that is right. You didn't provide any evidence for it and the only paper I have read that dealt with that was an academic Journal article on illegal immigration which showed that part of the reason for the recent rise in illegal immigration is that the US workforce shifted to higher skill set--meaning more American's were skilled as opposed to unskilled--and that created a shortage of unskilled labor which was filled by illegal immigrants.
You have any evidence that the US labor force is unskilled?
On January 30 2009 06:42 Savio wrote: Regarding the Fed, I agree with Ahrara. Despite whatever shortcomings it may have, it has a pretty dang good track record (especially in post WW2 time). I would worry much more about fiscal policy--that has not performed as well as monetary policy has.
Here you can see our growth rates and observe the severity of recessions post WWII and before.
That is almost exactly the graph I was looking for. The severity of post-war recessions is incomparable to the pre-war ones, with the difference being losing the gold standard, although a faster clip of technological development helped as well.
This is irrelevant when banks aren't lending. I'm actually not sure how these numbers are related, but there is plenty of evidence that companies are having tremendous difficulty rolling over debt. Drying up credit can also be caused by pessimistic short term expectations that have nothing to do with the fundamentals of the economy. People do not invest according to the productive capacity of an economy, but on its actual rate of production. It seems to me that supply side theories largely dismiss the psychological factor. In fact, what the US is suffering from right now is a self-fulfilling speculative attack whose effects are very real, even if the basis of its growth has been largely unaffected. The market can't be counted on to recover on its own because these expectations seem to usher in a new mindset that functionally lowers the equilibrium point. So long as these expectations persist, credit will remain slow. Savings are useless if banks aren't willing to lend in the first place. While I believe such a policy is appropriate where business confidence is high and the only restriction to growth is limited capital, in this instance, a resurgence in demand must occur first if we want to move those savings where it's needed most.
There is a psychological side to the market, but it was invested in all the undue optimism of the past few decades. Short-term expectations are of greater consequence in a bull market than a bear market, due to our natural tendency to avoid thinking about bad things, rather than avoiding hope. It was this psychological bubble that maintained housing and stock prices, which was itself in turn caused by easy money and overlending.
I don't think you understand what I'm saying. First, the recent growth in the economy isn't fueled by speculation alone. That's just a ridiculous statement -- there was plenty of sustainable growth. My argument is that we are current suffering from a speculation driven recession, an anti-bubble if you will. The equilibrium point for growth has been reset to a lower point as a result of distorted expectations.
You want investors and lenders to be seized with a certain sense of caution, and fear of the consequences of bad decisions. This is incidentally one area where no natural check is placed on government spending and investment. The money the government invests is simply taken out of the hands of individual investors, with the added handicap of a distorted benefit-cost assessment, lobbyist influence and lack of legal checks against corruption and waste.
Right, but these are problems in the long run. I will agree with you in that a balanced budget is important and that as much as possible of the stimulus spending should a.) not be locked in b.) should be placed in private hands. But in the short run, it is important that we pop the "anti-bubble" that's developed in order to restore growth. Without stimulus, all that currency in circulation will remain in the hands of the banks and won't be doing anything productive. The long run effects of a prolonged recession are considerably worse than the long run effects of expanding our deficit. In other words, your argument seems to be that government intervention has artificially elevated the rate of growth of the economy, and the recession represents a correction. What I am saying is that the economy is overshooting and because of the speculative environment, will not return to its "natural" rate of growth without government intervention. Only this time, we must be more prudent.
Maintaining an unrestricted credit flow when the natural mechanisms of overpriced markets force them to contract has the consequence of propping up the bubbles which cannot be maintained in the first price. We want credit to dry up, so prices can come down, unprofitable enterprises forced into bankrupcy and resources freed up for new investsments.
This is exactly what's happening now. It is important that we correct from the bubble, but it is also important to remember that it takes time to recover from this correction. During this time, even businesses that have every fundamental reason to remain profitable will be forced into bankruptcy because they can't rollover their debts. Remember, when the housing bubble first crashed, it wasn't just the subprime borrowers who were forced into foreclosure, but borrowers with otherwise excellent credit.
If you think that the American economy has sufficient productive capacity to make long-term profits on psychologically-induced low prices, then get yourself a broker and buy up all these underpriced assets. If you've figured out something that the market hasn't, take advantage of it and get rich. Otherwise, the value isn't there.
Right now is an excellent time to invest primarily because the value of many assets are artificially depressed. Speculation is a real factor, but I highly doubt that the speculation of the last several years was enough to drive the stock market up 75% over its real value.
You have any evidence that the US labor force is unskilled?
that is not what i said. my claim is that a shift towards a service economy demands a workforce with specialized skills and these skills need investment in education. thus investing in the education and health of your workers is investing in the economy. of course americans are more skilled than immigrant mexicans, but a large segment of the population, especially those working traditional manufacturing jobs, are not equipped to be professionals.
the US workforce shifted to higher skill set--meaning more American's were skilled as opposed to unskilled--and that created a shortage of unskilled labor which was filled by illegal immigrants.
that is true only in metro areas, and even in new york city immigrant labor is not so hot. when we are talking about areas that will be hit hardest by a transitioning economy, these are invariably blue collar areas with inadequate education systems.
On January 30 2009 05:04 oneofthem wrote: investing in your population is obviously investing in the economy especially given the importance of skilled workers. education and healthcare are not "baww the poor are jacking our moneys" projects. they help keep your workforce ready.
besides, the basic point of the economy is to provide a living for people. the govt should look out for the economic future of the lower middle class.
If the government is trying to look out for the economic future of the lower middle class, they should stop inefficiently spending money now. The money they spend now is at the cost of future growth.
no. the problem is that a large segment of the us population is not equipped with skills to get growth jobs. real wage for these people will not rise, and their traditional sources of employment are not doing well. you have to invest in education, and guarantee an income level that is sufficient to justify getting their kids to go to school instead of having them enter the work force early and unprepared.
I don't think that is right. You didn't provide any evidence for it and the only paper I have read that dealt with that was an academic Journal article on illegal immigration which showed that part of the reason for the recent rise in illegal immigration is that the US workforce shifted to higher skill set--meaning more American's were skilled as opposed to unskilled--and that created a shortage of unskilled labor which was filled by illegal immigrants.
You have any evidence that the US labor force is unskilled?
Though I don't think the US labor force is unskilled, I do think that a large part of what we're going through is a dramatic shift in the specialized skills required.
The trend towards a technology and service based economy has made people's skills more and more specialized. No longer are general skills useful, you have be a specialist in your particular field or area.
One of the problems comes when there's a large, sudden shift in the structure of the economy. The sudden change in risk preference has led to a huge reduction in demand for specialists in finance and banking, a sector that grew much too large during the housing boom. Now one of our problems is that we have to shift resources from finance to other areas; the financiers definitely aren't unskilled, it's just that a fundamental change has taken place in the economy that renders their skills somewhat obsolete, at least at the numbers that we have.
Normally these structural shifts happen gradually and their impact on unemployment is simply taken into the "natural unemployment" that always exists. But this time it was sudden, fast, and unexpected for the majority of those workers.
So essentially what you (oneofthem) are saying is that in the long run, we would benefit from subsidizing education more. That may be true, but for the short term (getting out of the current recession, which is what this is all about), I think that you will not see effects from higher education spending. Bush doubled the federal government spending on education and that had no measurable positive effect.
What I say is that we should be clear about what bills the government is passing. If we want to just set up a long term education infrastructure, then lets do it, but don't call that a stimulus bill that will get us out of the current recession. Pass a stimulus bill that makes jobs NOW, and then when things have calmed down, and government revenues are rising again due to economic growth, then lets build the long term infrastructure. Or you could do it earlier, but keep the bills separate so the American people know what they are getting.
Right now is an excellent time to invest primarily because the value of many assets are artificially depressed. Speculation is a real factor, but I highly doubt that the speculation of the last several years was enough to drive the stock market up 75% over its real value.
I'm not going to argue in a situation where correct forecasts are self-rewarding. If you think that US stocks are now undervalued, you would take appropriate action, although the very DOW projections for 2009's dividend yields http://www.indexarb.com/dividendYieldSorteddj.html suggest that prices are still too high, and above equilibrium.
Nonetheless, your private actions are one thing, and public action is another. Your argument that government should step in and replace the private investor in the market, apart from all attendant hazards legal, economic and moral, assumes that the government can more rationally determine the value of assets than public. It's therefore all the more ironic that someone who begins a thread with the hope of stimulating public awareness, advocates its supersession when they fail to reach the same conclusions.
P.S. The projected average dividend yields in a nutshell for all three major US indices.
that is not a stimulus bill in content, the part about unemployment insurance etc anyway, just in name. it is a recession coverage bill, and there is nothing wrong with that.
On January 30 2009 08:52 oneofthem wrote: that is not a stimulus bill in content, just in name. it is a recession coverage bill, and there is nothing wrong with that.
I don't know what you're defining a stimulus and "recession coverage" bill to be, but I'm betting that I think it's neither.
It's almost more of an attempt by Democrats to shift responsibility and %GDP from the private sector to the public sector, and an attempt to shift responsibility for funding (and therefore control) from states to the federal government. Stimulus should be timely, targeted, and temporary, as Larry Summers said. Much of this bill is not even one of those things, and few aspects satisfy all three. Even more of the provisions don't come anywhere close to even pretending to be useful stimulus (the overlap between construction/finance and alternative energy/education workers tends to be non-existent) and instead are just parts of the Democratic agenda.
Some of it's decent, some of it could be done better, a lot of it is trash and politics.
On January 30 2009 05:04 oneofthem wrote: investing in your population is obviously investing in the economy especially given the importance of skilled workers. education and healthcare are not "baww the poor are jacking our moneys" projects. they help keep your workforce ready.
besides, the basic point of the economy is to provide a living for people. the govt should look out for the economic future of the lower middle class.
If the government is trying to look out for the economic future of the lower middle class, they should stop inefficiently spending money now. The money they spend now is at the cost of future growth.
no. the problem is that a large segment of the us population is not equipped with skills to get growth jobs. real wage for these people will not rise, and their traditional sources of employment are not doing well. you have to invest in education, and guarantee an income level that is sufficient to justify getting their kids to go to school instead of having them enter the work force early and unprepared.
I don't think that is right. You didn't provide any evidence for it and the only paper I have read that dealt with that was an academic Journal article on illegal immigration which showed that part of the reason for the recent rise in illegal immigration is that the US workforce shifted to higher skill set--meaning more American's were skilled as opposed to unskilled--and that created a shortage of unskilled labor which was filled by illegal immigrants.
You have any evidence that the US labor force is unskilled?
That's part of it, there's also immigration policies which have made illegal immigration more permanent.
Savio, do you own your own house? I assume you're too young to, but when you do, or when you decide to buy a hybrid car, there will be all sorts of tax breaks and ways for you to get a government check for heat insulating windows and so on. Or hell, even the next time you get a Stafford loan. The welfare state already exists, and it's directed towards the middle/upper-middle class because that's what supposedly keeps things stable. It bugs me when the middle class complains about food stamps, etc. when they're the largest beneficiaries of government support without even knowing it.
On January 30 2009 08:20 Savio wrote: Don't wanna derail, but I got a new quote
Reagan was the king of bureaucracy.
BTW, the stimulus package is going to cost a lot more than what they're proposing right now. There's no way they can accomplish what they're trying to on that amount of money.
On January 30 2009 03:18 Savio wrote: I was sort of neutral about the stimulus before, but now it is becoming apparent that it is not so much an "economic stimulus bill" as it is a "stimulus for the democratic party".
This is clearly the most effective way to stimulate the economy. No one spends money faster and saves less than the poor. Even the Bush administration increased welfare payments temporarily as a component of fiscal stimulus because they know the empirical fact welfare is the most direct and effective form of economic stimulus available.
And this idea that they do not create jobs is a dangerous and perverse misunderstanding of simple economics. These people will take this $250Billion (which would already be in the economy if the Republican hadn't been cutting welfare already, they believe that by giving less money to the poor the poor will get richer ffs.) and spend it virtually instantly. This will immediately create jobs throughout the rest of the economy.
And to the people who say printing money out of thin air does not stimulate the economy you are simply wrong. If you don't spend it well than sure but it is a fact that the FDR stimulus plan created millions of jobs. It lowed the unemployment rate from around 25% down to around 15% the second world war then brought it down to 0% but FDR's plan worked wonders and created a recovery greatly improving the ease of American mobilization.
Policy makers were so impressed with the ability of fiscal policy to stimulate the economy realising they could lower the unemployment rate effectively to whatever level they chose they decided to constantly push unemployment toward 0%, below its natural rate, which created an inflationary crisis. The moral is do not over do it, it was never 'fiscal policy doesn't work'.
If the Democrats had their way sooner the American economy would not be in the state it is today. As you are probably aware Republicans controlled congress during Clinton's administration physically imposing their economic policies onto him (yes the Clinton surplus is because of the Republicans, there so proud of destroying the economy its rather distressing) meaning that America has been run by Republicans with all their small government ideas for 30 years now, the economy gradually getting worse the whole time until it reaches crisis.
The reason for apparent macro stability in recent times is because of the use of monetary policy. We gained stability at the cost of increasing debt and this is clearly not a good idea. Britain is screwed today because Thatcher followed Republican economic policies. Australia is screwed today because Howard followed Republican economic policies and these have achieved the same negative consequences each of these cases.
On January 30 2009 05:04 oneofthem wrote: investing in your population is obviously investing in the economy especially given the importance of skilled workers. education and healthcare are not "baww the poor are jacking our moneys" projects. they help keep your workforce ready.
besides, the basic point of the economy is to provide a living for people. the govt should look out for the economic future of the lower middle class.
If the government is trying to look out for the economic future of the lower middle class, they should stop inefficiently spending money now. The money they spend now is at the cost of future growth.
no. the problem is that a large segment of the us population is not equipped with skills to get growth jobs. real wage for these people will not rise, and their traditional sources of employment are not doing well. you have to invest in education, and guarantee an income level that is sufficient to justify getting their kids to go to school instead of having them enter the work force early and unprepared.
I don't think that is right. You didn't provide any evidence for it and the only paper I have read that dealt with that was an academic Journal article on illegal immigration which showed that part of the reason for the recent rise in illegal immigration is that the US workforce shifted to higher skill set--meaning more American's were skilled as opposed to unskilled--and that created a shortage of unskilled labor which was filled by illegal immigrants.
You have any evidence that the US labor force is unskilled?
That's part of it, there's also immigration policies which have made illegal immigration more permanent.
Savio, do you own your own house? I assume you're too young to, but when you do, or when you decide to buy a hybrid car, there will be all sorts of tax breaks and ways for you to get a government check for heat insulating windows and so on. Or hell, even the next time you get a Stafford loan. The welfare state already exists, and it's directed towards the middle/upper-middle class because that's what supposedly keeps things stable. It bugs me when the middle class complains about food stamps, etc. when they're the largest beneficiaries of government support without even knowing it.
I am just pointing out that food stamps are inefficient compared to direct $$$ transfers. If you want to help the poor people, you could just give them the money it costs to provide food stamps and they would be definitively better off.
I'm not against helping the poor, but it should not be wasteful and dead weight inefficiency is wasteful because potential benefit essentially disappears and is never regained.
On January 30 2009 08:20 Savio wrote: Don't wanna derail, but I got a new quote
Wow that quote would be so accurate if you turned it around the other way. The conservatives believe that if you spend less on health care it will improve the health care system. They believe that if you underfund education it will get better. If you give less money to the poor they will grow richer. If you do not invest in infrastructure some nice rich guy will step in even if there is no profit for him. Putting downward pressure on wages strengthen the economy. The dramatic oversimplification and misunderstanding of American conservatives is absolutely mind blowing but they are so indoctrinated they will not see reason even if it is right in front of their face.
Savio, this seems very ignorant..... Food stamps (in most states) are given in the form of credit on an EBT card. The only difference from direct deposit cash is you cannot buy non-food items including alcohol or cigarettes. This is an efficient way to moderate an economic slump (recession) from going into a worse trend and engulfing black markets with pure cash.
It is not good for the welfare of economy when people spend their welfare checks on pushing coke and not buying any food. This is incentive for them to eat and get their shit together someday, as opposed to spending all their money on alcohol and worsening the well-being of a state governments people.
All in all though, I don't get your point as far as cheaper to just give cash? I'm rather at a loss there....
On January 30 2009 05:04 oneofthem wrote: investing in your population is obviously investing in the economy especially given the importance of skilled workers. education and healthcare are not "baww the poor are jacking our moneys" projects. they help keep your workforce ready.
besides, the basic point of the economy is to provide a living for people. the govt should look out for the economic future of the lower middle class.
If the government is trying to look out for the economic future of the lower middle class, they should stop inefficiently spending money now. The money they spend now is at the cost of future growth.
no. the problem is that a large segment of the us population is not equipped with skills to get growth jobs. real wage for these people will not rise, and their traditional sources of employment are not doing well. you have to invest in education, and guarantee an income level that is sufficient to justify getting their kids to go to school instead of having them enter the work force early and unprepared.
I don't think that is right. You didn't provide any evidence for it and the only paper I have read that dealt with that was an academic Journal article on illegal immigration which showed that part of the reason for the recent rise in illegal immigration is that the US workforce shifted to higher skill set--meaning more American's were skilled as opposed to unskilled--and that created a shortage of unskilled labor which was filled by illegal immigrants.
You have any evidence that the US labor force is unskilled?
That's part of it, there's also immigration policies which have made illegal immigration more permanent.
Savio, do you own your own house? I assume you're too young to, but when you do, or when you decide to buy a hybrid car, there will be all sorts of tax breaks and ways for you to get a government check for heat insulating windows and so on. Or hell, even the next time you get a Stafford loan. The welfare state already exists, and it's directed towards the middle/upper-middle class because that's what supposedly keeps things stable. It bugs me when the middle class complains about food stamps, etc. when they're the largest beneficiaries of government support without even knowing it.
I am just pointing out that food stamps are inefficient compared to direct $$$ transfers. If you want to help the poor people, you could just give them the money it costs to provide food stamps and they would be definitively better off.
I'm not against helping the poor, but it should not be wasteful and dead weight inefficiency is wasteful because potential benefit essentially disappears and is never regained.
Well we could fill 10 new threads on wasteful aid, but there hasn't been enough effort to fix it since the 1970s.
On January 30 2009 07:53 Savio wrote: So essentially what you (oneofthem) are saying is that in the long run, we would benefit from subsidizing education more. That may be true, but for the short term (getting out of the current recession, which is what this is all about), I think that you will not see effects from higher education spending.
No but you will feel the expansionary effects of hiring more teachers and increasing teachers pay. This is one of the best ways of dealing with the current crisis because it not only creates the short term stimulus to deal with the immediate problem it creates long term benefits to permanently strengthen the economy, until republicans get elected and cut education spending again that is. :\
On January 30 2009 07:53 Savio wrote: So essentially what you (oneofthem) are saying is that in the long run, we would benefit from subsidizing education more. That may be true, but for the short term (getting out of the current recession, which is what this is all about), I think that you will not see effects from higher education spending. Bush doubled the federal government spending on education and that had no measurable positive effect.
What I say is that we should be clear about what bills the government is passing. If we want to just set up a long term education infrastructure, then lets do it, but don't call that a stimulus bill that will get us out of the current recession. Pass a stimulus bill that makes jobs NOW, and then when things have calmed down, and government revenues are rising again due to economic growth, then lets build the long term infrastructure. Or you could do it earlier, but keep the bills separate so the American people know what they are getting.
It is obvious that with teachers unions with no effect, the lack of choices and incentives for good teachers, the American economy will take forever to come around unless something is done. It all comes down to where the motivation comes from....
Why does America have shitty public schools: Bad incentives for good teachers, bad incentives for schools to get enrollments, and bad incentives for students to do well on the whole.
However, America does have great Universities, as do most countries, but why do they do better? Their incentives to be the best are to be highly accredited professionals and contributors to their subject are a lot higher. Professors make decent money, but This however can make instructors seem distant and too busy to help their students (huge class sizes)
So we are "getting there" but throwing money at a school to not have good education incentives and not giving it to the important people (teachers). Budget isn't a huge concern, but reform in the education system to be more like countries such as Finland and other EU states is what it will end up being about.
On January 30 2009 07:53 Savio wrote: So essentially what you (oneofthem) are saying is that in the long run, we would benefit from subsidizing education more. That may be true, but for the short term (getting out of the current recession, which is what this is all about), I think that you will not see effects from higher education spending. Bush doubled the federal government spending on education and that had no measurable positive effect.
What I say is that we should be clear about what bills the government is passing. If we want to just set up a long term education infrastructure, then lets do it, but don't call that a stimulus bill that will get us out of the current recession. Pass a stimulus bill that makes jobs NOW, and then when things have calmed down, and government revenues are rising again due to economic growth, then lets build the long term infrastructure. Or you could do it earlier, but keep the bills separate so the American people know what they are getting.
It is obvious that with teachers unions with no effect, the lack of choices and incentives for good teachers, the American economy will take forever to come around unless something is done. It all comes down to where the motivation comes from....
Why does America have shitty public schools: Bad incentives for good teachers, bad incentives for schools to get enrollments, and bad incentives for students to do well on the whole.
However, America does have great Universities, as do most countries, but why do they do better? Their incentives to be the best are to be highly accredited professionals and contributors to their subject are a lot higher. Professors make decent money, but This however can make instructors seem distant and too busy to help their students (huge class sizes)
So we are "getting there" but throwing money at a school to not have good education incentives and not giving it to the important people (teachers). Budget isn't a huge concern, but reform in the education system to be more like countries such as Finland and other EU states is what it will end up being about.
I think its as simple as increasing teacher pay and hiring more teachers, something like 50% of teachers quit after their first year because its so hard and they get paid so little. Increase pay to attract and retain quality labor. Paying for the maintenance that is over due would help out alot. And you stimulate the economy as an added bonus.
On January 30 2009 11:08 ToSs.Bag wrote: Savio, this seems very ignorant..... Food stamps (in most states) are given in the form of credit on an EBT card. The only difference from direct deposit cash is you cannot buy non-food items including alcohol or cigarettes. This is an efficient way to moderate an economic slump (recession) from going into a worse trend and engulfing black markets with pure cash.
It is not good for the welfare of economy when people spend their welfare checks on pushing coke and not buying any food. This is incentive for them to eat and get their shit together someday, as opposed to spending all their money on alcohol and worsening the well-being of a state governments people.
All in all though, I don't get your point as far as cheaper to just give cash? I'm rather at a loss there....
Come back to this thread after taking some econ classes. The fact that you can't spend it on anything besides food is the source of the inefficiency. Whether it comes as a stamp or card is irrelevant. It is also provable and not something that can be debated against. There is a mathematical proof and graphical representation. Will look to see if I can find it on the web since I can't show you on a blackboard....
Bah, its best found in textbooks. Anyway, I already explained it in an earlier post. Reciepients of food stamps do not value a food stamp dollar at the value of a regular dollar. They value it at something less like 75-85 cents. Thus, the government spends 400 dollars for a family providing food stamps that that family values at $300-$340. If the government had taken that $400 and just given it to the family, they would have recienved $400 worth of benefit. Thus under the foot stamp program, 60-100 dollars of benefit are "lost" to innefficiency. Multiply that by the millions that are on food stamps, and multiply that by 12 to get to total loss in 1 years time.
On January 30 2009 07:53 Savio wrote: So essentially what you (oneofthem) are saying is that in the long run, we would benefit from subsidizing education more. That may be true, but for the short term (getting out of the current recession, which is what this is all about), I think that you will not see effects from higher education spending. Bush doubled the federal government spending on education and that had no measurable positive effect.
What I say is that we should be clear about what bills the government is passing. If we want to just set up a long term education infrastructure, then lets do it, but don't call that a stimulus bill that will get us out of the current recession. Pass a stimulus bill that makes jobs NOW, and then when things have calmed down, and government revenues are rising again due to economic growth, then lets build the long term infrastructure. Or you could do it earlier, but keep the bills separate so the American people know what they are getting.
It is obvious that with teachers unions with no effect, the lack of choices and incentives for good teachers, the American economy will take forever to come around unless something is done. It all comes down to where the motivation comes from....
Why does America have shitty public schools: Bad incentives for good teachers, bad incentives for schools to get enrollments, and bad incentives for students to do well on the whole.
However, America does have great Universities, as do most countries, but why do they do better? Their incentives to be the best are to be highly accredited professionals and contributors to their subject are a lot higher. Professors make decent money, but This however can make instructors seem distant and too busy to help their students (huge class sizes)
So we are "getting there" but throwing money at a school to not have good education incentives and not giving it to the important people (teachers). Budget isn't a huge concern, but reform in the education system to be more like countries such as Finland and other EU states is what it will end up being about.
Teachers Unions are to blame for the lack of incentives to teach well. Think about what the "job" of a union is....It is to "protect" its members right? Unions inherently seek to:
1. Raise salaries of current teachers 2. Inhibit the firing of union members 3. Lighten the teaching load or burden (make life easier) 4. Raise members benefits
But because of #1, schools can't afford to hire more teachers so the teacher/student ratio rises. Because of #2, bad teachers can not be easily replaced by better teachers. Because of #3, school systems (who already can't fire bad teachers), lose the ability to pressure teachers into improving.
So because of our unions we end up with lower quality, expensive teachers...and not enough of them.
American universities do better than our grade schools because GUESS WHAT...there are no unions messing up the system! That is also one reason why foreign car companies are doing better than our "big 3".
Unions were needed once, but their time is over and they are only holding our car companies back, and our education.
My biggest fear from this new democratic administration is that they will pass laws trying to strengthen unions. Its good politics for them since unions are democratic powerhouses, but it is bad for America.
now that i've read that wsj article, it is clear that wsj people dont take subways to work. along with the usual anti-labor rhetoric, we have gems like "Most of the rest of this project spending will go to such things as renewable energy funding ($8 billion) or mass transit ($6 billion) that have a low or negative return on investment." yea, low return is precisely why they are underinvested privately.
of course, with interest groups you will have political budgets. surely republicans are guilty of this too. at least democrat interest groups are more tolerable. i'd rather see the nea getting money than ethanol. however, the nea does associate with damn hippie artists. those unproductive leeches!
it is also rather surprising that wsj does a tricky job of only talking about growth stimulus, rather than simple economic activity. surely aid to the poor would be spent quickly. if anything they need to complain that this is not enough aid. the lower middle class goes through money rather quickly, and banks are doing it rather reluctantly right now.
teacher unions are not driving potential teachers away. without them you'd have less people wanting to become teachers, especially in bad areas, unless you increase teachers' pay drastically. but i do not see why teacher unions are impeding that particular effort.
tying performance incentive into pay for teachers is rather tricky. a messed up attempt at universalised performance indicator would not only fail to deliver promised accountability but also discourage teachers, especially in schools with far more problems than what goes on in the classroom. if anything, put more focus on early childhood education.
Why does everybody INSIST that the poor should be getting all the money? Growth cannot be created by giving the poor money. Even for all the liberals out there, you should know about Marx's basic tenet of surplus value. It's the additional profit from spending on big screen tvs, cars, etc that creates growth because there is profit to be made. Extra cash = extra investment = growth. Poor people don't have the extra cash to spend on these high profit overpriced items, so that will create no growth. Almost all cash that gets into the hands of the poor will be spent on day to day sustenance like rent, food, bills, etc. These markets are already saturated with low profit margins and thus will not create growth. Of course, in classical theory, this is only short term and long term growth can only be created from new technologies/ideas. But even then, the impoverished themselves do not contribute that much to new technologies and ideas.
I know that I'm going to get flamed for posting this, but I also know that social justice comes at the cost of growth. That is not to say that I don't think we should sacrifice some growth for social justice, but the only question is to what degree.
how about negative growth, as in people getting laid off because their employers are not selling as much stuff. do you think increasing spending would at least alleviate some of that.
Right now is an excellent time to invest primarily because the value of many assets are artificially depressed. Speculation is a real factor, but I highly doubt that the speculation of the last several years was enough to drive the stock market up 75% over its real value.
I'm not going to argue in a situation where correct forecasts are self-rewarding. If you think that US stocks are now undervalued, you would take appropriate action, although the very DOW projections for 2009's dividend yields http://www.indexarb.com/dividendYieldSorteddj.html suggest that prices are still too high, and above equilibrium.
Nonetheless, your private actions are one thing, and public action is another. Your argument that government should step in and replace the private investor in the market, apart from all attendant hazards legal, economic and moral, assumes that the government can more rationally determine the value of assets than public. It's therefore all the more ironic that someone who begins a thread with the hope of stimulating public awareness, advocates its supersession when they fail to reach the same conclusions.
P.S. The projected average dividend yields in a nutshell for all three major US indices.
You've completely ignored my argument that the private sector is equally capable of inaccurately estimating the value of an asset in times of recession. What makes you believe otherwise? Would you similar argue that the Great Depression was simply a giant price correction?
I really wonder what will happen in the United States, a country full of guns. They will probably be traded for food.
Here is some interesting information about cyclical observations in world economies. This guy says he can predict major world events, starting from hundreds of years ago, because they always come in very predictable cycles. His theory is called the Economic Confidence model, and it's main idea is that waves combine in a cyclical fashion to regularly produce the type of crash we are now seeing. It isn't based off anything except observations, and I really wish he could put it into a more clear mathematical model because its pretty confusing to try to understand some of the stuff he says.
Of course it flies in the face of most of what is posted in this thread, but hell, its not like the financial establishment predicted the current crisis would happen.
(it looks like it was typed on a typewriter because it was written in prison.....yea you may say the credibility immediately breaks down, but who spends 7 years in prison for contempt of court? Then after pleading guilty spends another 5 years for conspiracy to commit fraud?)
My main problem with the theory is that I'm not educated enough to determine if the events he chooses truly are significant "turning points" which are more significant then other events not listed. Good read though.
On January 30 2009 07:53 Savio wrote: So essentially what you (oneofthem) are saying is that in the long run, we would benefit from subsidizing education more. That may be true, but for the short term (getting out of the current recession, which is what this is all about), I think that you will not see effects from higher education spending. Bush doubled the federal government spending on education and that had no measurable positive effect.
What I say is that we should be clear about what bills the government is passing. If we want to just set up a long term education infrastructure, then lets do it, but don't call that a stimulus bill that will get us out of the current recession. Pass a stimulus bill that makes jobs NOW, and then when things have calmed down, and government revenues are rising again due to economic growth, then lets build the long term infrastructure. Or you could do it earlier, but keep the bills separate so the American people know what they are getting.
It is obvious that with teachers unions with no effect, the lack of choices and incentives for good teachers, the American economy will take forever to come around unless something is done. It all comes down to where the motivation comes from....
Why does America have shitty public schools: Bad incentives for good teachers, bad incentives for schools to get enrollments, and bad incentives for students to do well on the whole.
However, America does have great Universities, as do most countries, but why do they do better? Their incentives to be the best are to be highly accredited professionals and contributors to their subject are a lot higher. Professors make decent money, but This however can make instructors seem distant and too busy to help their students (huge class sizes)
So we are "getting there" but throwing money at a school to not have good education incentives and not giving it to the important people (teachers). Budget isn't a huge concern, but reform in the education system to be more like countries such as Finland and other EU states is what it will end up being about.
Teachers Unions are to blame for the lack of incentives to teach well. Think about what the "job" of a union is....It is to "protect" its members right? Unions inherently seek to:
1. Raise salaries of current teachers 2. Inhibit the firing of union members 3. Lighten the teaching load or burden (make life easier) 4. Raise members benefits
But because of #1, schools can't afford to hire more teachers so the teacher/student ratio rises. Because of #2, bad teachers can not be easily replaced by better teachers. Because of #3, school systems (who already can't fire bad teachers), lose the ability to pressure teachers into improving.
So because of our unions we end up with lower quality, expensive teachers...and not enough of them.
American universities do better than our grade schools because GUESS WHAT...there are no unions messing up the system! That is also one reason why foreign car companies are doing better than our "big 3".
Unions were needed once, but their time is over and they are only holding our car companies back, and our education.
My biggest fear from this new democratic administration is that they will pass laws trying to strengthen unions. Its good politics for them since unions are democratic powerhouses, but it is bad for America.
So its because of the unions schools are in a bad shape? got nothing to do with the Republicans dramatically reducing education spending then I suppose.
On January 30 2009 12:56 gchan wrote: Wow this thread grows really rapidly.
Why does everybody INSIST that the poor should be getting all the money? Growth cannot be created by giving the poor money.
You are missing the point. It is not that we should give all the money to the poor, nor should we give it all to the rich but there must be balance. The impact of spending from a poor person is different compared to the spending of the middle class or the rich. The rich provide investment but investment is very different to demand and impacts on the economy in different ways, you need both. Will I invest in a factory if there is no demand for the goods I will be producing?
It is the masses that create demand. Income and wealth inequality has gotten really quite bad over recent decades resulting in deficiencies in demand as the poor and middle class people no longer have as much money to spend. There is a significant lack of productive investment out of the private sector today but this is not because the rich don't have enough money (obviously). Bush gave the mega rich over $300 Billion in extra tax cuts per year and did it help the economy at all?
You must give more money to the poor to bring things back into balance.
Edit: Put simply growth can be created by giving the poor money.
On January 30 2009 07:53 Savio wrote: So essentially what you (oneofthem) are saying is that in the long run, we would benefit from subsidizing education more. That may be true, but for the short term (getting out of the current recession, which is what this is all about), I think that you will not see effects from higher education spending. Bush doubled the federal government spending on education and that had no measurable positive effect.
What I say is that we should be clear about what bills the government is passing. If we want to just set up a long term education infrastructure, then lets do it, but don't call that a stimulus bill that will get us out of the current recession. Pass a stimulus bill that makes jobs NOW, and then when things have calmed down, and government revenues are rising again due to economic growth, then lets build the long term infrastructure. Or you could do it earlier, but keep the bills separate so the American people know what they are getting.
It is obvious that with teachers unions with no effect, the lack of choices and incentives for good teachers, the American economy will take forever to come around unless something is done. It all comes down to where the motivation comes from....
Why does America have shitty public schools: Bad incentives for good teachers, bad incentives for schools to get enrollments, and bad incentives for students to do well on the whole.
However, America does have great Universities, as do most countries, but why do they do better? Their incentives to be the best are to be highly accredited professionals and contributors to their subject are a lot higher. Professors make decent money, but This however can make instructors seem distant and too busy to help their students (huge class sizes)
So we are "getting there" but throwing money at a school to not have good education incentives and not giving it to the important people (teachers). Budget isn't a huge concern, but reform in the education system to be more like countries such as Finland and other EU states is what it will end up being about.
Teachers Unions are to blame for the lack of incentives to teach well. Think about what the "job" of a union is....It is to "protect" its members right? Unions inherently seek to:
1. Raise salaries of current teachers 2. Inhibit the firing of union members 3. Lighten the teaching load or burden (make life easier) 4. Raise members benefits
But because of #1, schools can't afford to hire more teachers so the teacher/student ratio rises. Because of #2, bad teachers can not be easily replaced by better teachers. Because of #3, school systems (who already can't fire bad teachers), lose the ability to pressure teachers into improving.
So because of our unions we end up with lower quality, expensive teachers...and not enough of them.
American universities do better than our grade schools because GUESS WHAT...there are no unions messing up the system! That is also one reason why foreign car companies are doing better than our "big 3".
Unions were needed once, but their time is over and they are only holding our car companies back, and our education.
My biggest fear from this new democratic administration is that they will pass laws trying to strengthen unions. Its good politics for them since unions are democratic powerhouses, but it is bad for America.
So its because of the unions schools are in a bad shape? got nothing to do with the Republicans dramatically reducing education spending then I suppose.
Dude, what are you even talking about? I already stated in this thread that Bush doubled federal spending on education. He increased it more than Clinton did. So what are you even talking about?
Its like you have these preconceived ideas in your head and cling to them regardless of what you learn. See my quote...
EDIT: Also, Bush's education spending increase is something that I disagree with him on. He doubles federal spending and there was no measurable benefit as far as I am aware. It just goes to show that throwing money at schools does not make them better. Private schools on the other hand have always outperformed public schools...but then again....private schools generally aren't unionized. That's a big difference, just like the difference between American car manufacturers and Japanese ones operating in the US.
If the government had taken that $400 and just given it to the family, they would have recienved $400 worth of benefit.
Or 400$ worth of booze and drugs. Food stamps aren't designed to provide maximum economic stimulus, they're designed to put food on the table and keep kids from starving, which in turn makes them less likely to kneecap people for their daily bread, which in turn makes them less likely to suck up a gigantic wad of tax dollars sitting in prison.
If the government had taken that $400 and just given it to the family, they would have recienved $400 worth of benefit.
Or 400$ worth of booze and drugs. Food stamps aren't designed to provide maximum economic stimulus, they're designed to put food on the table and keep kids from starving, which in turn makes them less likely to kneecap people for their daily bread, which in turn makes them less likely to suck up a gigantic wad of tax dollars sitting in prison.
The liberal assumption is always that government knows better than you what you need. It is also that government loves your children more than you do and will take better care of them.
Under these assumptions, policies like this are created.
Also, the idea the food stamp users are generally crack heads or drunks is simply false.
You've completely ignored my argument that the private sector is equally capable of inaccurately estimating the value of an asset in times of recession.
If the private sector and government are equally incapable of gauging value, then why give private money to the government to spend? Government speculation has all the disadvantages of private speculation with the added disadvantages of:
-Lack of direct incentive or risk -Power to tax their capital and dump losses and debts on taxpayers -Power to inflate their way out of any losses -Power, through rebates and vouchers, to favour certain sectors of the economy -Power to outcompete rivals through loss-making subsidization -Power to enact legislation and regulation to restrict market entry, fair competition, and establish monopolies -Power to disregard their own regulations -Non-accountability for waste, corruption or fraud -Tendency to paint unrealistically optimistic scenarios to maintain popularity -Tendency to be influenced by lobbyists
Therefore if you argue that the government should buy derivatives and assets, you ought to at the very least successfully make the case that the government can estimate market value better than the market, OR that the market really is underpriced.
Or if you're speaking from an abstract philosophical perspective, I would agree that the market is psychologically-driven, and often bad decisions are made on the basis of faulty information or judgement, but the Federal Reserve and Government have been in the practice of providing the market with faulty information for a long time. The lowering of interest rates during recessions is an act of providing the market with false information. The purpose of manipulating interest rates is to attempt to force the market to behave irrationally by providing excess liquidity in periods when they need to contract. They are the cause of bubbles and upward speculation. If the Fed raised interest rates to 30%, you may have a case there. As is it, the government is making loans free and people are still hesitant to lend.
You've completely ignored my argument that the private sector is equally capable of inaccurately estimating the value of an asset in times of recession.
If the private sector and government are equally incapable of gauging value, then why give private money to the government to spend? Government speculation has all the disadvantages of private speculation with the added disadvantages of:
-Lack of direct incentive or risk -Power to tax their capital and dump losses and debts on taxpayers -Power to inflate their way out of any losses -Power, through rebates and vouchers, to favour certain sectors of the economy -Power to outcompete rivals through loss-making subsidization -Power to enact legislation and regulation to restrict market entry, fair competition, and establish monopolies -Power to disregard their own regulations -Non-accountability for waste, corruption or fraud -Tendency to paint unrealistically optimistic scenarios to maintain popularity -Tendency to be influenced by lobbyists
Therefore if you argue that the government should buy derivatives and assets, you ought to at the very least successfully make the case that the government can estimate market value better than the market, OR that the market really is underpriced.
Or if you're speaking from an abstract philosophical perspective, I would agree that the market is psychologically-driven, and often bad decisions are made on the basis of faulty information or judgement, but the Federal Reserve and Government have been in the practice of providing the market with faulty information for a long time. The lowering of interest rates during recessions is an act of providing the market with false information. The purpose of manipulating interest rates is to attempt to force the market to behave irrationally by providing excess liquidity in periods when they need to contract. They are the cause of bubbles and upward speculation. If the Fed raised interest rates to 30%, you may have a case there. As is it, the government is making loans free and people are still hesitant to lend.
What I am saying is that a recessionary environment instills a new logic whereby the private sector determines a new equilibrium altogether. For prices to correct themselves, deflation must kick in. But deflation discourages spending, so demand falls, lowering the price still further. The expectation of lower prices ensures that the equilibrium price in a recession won't be the same as an economy at full production. The only way out of such a spiral is a boost to demand so that these expectations can be broken.
Anyway, I think it's a little inane to argue just on theory and ignore the empirical evidence, so I'll repeat the fact that since the inception of the fed and monetary policy, the severity and duration of recessions in the US have been considerably weaker. Refer to the chart posted earlier of GDP growth during the past century, and you get the gist. If the free market were so accurate, why has government intervention considerably accelerated the rate of growth? Or are those decades of growth based solely on speculation? Your argument is only true if we were to ignore the short run costs of volatility and other corrective forces.
It's debateable whether the economy is done correcting itself currently. In fact, you've made the (probably true) argument that PE ratios are still too high. And the housing market continues to plunge. I don't know. But contrary to your assertion that government, or rather, Fed intervention which is politically independent, is inaccurate, there is plenty of empirical evidence that monetary policy has helped us out of recessions in the past.
Anyway, I think it's a little inane to argue just on theory and ignore the empirical evidence, so I'll repeat the fact that since the inception of the fed and monetary policy, the severity and duration of recessions in the US have been considerably weaker. Refer to the chart posted earlier of GDP growth during the past century, and you get the gist. If the free market were so accurate, why has government intervention considerably accelerated the rate of growth?
Empirical evidence would be taking the living standards of a middle-class American family in the 1950s and comparing it with today. The cardinal question is: are American households that much wealthier than they were fifty years ago? By looking at GDP per capita numbers, one would be under the impression that the living standard of the average American has been raised twenty-five fold since 1950, and one hundred and sixty-fold since 1908. Empirically, this would be nonsense.
The GDP growth you represented depends on 1) Government accurately calculating inflation, which is inherently problematic even if we gave them the benefit of the doubt. The US government, for example, factors in qualitative deflators when calculating its rate of inflation, whereas the German government does not, hence giving Germany a higher figure vis-a-vis the US every year. The basket of goods against which inflation is measured is arbitrarily chosen by the government, and is modified when necessary to produce target numbers 2) GDP does not calculate the productive value of an economy. If an American lives an unhealthy lifestyle, and smokes and eats in McDonalds every year, his spending in those industries are added to the GDP, and then when he is treated for heart disease and lung cancer, those are again added to the GDP. If Americans spend a trillion dollars on military spending, this is added to the GDP despite it having zero or a negative effect on the living standards of the American people. 3) GDP figures can bubble like the present US GDP based on the US dollar, a currency which is overvalued in the marketplace. If the USD falls 50% in value, the US's GDP falls in terms of every other currency, and every other country's GDP rises in proportion to the USA's. Hence nearly every country recorded vast gains in their GDPs measured in USD in the year 2008 despite many having no growth.
Therefore let's take the reports of the US' growth valued in dollars with a grain of salt.
Let's take a history the US's GDP valued in Gold as a point of comparison:
Capital gains made up 63 percent of the richest 400 Americans’ adjusted gross income in 2006, or a combined $66.1 billion, according to the data. In all, the 400 wealthiest Americans reported a combined $105.3 billion of adjusted gross income in 2006, the most recent year for which the IRS has data.
The richest 1% of Americans earned $1.3 trillion in 2004, an amount greater than the total national income of Canada. Further the top 1% of Americans has 33% of the country's wealth.
If the government had taken that $400 and just given it to the family, they would have recienved $400 worth of benefit.
Or 400$ worth of booze and drugs. Food stamps aren't designed to provide maximum economic stimulus, they're designed to put food on the table and keep kids from starving, which in turn makes them less likely to kneecap people for their daily bread, which in turn makes them less likely to suck up a gigantic wad of tax dollars sitting in prison.
The liberal assumption is always that government knows better than you what you need. It is also that government loves your children more than you do and will take better care of them.
Under these assumptions, policies like this are created.
Also, the idea the food stamp users are generally crack heads or drunks is simply false.
Anyway, I think it's a little inane to argue just on theory and ignore the empirical evidence, so I'll repeat the fact that since the inception of the fed and monetary policy, the severity and duration of recessions in the US have been considerably weaker. Refer to the chart posted earlier of GDP growth during the past century, and you get the gist. If the free market were so accurate, why has government intervention considerably accelerated the rate of growth?
Empirical evidence would be taking the living standards of a middle-class American family in the 1950s and comparing it with today. The cardinal question is: are American households that much wealthier than they were fifty years ago? By looking at GDP per capita numbers, one would be under the impression that the living standard of the average American has been raised twenty-five fold since 1950, and one hundred and sixty-fold since 1908. Empirically, this would be nonsense.
The GDP growth you represented depends on 1) Government accurately calculating inflation, which is inherently problematic even if we gave them the benefit of the doubt. The US government, for example, factors in qualitative deflators when calculating its rate of inflation, whereas the German government does not, hence giving Germany a higher figure vis-a-vis the US every year. The basket of goods against which inflation is measured is arbitrarily chosen by the government, and is modified when necessary to produce target numbers 2) GDP does not calculate the productive value of an economy. If an American lives an unhealthy lifestyle, and smokes and eats in McDonalds every year, his spending in those industries are added to the GDP, and then when he is treated for heart disease and lung cancer, those are again added to the GDP. If Americans spend a trillion dollars on military spending, this is added to the GDP despite it having zero or a negative effect on the living standards of the American people. 3) GDP figures can bubble like the present US GDP based on the US dollar, a currency which is overvalued in the marketplace. If the USD falls 50% in value, the US's GDP falls in terms of every other currency, and every other country's GDP rises in proportion to the USA's. Hence nearly every country recorded vast gains in their GDPs measured in USD in the year 2008 despite many having no growth.
Therefore let's take the reports of the US' growth valued in dollars with a grain of salt.
Let's take a history the US's GDP valued in Gold as a point of comparison:
US average wages valued in Gold:
US Home prices valued in Gold:
Crude Oil prices valued in Gold:
The historical value of the DOW valued in Gold:
Granted, I'm just taking potshots now, but how exactly do you go about calculating GDP in the weight of gold if you don't use the dollar value to begin with? Even if your GDP graph were adjusted for changes in the price of gold, it's telling me that GDP has been halved during the last decade. That would require reductions of about 5% a year. Yet no other indicator reflects this downturn. Moreover, the climb in GDP correlates with a period where the Fed Funds rate was at a steady 5%.
If the government had taken that $400 and just given it to the family, they would have recienved $400 worth of benefit.
Or 400$ worth of booze and drugs. Food stamps aren't designed to provide maximum economic stimulus, they're designed to put food on the table and keep kids from starving, which in turn makes them less likely to kneecap people for their daily bread, which in turn makes them less likely to suck up a gigantic wad of tax dollars sitting in prison.
The liberal assumption is always that government knows better than you what you need. It is also that government loves your children more than you do and will take better care of them.
Under these assumptions, policies like this are created.
Also, the idea the food stamp users are generally crack heads or drunks is simply false.
If the government had taken that $400 and just given it to the family, they would have recienved $400 worth of benefit.
Or 400$ worth of booze and drugs. Food stamps aren't designed to provide maximum economic stimulus, they're designed to put food on the table and keep kids from starving, which in turn makes them less likely to kneecap people for their daily bread, which in turn makes them less likely to suck up a gigantic wad of tax dollars sitting in prison.
The liberal assumption is always that government knows better than you what you need. It is also that government loves your children more than you do and will take better care of them.
Under these assumptions, policies like this are created.
Also, the idea the food stamp users are generally crack heads or drunks is simply false.
What? For the most part, the government tries to operate on the assumption that there are problems which the market cannot fix or for which there is no market, outliers, and tries to address them. There is no market to help poor people. There is no market to develop medicine for rare diseases instead of cancer. Up until recently, and arguably even still, there is no market to develop cleaner emissions. There was no market for a national highway system or the internet until they were actually developed.
If you took purely an economist's view, there would be no development of any sort of AIDS treatment in the 1980s because it was so costly and because breast cancer was far more widespread and was far more profitable. Instead, we took the religious right's view and decided there would be little development of any sort of AIDS treatment in the 1980s because faggots are sodomites and are going to hell. Isn't that right, Mrs. Reagan?
On January 31 2009 03:21 Savio wrote: The liberal assumption is always that government knows better than you what you need. It is also that government loves your children more than you do and will take better care of them.
The conservative assumption is always that this is the liberal assumption.
haha actually what Savio described as "liberal assumption" is the exact opposite of what we call "liberal" here in France :D Must be language barrier...
Japan's manufacturing industry across the boards is getting RAPED right now b/c of (a) low demand, but moreso b/c of the federal bank's complacency leading to the ridiculous exchange rate.
The Yen is so strong right now that anything pertaining to exports is doing horrendously. Facilities is 70% down, Semiconductors are 50% down, and automobiles are 40% down.
Unless the fed over there takes action and gets the Yen:Dollar rate to 100Yen : 1 dollar or so, that country is going back into the shitter.
If the government had taken that $400 and just given it to the family, they would have recienved $400 worth of benefit.
Or 400$ worth of booze and drugs. Food stamps aren't designed to provide maximum economic stimulus, they're designed to put food on the table and keep kids from starving, which in turn makes them less likely to kneecap people for their daily bread, which in turn makes them less likely to suck up a gigantic wad of tax dollars sitting in prison.
The liberal assumption is always that government knows better than you what you need. It is also that government loves your children more than you do and will take better care of them.
Under these assumptions, policies like this are created.
Also, the idea the food stamp users are generally crack heads or drunks is simply false.
hahahhahaha are you serious
No. Essentially what I am saying is the liberals are more ok with increasing taxes and spending which doesn't mean that overall spending changes by much, it just means that who is spending the money is different. With big government, government chooses how your money gets spent, and in small government, that is less so.
I was also saying that the assumption that was put forward--that we should give people food stamps instead of money since you can't control what they spend the money on--is more of a liberal idea. As is the idea that you should just provide them with health care instead of money since they might not spend that money on what you want them to spend it on (health care).
If the government had taken that $400 and just given it to the family, they would have recienved $400 worth of benefit.
Or 400$ worth of booze and drugs. Food stamps aren't designed to provide maximum economic stimulus, they're designed to put food on the table and keep kids from starving, which in turn makes them less likely to kneecap people for their daily bread, which in turn makes them less likely to suck up a gigantic wad of tax dollars sitting in prison.
The liberal assumption is always that government knows better than you what you need. It is also that government loves your children more than you do and will take better care of them.
Under these assumptions, policies like this are created.
Also, the idea the food stamp users are generally crack heads or drunks is simply false.
What? For the most part, the government tries to operate on the assumption that there are problems which the market cannot fix or for which there is no market, outliers, and tries to address them. There is no market to help poor people. There is no market to develop medicine for rare diseases instead of cancer. Up until recently, and arguably even still, there is no market to develop cleaner emissions. There was no market for a national highway system or the internet until they were actually developed.
If you took purely an economist's view, there would be no development of any sort of AIDS treatment in the 1980s because it was so costly and because breast cancer was far more widespread and was far more profitable. Instead, we took the religious right's view and decided there would be little development of any sort of AIDS treatment in the 1980s because faggots are sodomites and are going to hell. Isn't that right, Mrs. Reagan?
You are wrong about the "economists view". When there is no functioning market (as in some of the cases you listed), or if there is failure of the market (negative externalities like pollution or monopoly), then by the economists view, the government should step in. But if you were reading the whole exchange I was having when I made this comment, you would know that we were talking about food. There definitely IS a market for food.
My argument is that we should give poor people money rather than food stamps because it is more efficient (read my posts explaining the proof for this). Food stamps are an inherently inefficient program. I was not arguing that we shouldn't help the poor, but that we should give them the money that it costs to provide food stamps so there is not lost benefit.
My comment was in response to someone who said we shouldn't give them money because they might spend it on things that we (the government) don't want them to spend it on. I said that was a liberal mindset.
Many poor people would buy garbage food if you gave them money or even worse save this money to buy alcohol or drugs. That would make even more fat/drunk/drug addicts people. That why food stamps might not be the worse solution.
you realize that these things are easier to pass under the auspice of specific needs rather than direct transfers right. funny seeing a republican arguing for such a silly thing like that
On January 30 2009 07:53 Savio wrote: So essentially what you (oneofthem) are saying is that in the long run, we would benefit from subsidizing education more. That may be true, but for the short term (getting out of the current recession, which is what this is all about), I think that you will not see effects from higher education spending. Bush doubled the federal government spending on education and that had no measurable positive effect.
What I say is that we should be clear about what bills the government is passing. If we want to just set up a long term education infrastructure, then lets do it, but don't call that a stimulus bill that will get us out of the current recession. Pass a stimulus bill that makes jobs NOW, and then when things have calmed down, and government revenues are rising again due to economic growth, then lets build the long term infrastructure. Or you could do it earlier, but keep the bills separate so the American people know what they are getting.
It is obvious that with teachers unions with no effect, the lack of choices and incentives for good teachers, the American economy will take forever to come around unless something is done. It all comes down to where the motivation comes from....
Why does America have shitty public schools: Bad incentives for good teachers, bad incentives for schools to get enrollments, and bad incentives for students to do well on the whole.
However, America does have great Universities, as do most countries, but why do they do better? Their incentives to be the best are to be highly accredited professionals and contributors to their subject are a lot higher. Professors make decent money, but This however can make instructors seem distant and too busy to help their students (huge class sizes)
So we are "getting there" but throwing money at a school to not have good education incentives and not giving it to the important people (teachers). Budget isn't a huge concern, but reform in the education system to be more like countries such as Finland and other EU states is what it will end up being about.
Teachers Unions are to blame for the lack of incentives to teach well. Think about what the "job" of a union is....It is to "protect" its members right? Unions inherently seek to:
1. Raise salaries of current teachers 2. Inhibit the firing of union members 3. Lighten the teaching load or burden (make life easier) 4. Raise members benefits
But because of #1, schools can't afford to hire more teachers so the teacher/student ratio rises. Because of #2, bad teachers can not be easily replaced by better teachers. Because of #3, school systems (who already can't fire bad teachers), lose the ability to pressure teachers into improving.
So because of our unions we end up with lower quality, expensive teachers...and not enough of them.
American universities do better than our grade schools because GUESS WHAT...there are no unions messing up the system! That is also one reason why foreign car companies are doing better than our "big 3".
Unions were needed once, but their time is over and they are only holding our car companies back, and our education.
My biggest fear from this new democratic administration is that they will pass laws trying to strengthen unions. Its good politics for them since unions are democratic powerhouses, but it is bad for America.
So its because of the unions schools are in a bad shape? got nothing to do with the Republicans dramatically reducing education spending then I suppose.
Dude, what are you even talking about? I already stated in this thread that Bush doubled federal spending on education. He increased it more than Clinton did. So what are you even talking about?
Its like you have these preconceived ideas in your head and cling to them regardless of what you learn. See my quote...
EDIT: Also, Bush's education spending increase is something that I disagree with him on. He doubles federal spending and there was no measurable benefit as far as I am aware. It just goes to show that throwing money at schools does not make them better. Private schools on the other hand have always outperformed public schools...but then again....private schools generally aren't unionized. That's a big difference, just like the difference between American car manufacturers and Japanese ones operating in the US.
This is something people do all the time to hide the facts, the fact that people use nominal rather than real highlights distorts statistics, it is a simple case of missleading statistics to further Republican objectives whilst they cut real education spending where it was needed they boosted it where it was not then claimed how good they were.
What you need to recognise that the defining factor about whether increased spending will work is where you put it, Bush poured money into upper class universities, there are Unis in America earning around a billion dollars plus in revenue today which in its own right is not a problem but it becomes one when people like you say that because Bush gave rich universities billions that means that we should not give run down public schools more money. I find it confusing how every one in the world seem to be much more keenly aware of the real problems in America but Americans themselves are in a state of denial.
Edit: I am sure Clinton would have actually increased spending to appropriate levels if the Republicans did not control both houses of congress forcibly imposing their incompetent policies upon him.
On January 31 2009 10:43 oneofthem wrote: you realize that these things are easier to pass under the auspice of specific needs rather than direct transfers right. funny seeing a republican arguing for such a silly thing like that
obviously when u consider the retroactive effects of fiscal transfer during periods of political reconciliation, we must act in a postbehavioral fashion so as to contain the sociological externalities of unchecked executive action. unbelievable that a gentleman of your intellectual caliber could forget an elementary detail like that.
On January 31 2009 10:04 thedeadhaji wrote: Japan's manufacturing industry across the boards is getting RAPED right now b/c of (a) low demand, but moreso b/c of the federal bank's complacency leading to the ridiculous exchange rate.
The Yen is so strong right now that anything pertaining to exports is doing horrendously. Facilities is 70% down, Semiconductors are 50% down, and automobiles are 40% down.
Unless the fed over there takes action and gets the Yen:Dollar rate to 100Yen : 1 dollar or so, that country is going back into the shitter.
Japan has an absolutely terrible social security system, when I found that out it became clear to me why Japan has been in such great trouble for so long. They pour money into investment infrastructure and cash handouts to stimulate short term demand but you would think a decade later that they would recognise that short term demand is not going to actually fix their problems at all, they must create permanent incomes for individuals in order to restore the economy, unemployment benefits are a really good way to do this (but you need to do more than just that).
Unfortunately the Japanese seem to miss understand how to actually deal with their problems, they are reducing welfare spending at this very moment. There going to get whats coming to them just like America I suspect....
BTW: The Yen is so bad now because they have been constantly increasing their money supply to restore the economy but have totally failed to actually get that money where it needs to be.
Anyway, I think it's a little inane to argue just on theory and ignore the empirical evidence, so I'll repeat the fact that since the inception of the fed and monetary policy, the severity and duration of recessions in the US have been considerably weaker. Refer to the chart posted earlier of GDP growth during the past century, and you get the gist. If the free market were so accurate, why has government intervention considerably accelerated the rate of growth?
Empirical evidence would be taking the living standards of a middle-class American family in the 1950s and comparing it with today. The cardinal question is: are American households that much wealthier than they were fifty years ago? By looking at GDP per capita numbers, one would be under the impression that the living standard of the average American has been raised twenty-five fold since 1950, and one hundred and sixty-fold since 1908. Empirically, this would be nonsense.
The GDP growth you represented depends on 1) Government accurately calculating inflation, which is inherently problematic even if we gave them the benefit of the doubt. The US government, for example, factors in qualitative deflators when calculating its rate of inflation, whereas the German government does not, hence giving Germany a higher figure vis-a-vis the US every year. The basket of goods against which inflation is measured is arbitrarily chosen by the government, and is modified when necessary to produce target numbers 2) GDP does not calculate the productive value of an economy. If an American lives an unhealthy lifestyle, and smokes and eats in McDonalds every year, his spending in those industries are added to the GDP, and then when he is treated for heart disease and lung cancer, those are again added to the GDP. If Americans spend a trillion dollars on military spending, this is added to the GDP despite it having zero or a negative effect on the living standards of the American people. 3) GDP figures can bubble like the present US GDP based on the US dollar, a currency which is overvalued in the marketplace. If the USD falls 50% in value, the US's GDP falls in terms of every other currency, and every other country's GDP rises in proportion to the USA's. Hence nearly every country recorded vast gains in their GDPs measured in USD in the year 2008 despite many having no growth.
Therefore let's take the reports of the US' growth valued in dollars with a grain of salt.
Let's take a history the US's GDP valued in Gold as a point of comparison:
US average wages valued in Gold:
US Home prices valued in Gold:
Crude Oil prices valued in Gold:
The historical value of the DOW valued in Gold:
You know, taking commodities as a comparison point isn't entirely accurate either. Nowadays, commodities are practically as liquid as cash. Plus, if you take the historical perspective, the way commodities have been treated has also changed drastically in the last hundred years (abolishing of gold standard, OPEC embargoing, etc). The fact of the matter is that it is near impossible to truly accurately gauge the well being of a family in 1900 with a family today, but emperical evidence does tend to provide a basic framework to use.
On January 31 2009 10:32 Boblion wrote: Many poor people would buy garbage food if you gave them money or even worse save this money to buy alcohol or drugs. That would make even more fat/drunk/drug addicts people. That why food stamps might not be the worse solution.
A lot of people who are not on food stamps buy drugs. Should we tax them more and then provide them with their needs?
I am willing to bet that the few who would buy drugs would be less of a problem than the millions losing potential benefit (that is every person on food stamps in every state, every month).
EDIT: besides, what is to keep them from spending the money they would have spent on food and spending THAT on drugs instead? Food stamps do NOT solve that problem. I still have yet to hear a good explanation for why food stamps is better than giving someone straight up money.
Changes in the price of gold do significantly account for the discrepancy between GDP by gold and GDP by the dollar. Naturally, investors sell their gold and move to stocks in a bull market. Between 96 and 2000, when the tech bubble grew, the price of gold fell by 25%. I'm not entirely sure how to do the math here, but if my back of the envelope work is right, that reduces the growth shown in your GDP chart considerably. Compare:
Price of gold (not adjusted for inflation):
Particularly, compare price fluctuations during the 1995-2005 bubble and crash, during which the value of an ounce of gold depreciated from $450-$300 with GDP growth depicted below.
Further, your account doesn't significantly differ from official accounts. The best graph I could find only depicts velocity of money, but the growth rate chart earlier indicates pretty much the same thing, just without the same visual impact. This chart resembles your graph because money supply, like the value of gold, has gained steadily since the crash in 2000. GDP appears to have continuously fallen during official boom times because the price of gold was gaining at the same time. (I am not denying that the growth of gold is not itself an indicator of a bubble, but it suggests the severity is not so strong as you suggest.)
Finally, Moltke's GDP-to-gold graphs don't cover the entire 20th century, which kind of defeats the purpose of posting the graph in the first place, which I assume is to make the point that volatility has only increased since we started messing with the money supply. My analysis above indicates that if there is any excess volatility according to your data, it can be accounted for largely by fluctuations in the price of gold. And do you really think the price of an arbitrary commodity is a better indicator than official US data? The whole point of compiling that kind of information is because there are no sufficiently accurate natural indicators.
I also don't understand the point of posting dozens of graphs describing bubbles we already knew existed using the dollar. If the point was to impress, it obviously worked on some posters. If you like I could show you the same patterns on oil futures and housing priced in dollars.
Thus, it still stands that even according to the value of gold, growth has been comparatively stable since the Fed kicked in. It's not true that real per capita wealth has remained stagnant. Your argument only makes this appear to be true because it doesn't take into account changes in the price of gold. Granted, you'd also have to take inflation under consideration, but I don't have the data nor the math wizardry to figure that one out. Yet other empirical measures indicate a general growth in per capita wealth: the number of autos owned per household, for example. How do you account for such discrepancies?
Even if per capita wages have remained stagnant, that can be accounted for by downward pressures from global trade, the downward trend of organized labor, and most importantly -- population growth.
Actually, probably another good addition to indicators is to look at the gini coefficient (wealth disparity). Could probably argue that conditions did improve because we slowly converged to a huge middle class throughout the 20th century while simultaneously increasing per capita wealth.
If the government had taken that $400 and just given it to the family, they would have recienved $400 worth of benefit.
Or 400$ worth of booze and drugs. Food stamps aren't designed to provide maximum economic stimulus, they're designed to put food on the table and keep kids from starving, which in turn makes them less likely to kneecap people for their daily bread, which in turn makes them less likely to suck up a gigantic wad of tax dollars sitting in prison.
The liberal assumption is always that government knows better than you what you need. It is also that government loves your children more than you do and will take better care of them.
Under these assumptions, policies like this are created.
Also, the idea the food stamp users are generally crack heads or drunks is simply false.
What? For the most part, the government tries to operate on the assumption that there are problems which the market cannot fix or for which there is no market, outliers, and tries to address them. There is no market to help poor people. There is no market to develop medicine for rare diseases instead of cancer. Up until recently, and arguably even still, there is no market to develop cleaner emissions. There was no market for a national highway system or the internet until they were actually developed.
If you took purely an economist's view, there would be no development of any sort of AIDS treatment in the 1980s because it was so costly and because breast cancer was far more widespread and was far more profitable. Instead, we took the religious right's view and decided there would be little development of any sort of AIDS treatment in the 1980s because faggots are sodomites and are going to hell. Isn't that right, Mrs. Reagan?
You are wrong about the "economists view". When there is no functioning market (as in some of the cases you listed), or if there is failure of the market (negative externalities like pollution or monopoly), then by the economists view, the government should step in. But if you were reading the whole exchange I was having when I made this comment, you would know that we were talking about food. There definitely IS a market for food.
My argument is that we should give poor people money rather than food stamps because it is more efficient (read my posts explaining the proof for this). Food stamps are an inherently inefficient program. I was not arguing that we shouldn't help the poor, but that we should give them the money that it costs to provide food stamps so there is not lost benefit.
My comment was in response to someone who said we shouldn't give them money because they might spend it on things that we (the government) don't want them to spend it on. I said that was a liberal mindset.
You might be right on this. There's obviously the risk that they'll "abuse" the money, but abuse in this case is fairly relative and the same could be said for other things. The USDA did a research report on it and their conclusion was that cash instead of stamp programs cause a downturn in food spending, hurting the agriculture industry. I haven't looked at the report, but it wouldn't surprise me if they inaccurately account for the actual amount of food purchased and I'm not sure how they came to their "15% towards non-food items" figure.
It strikes me that in writing the Welfare Reform Act (1996), the food stamp program was virtually unchanged. It'd be interesting to take a look at the votes on it and see who was trading what.
It actually come out of the House Budget committee from John Kasich (R-OH.) Every act is written by staffers and lobbyists, but it doesn't seem like he has much of a connection to agriculture, since he's mostly about finance. Maybe it was just overlooked or they had serious moral concerns.
1.6 Conclusions 1. Are recipients “distorted?” That is, do they indeed spend more on food than they other-wise would without food stamps? Yes they are. About 7 cents is wasted on the dollar. 2. What share of food stamps are sold onto the black market? And at what price? About 3.5 percent of food stamps are trafficked illegally.• They sell at 50 to 60 percent at face value. 3. Does cash versus in-kind have any effect on nutrition? • Does reduce calories.• Not clear it harms nutrition. (Jibba's note: Within the lecture, he specifies that cash-out vs stamp has no effect on alcohol or cig spending) 4. How costly are cash versus in-kind programs to administer? Cash versus EBT: EBT is about $2.16 more expensive per person per month thansending checks.• Nationally, that’s about $200 million per year.• Retailers also spend about $260 million per year to administer EBT.• Plus the cost of the underground market (harder to assess)
Other considerations:• Political economy: — Food stamps have political support that welfare does not have because they are notviewed as a handout — They have lobbying clout because they are administered by the Department of Agri-culture and the Farm lobby seems to believe that food stamps are ultimately spenton farm products — and so Farmers view it as their subsidy too — Possible that cashing out the program would help recipients in the short run, harmthem in the long run
I'm lazy so I'm going to trust these results from the Whitmore study, Whitmore being an assistant prof at Chicago's public policy school.
On January 31 2009 10:43 oneofthem wrote: you realize that these things are easier to pass under the auspice of specific needs rather than direct transfers right. funny seeing a republican arguing for such a silly thing like that
lol republicans
i agree bro
in all seriousness, this food stamp business does not exclude other welfare. i don't see why it is a big deal.
The liberal assumption is always that government knows better than you what you need. It is also that government loves your children more than you do and will take better care of them.
So in the case of people who have proven themselves to not know what they need due to obvious mismanagement of their finances or having been sucked into an addictive, self destructive lifestyle the government's role should be that of a facilitator? Awesome! Hey, why don't we legalize crack and allow people to buy it and OD, then lay in the streets: the government can't tell them shit, they know what's best for themselves!
Instead of your bullshit all encompassing "its government spending ergo its bad" why don't you actually develop a rational as to why people at risk should get a subsidy towards doing anything they want instead of doing what they need if they are indeed going to get such assistance. What, exactly, does having 400$ specifically allocated to food do for the rest of the recipient's income? Does it mean that they can go out and buy booze with the money that's left over? Sure. Does it mean they can go out and do whatever they want with whatever other cash they have? Sure. But that comes after the family is fed. There's a human element in our market based economy:
1.People buy what they WANT to buy over what they NEED to buy. And 2.People have requisite needs to survive.
Arguing that since 2., the want in 1. must follow encompass what they need is a gigantic fallacy, especially when one person is in control of the income, and others depend on his stream of revenue. Gambling problems, drug addictions, alcohol overuse aren't shadow problems; they spawned a massive movement which in part led to the enfranchisement of women. If you think this scenario is different now for whatever reason, you might want to look into the co-incidence of video lottery terminals (lol gambling crack) with usage after paychecks in poor areas of towns: hint hint, VLTs are concentrated in poor areas of town and their usage massively spikes after payday. Everyone has their foibles, and pretending they don't exist because everyone in society should benefit according to some pseudo-protestant merit at the expense of actually helping people is absolutely disgusting.
If the government had taken that $400 and just given it to the family, they would have recienved $400 worth of benefit.
Or 400$ worth of booze and drugs. Food stamps aren't designed to provide maximum economic stimulus, they're designed to put food on the table and keep kids from starving, which in turn makes them less likely to kneecap people for their daily bread, which in turn makes them less likely to suck up a gigantic wad of tax dollars sitting in prison.
The liberal assumption is always that government knows better than you what you need. It is also that government loves your children more than you do and will take better care of them.
Under these assumptions, policies like this are created.
Also, the idea the food stamp users are generally crack heads or drunks is simply false.
What? For the most part, the government tries to operate on the assumption that there are problems which the market cannot fix or for which there is no market, outliers, and tries to address them. There is no market to help poor people. There is no market to develop medicine for rare diseases instead of cancer. Up until recently, and arguably even still, there is no market to develop cleaner emissions. There was no market for a national highway system or the internet until they were actually developed.
If you took purely an economist's view, there would be no development of any sort of AIDS treatment in the 1980s because it was so costly and because breast cancer was far more widespread and was far more profitable. Instead, we took the religious right's view and decided there would be little development of any sort of AIDS treatment in the 1980s because faggots are sodomites and are going to hell. Isn't that right, Mrs. Reagan?
You are wrong about the "economists view". When there is no functioning market (as in some of the cases you listed), or if there is failure of the market (negative externalities like pollution or monopoly), then by the economists view, the government should step in. But if you were reading the whole exchange I was having when I made this comment, you would know that we were talking about food. There definitely IS a market for food.
My argument is that we should give poor people money rather than food stamps because it is more efficient (read my posts explaining the proof for this). Food stamps are an inherently inefficient program. I was not arguing that we shouldn't help the poor, but that we should give them the money that it costs to provide food stamps so there is not lost benefit.
My comment was in response to someone who said we shouldn't give them money because they might spend it on things that we (the government) don't want them to spend it on. I said that was a liberal mindset.
You might be right on this. There's obviously the risk that they'll "abuse" the money, but abuse in this case is fairly relative and the same could be said for other things. The USDA did a research report on it and their conclusion was that cash instead of stamp programs cause a downturn in food spending, hurting the agriculture industry. I haven't looked at the report, but it wouldn't surprise me if they inaccurately account for the actual amount of food purchased and I'm not sure how they came to their "15% towards non-food items" figure.
It strikes me that in writing the Welfare Reform Act (1996), the food stamp program was virtually unchanged. It'd be interesting to take a look at the votes on it and see who was trading what.
It actually come out of the House Budget committee from John Kasich (R-OH.) Every act is written by staffers and lobbyists, but it doesn't seem like he has much of a connection to agriculture, since he's mostly about finance. Maybe it was just overlooked or they had serious moral concerns.
1.6 Conclusions 1. Are recipients “distorted?” That is, do they indeed spend more on food than they other-wise would without food stamps? Yes they are. About 7 cents is wasted on the dollar. 2. What share of food stamps are sold onto the black market? And at what price? About 3.5 percent of food stamps are trafficked illegally.• They sell at 50 to 60 percent at face value. 3. Does cash versus in-kind have any effect on nutrition? • Does reduce calories.• Not clear it harms nutrition. (Jibba's note: Within the lecture, he specifies that cash-out vs stamp has no effect on alcohol or cig spending) 4. How costly are cash versus in-kind programs to administer? Cash versus EBT: EBT is about $2.16 more expensive per person per month thansending checks.• Nationally, that’s about $200 million per year.• Retailers also spend about $260 million per year to administer EBT.• Plus the cost of the underground market (harder to assess)
Other considerations:• Political economy: — Food stamps have political support that welfare does not have because they are notviewed as a handout — They have lobbying clout because they are administered by the Department of Agri-culture and the Farm lobby seems to believe that food stamps are ultimately spenton farm products — and so Farmers view it as their subsidy too — Possible that cashing out the program would help recipients in the short run, harmthem in the long run
I'm lazy so I'm going to trust these results from the Whitmore study, Whitmore being an assistant prof at Chicago's public policy school.
I never thought about the agriculture industry/lobbying aspect of food stamps before. They of course would be in support of them. All the findings you list sound about right. People value $1 of food stamps at about 50-60 cents (the market price for food stamps).
Also, I am sure that food stamps DO cause people to buy more food than they normally would since it essentially lowers the relative price of food. But one other thought I had was that your professor found that changing from stamps to money led to a reduction in calories. I would say that is a positive aspect of changing. Most Americans suffer from TOO many calories rather than too little and this is even MORE true among the poor and minorities. It seems paradoxical, but poor people take in more calories, and have a much greater relative risk for obesity, metabolic syndrome and diabetes.
Diabetes is seriously out of control in this country. I never realized just how crazy it is until I got deep into med school but it is the plague of our time.
The liberal assumption is always that government knows better than you what you need. It is also that government loves your children more than you do and will take better care of them.
So in the case of people who have proven themselves to not know what they need due to obvious mismanagement of their finances or having been sucked into an addictive, self destructive lifestyle the government's role should be that of a facilitator? Awesome! Hey, why don't we legalize crack and allow people to buy it and OD, then lay in the streets: the government can't tell them shit, they know what's best for themselves!
Instead of your bullshit all encompassing "its government spending ergo its bad" why don't you actually develop a rational as to why people at risk should get a subsidy towards doing anything they want instead of doing what they need if they are indeed going to get such assistance. What, exactly, does having 400$ specifically allocated to food do for the rest of the recipient's income? Does it mean that they can go out and buy booze with the money that's left over? Sure. Does it mean they can go out and do whatever they want with whatever other cash they have? Sure. But that comes after the family is fed. There's a human element in our market based economy:
1.People buy what they WANT to buy over what they NEED to buy. And 2.People have requisite needs to survive.
Arguing that since 2., the want in 1. must follow encompass what they need is a gigantic fallacy, especially when one person is in control of the income, and others depend on his stream of revenue. Gambling problems, drug addictions, alcohol overuse aren't shadow problems; they spawned a massive movement which in part led to the enfranchisement of women. If you think this scenario is different now for whatever reason, you might want to look into the co-incidence of video lottery terminals (lol gambling crack) with usage after paychecks in poor areas of towns: hint hint, VLTs are concentrated in poor areas of town and their usage massively spikes after payday. Everyone has their foibles, and pretending they don't exist because everyone in society should benefit according to some pseudo-protestant merit at the expense of actually helping people is absolutely disgusting.
Just a few things to consider:
1. If people want drugs, they simply sell their food stamps for money, then buy drugs. If someone is actually addicted, then they WILL dupe the system to get what they want. Food stamps do NOT fix this problem. 2. Nearly 10% of the entire US population is on food stamps. The number of these who would tell their family, "screw you, I am buying drugs" is most likely tiny in comparison. But... 3. For all 28 million people on food stamps, there is a LARGE loss to inefficiency every single of month of every single year to every single family.
Neither solution will fix ALL the problems, but one creates a problem for 28 million people every single month while the other is a problem for...maybe 1 million of those? That seems pretty generous.
Also, by your reasoning, we shouldn't provide $$$ payments at any time, whether it be unemployment benefits, or social security, stimulus checks or simple redistributive tax refunds because ANY of those people could go and spend all their money and their check on booze and screw their family over.
The problem with addiction is that you really can't help those people unless you take the children out of the home because the food stamps get sold, the free health care doesn't get used because they don't even take their kids to the doctor. But the fact that these families are in terrible circumstances, doesn't justify screwing over 28 million people and wasting billions of dollars to inefficiency.
Programs like substance treatment programs and social services help families in addiction. Those are the best tools we have as society to deal with these complicated cases.
Although there are several other countries that use our currency. Ecuador for example gave up its own currency and uses dollars. Now a penny in Ecuador is worth quite a bit more. I was there when they changed the bus fares from 18 cents to like 23 cents, and the people were all in an uproar.
Also, by your reasoning, we shouldn't provide $$$ payments at any time, whether it be unemployment benefits, or social security, stimulus checks or simple redistributive tax refunds because ANY of those people could go and spend all their money and their check on booze and screw their family over.
Err, no, there's a difference between someone being between jobs or someone getting a tax refund because he's in a lower bracket compared to someone being in a high risk group who can't pay for food.
The problem with addiction is that you really can't help those people unless you take the children out of the home because the food stamps get sold, the free health care doesn't get used because they don't even take their kids to the doctor. But the fact that these families are in terrible circumstances, doesn't justify screwing over 28 million people and wasting billions of dollars to inefficiency.
Programs like substance treatment programs and social services help families in addiction. Those are the best tools we have as society to deal with these complicated cases.
Why do you assume that solutions can't be cumulative and instead must be mutually exclusive? Additionally there's a concrete barrier which you yourself noted between food stamps being traded for money; food stamps typically aren't valued at full price, which means that a household is better off redeeming their stamps for full value before using other streams of revenue. Nevermind that there's a solid barrier in requiring the trades in the first place.
Neither solution will fix ALL the problems, but one creates a problem for 28 million people every single month while the other is a problem for...maybe 1 million of those? That seems pretty generous.
Rates of self destructive addictive behavior are far higher than 1/28, especially in the high risk groups that actually recieve food stamps.
The only people who have 'problems' with the current system are those that eat far less than they're allocated. If that's the case, and the issue is documented and systemic, the solution isn't to revoke distribution of food stamps; its to reduce the amount distributed.
A lot of people who are not on food stamps buy drugs. Should we tax them more and then provide them with their needs?
Drugs are illegal period.
I am willing to bet that the few who would buy drugs would be less of a problem than the millions losing potential benefit (that is every person on food stamps in every state, every month).
Benefits of what dude ? Your government must help you if you are starving, not if you want a new pair of nike or two packs of beer. Like someone said earlier, food stamp prevent somewhat this kind of behaviour because it is harder to change stamps for real money ( you will probably lose value ) then to buy your stuff than if the government give you some $ ...
EDIT: besides, what is to keep them from spending the money they would have spent on food and spending THAT on drugs instead? Food stamps do NOT solve that problem. I still have yet to hear a good explanation for why food stamps is better than giving someone straight up money.
Although it is heavily discussed some say so:
Finally, while the evidence is mixed as to the effect of the food stamps program on weight gain, studies conducted by the USDA on the receipts of food stamps purchases have found that program participants are more likely to spend their income on fruits, vegetables and healthful foods than low-income consumers who do not participate in the program.
Oh and Savio, more calories doesn't always mean junk food...
But more calories DOES mean higher blood sugar and higher insulin levels which downregulates insulin receptors in fat and muscle as well as adding more fat, both of which increase insulin resistance and predispose to Metabolic Syndrome leading to type II diabetes.
The fact still remains that America suffers much more from too many calories than we do from too little. And poor people and minorities are particularly at risk for the Metabolic Syndrome and diabetes.
EDIT: I think I have said all that can be said regarding food stamps vs. direct monetary transfers. Anything else will just be repetition.
False. SO FALSE. Like, I'm tearing at the eyes at how false that statement is. Maybe if the caloric intake is in unfavorable carbohydrate poor glycemic index foods, yeah, but those would be the aforementioned 'junk foods'.
The fact still remains that America suffers much more from too many calories than we do from too little. And poor people and minorities are particularly at risk for the Metabolic Syndrome and diabetes.
Is that because of food stamps, or because the cheapest foods are largely those which are not organic, have high fructose corn syrup as their source of sweetener (which largely bypasses most of your body's metabolic control mechanisms), and have significant deficits in many essential nutrients?
Is it because poorer people tend to work longer hours for less income, limiting their time for exercize and cooking? Is it because poorer people tend to have far less ability to access proper health care to recieve preventative treatment or diagnosis?
You've linked Poor people, calories, and health issues together, but attempt to submit that there's a causal relationship between 2 that have no causal relationship. Poor argumentation.
Thank you L. I don't really know how exactly the food stamps system works but fruits and vegetables should be a priority especially because junk food is cheaper and poor people are less likely to spend money to buy "good" food. For example there should be more special tickets ( or with higher value ) for "healthy" food.
I wasn't actually trying to explain diabetes pathophysiology. The overall point I was making is that Americans are too FAT, not too skinny and we certainly don't suffer from not being able to get enough calories so increasing the amount of food eaten can't be an argument for food stamps against direct monetary payments.
Perhaps you could argue that food stamps lead to people eating better kinds of food, but you would have to back that up with data and then show that whatever benefit is gained from it is worth losing a few billion dollars of "lost benefit" to inefficiency every year. A few billion that could have been used in some other way to help poor people.
On January 30 2009 07:53 Savio wrote: So essentially what you (oneofthem) are saying is that in the long run, we would benefit from subsidizing education more. That may be true, but for the short term (getting out of the current recession, which is what this is all about), I think that you will not see effects from higher education spending. Bush doubled the federal government spending on education and that had no measurable positive effect.
What I say is that we should be clear about what bills the government is passing. If we want to just set up a long term education infrastructure, then lets do it, but don't call that a stimulus bill that will get us out of the current recession. Pass a stimulus bill that makes jobs NOW, and then when things have calmed down, and government revenues are rising again due to economic growth, then lets build the long term infrastructure. Or you could do it earlier, but keep the bills separate so the American people know what they are getting.
It is obvious that with teachers unions with no effect, the lack of choices and incentives for good teachers, the American economy will take forever to come around unless something is done. It all comes down to where the motivation comes from....
Why does America have shitty public schools: Bad incentives for good teachers, bad incentives for schools to get enrollments, and bad incentives for students to do well on the whole.
However, America does have great Universities, as do most countries, but why do they do better? Their incentives to be the best are to be highly accredited professionals and contributors to their subject are a lot higher. Professors make decent money, but This however can make instructors seem distant and too busy to help their students (huge class sizes)
So we are "getting there" but throwing money at a school to not have good education incentives and not giving it to the important people (teachers). Budget isn't a huge concern, but reform in the education system to be more like countries such as Finland and other EU states is what it will end up being about.
Teachers Unions are to blame for the lack of incentives to teach well. Think about what the "job" of a union is....It is to "protect" its members right? Unions inherently seek to:
1. Raise salaries of current teachers 2. Inhibit the firing of union members 3. Lighten the teaching load or burden (make life easier) 4. Raise members benefits
But because of #1, schools can't afford to hire more teachers so the teacher/student ratio rises. Because of #2, bad teachers can not be easily replaced by better teachers. Because of #3, school systems (who already can't fire bad teachers), lose the ability to pressure teachers into improving.
So because of our unions we end up with lower quality, expensive teachers...and not enough of them.
American universities do better than our grade schools because GUESS WHAT...there are no unions messing up the system! That is also one reason why foreign car companies are doing better than our "big 3".
Unions were needed once, but their time is over and they are only holding our car companies back, and our education.
My biggest fear from this new democratic administration is that they will pass laws trying to strengthen unions. Its good politics for them since unions are democratic powerhouses, but it is bad for America.
I don't think I went into this as much as I should have, but yes, Teachers unions are almost entirely to blame for that, but as far as the money not being there, believe me, its there, it is WAY there.... but money isnt the issue.
You guys do realize that our whole civilization is build upon fossil fuels, right? And the fuels are gradually running out. Which makes the factories and farms more expansive to run. Thus less stuff for every one.
Exactly like how all the minerals are running out in a starcraft game.
The overall point I was making is that Americans are too FAT, not too skinny and we certainly don't suffer from not being able to get enough calories so increasing the amount of food eaten can't be an argument for food stamps against direct monetary payments.
Perhaps you could argue that food stamps lead to people eating better kinds of food, but you would have to back that up with data and then show that whatever benefit is gained from it is worth losing a few billion dollars of "lost benefit" to inefficiency every year. A few billion that could have been used in some other way to help poor people.
You mean like the above mentioned pointer towards the increased spending on healthier foods, for instance? How's about the multiplicative effect of prevention dollars on the massive overspending on health care in the united states?
Additionally, the statement that america is fat, the poor people are americans, thus people qualifying for food stamps are fat americans that should spend less money on food because they eat too much is hilarious. Food quality substantially drops as you drop through the economic classes; the classic example is where malt liquor was cheaper than water, so people got fucking hammered 24/7. The entirety of the health issues surrounding golden rice are also relevant. Next up: Potato famine. Etc etc. Add that to the fact that the least expensive food is now generally the most processed food: whole grain breads cost more than white loafs, organic ingredients cost more than inorganic ingredients, natural fruit costs more than imitation fruit.
I wasn't actually trying to explain diabetes pathophysiology.
You were making a hilariously inaccurate post about something you know incredibly little about, and you got called on it. You were, actually, trying to explain the pathophysiology of increased caloric intake as a method of supporting your assertion that food stamps are bad, but you made the assumption that food stamps lead to higher caloric intake without any causal evidence (circumstantial or not), as well as the assumption that higher caloric intake leads causally to increased rates of disease.
L, you are one of the dumbest people on TL. The whole discussion of weight in America was brought up because people were arguing that providing food stamps was better because then they would not buy drugs with the money but would rather buy food. Therefore they would have more food and less drugs. Those were the points that were being used against me...not the ones I was using like your little child-brain thought.
you made the assumption that food stamps lead to higher caloric intake without any causal evidence
You retard. I said that even if that IS true, our country does NOT need more calories.
I don't think you are a serious poster L. I think you are a child (or youth..whatever), who just wants to have a kick on the internet. There are a lot of people who disagree with me on TL which I like. Some are smart and serious (like Jibba), but a lot are just little kids like you. I'm tired of arguing with children so I am going to focus more on the more serious posters.
On February 04 2009 13:28 Savio wrote: L, you are one of the dumbest people on TL. The whole discussion of weight in America was brought up because people were arguing that providing food stamps was better because then they would not buy drugs with the money but would rather buy food. Therefore they would have more food and less drugs. Those were the points that were being used against me...not the ones I was using like your little child-brain thought.
you made the assumption that food stamps lead to higher caloric intake without any causal evidence
You retard. I said that even if that IS true, our country does NOT need more calories.
I don't think you are a serious poster L. I think you are a child (or youth..whatever), who just wants to have a kick on the internet. There are a lot of people who disagree with me on TL which I like. Some are smart and serious (like Jibba), but a lot are just little kids like you. I'm tired of arguing with children so I am going to focus more on the more serious posters.
Holy crap, I've never seen you actually get annoyed before.
On February 04 2009 13:28 Savio wrote: L, you are one of the dumbest people on TL. The whole discussion of weight in America was brought up because people were arguing that providing food stamps was better because then they would not buy drugs with the money but would rather buy food. Therefore they would have more food and less drugs. Those were the points that were being used against me...not the ones I was using like your little child-brain thought.
you made the assumption that food stamps lead to higher caloric intake without any causal evidence
You retard. I said that even if that IS true, our country does NOT need more calories.
I don't think you are a serious poster L. I think you are a child (or youth..whatever), who just wants to have a kick on the internet. There are a lot of people who disagree with me on TL which I like. Some are smart and serious (like Jibba), but a lot are just little kids like you. I'm tired of arguing with children so I am going to focus more on the more serious posters.
Holy crap, I've never seen you actually get annoyed before.
And answer my pm. No one answers me anymore.
take a hint
omg im kidding
im just being an asshole.
On February 04 2009 13:28 Savio wrote: L, you are one of the dumbest people on TL. The whole discussion of weight in America was brought up because people were arguing that providing food stamps was better because then they would not buy drugs with the money but would rather buy food. Therefore they would have more food and less drugs. Those were the points that were being used against me...not the ones I was using like your little child-brain thought.
you made the assumption that food stamps lead to higher caloric intake without any causal evidence
You retard. I said that even if that IS true, our country does NOT need more calories.
I don't think you are a serious poster L. I think you are a child (or youth..whatever), who just wants to have a kick on the internet. There are a lot of people who disagree with me on TL which I like. Some are smart and serious (like Jibba), but a lot are just little kids like you. I'm tired of arguing with children so I am going to focus more on the more serious posters.
hahahahaha wow savio's letting her rip. this post was VICIOUS
L, you are one of the dumbest people on TL. The whole discussion of weight in America was brought up because people were arguing that providing food stamps was better because then they would not buy drugs with the money but would rather buy food. Therefore they would have more food and less drugs. Those were the points that were being used against me...not the ones I was using like your little child-brain thought.
Yeah, I was the one that brought in the directed nature of the food stamps as a benefit derived from them. Thanks for noting that we came from there, seeing as it was my line of reasoning. The discussion about weight in america was your attempt to say that the health benefits associated with directing funds into food were potentially negated or negative in nature because of the issues with obesity.
You retard. I said that even if that IS true, our country does NOT need more calories.
I picked up on that, I was merely noting that scientifically, you made a bunch of false statements regarding caloric consumption, and the only way you could fall back on an anti-food stamp position was to construct a causal link. Without that, you're forced to admit that there's a substantial benefit to food stamps from a health perspective. This train of thought is actually succinctly encapsulated in my first reply regarding the calorie issue. Here you reply:
we certainly don't suffer from not being able to get enough calories so increasing the amount of food eaten can't be an argument for food stamps against direct monetary payments.
Making the link that supplying food cannot be an argument for food stamps because people are fat, which assumes a causal link which I submitted argumentation against (and had done so from the prior post as well). I still don't find this statement of yours to be true; Not everyone is fat, especially not the most emaciated of americans, which also happen to be the poorest of americans. Additionally the study cited earlier points to a reduction of caloric intake, with an increased rate of spending points to a shift from high fructose, high calorie food to one including more healthful foods (which is somewhat requisite, because the high fructose, high calorie food is the cheapest form of subsistence possible, and it has pretty much zero nutritional value besides keeping your body from undergoing ketosis. The cheaper your food is, the more your calories are coming from corn-sugar, which really wasn't designed in the natural world to be purified and substituted for sucrose and other 'standard' sugars in foods).
The way this phrase is organized also puts in a subsidiary assumption that someone able to buy more food buys more calories, which is false. The only example which I'll need to debunk this is one of method. We can both buy a chicken breast, but if i make a glaze out of red wine and white beans, and you deep fry yours, i will have actually have purchased more 'food', but you will obviously have both a higher caloric intake, a dearth of protective tannins, a lack of a number of vitamins and minerals, and a gigantic amount of cholesterol.
The argument I've put forward is that its not a calorie issue: its a quality of calorie issue which you've painted in broad strokes by using the calorie as a specter of obesity which somewhat truistically (no one likes fat people :O) opposes all additional food ingestion, whereas that simply isn't the case. To extend this argument would be to point towards both my assertion that food stamps can be part of a cumulative help program, and that the proper 'partner' would be to increase levels of physical activity and provide accessible information on the subject to those at risk. Its a fairly accepted principle that prevention of obesity and related diseases are far less costly as a societal strain if funds are put into prevention instead of crisis treatment. There is also a social dynamic at play here, but I've already touched upon the basics previously.
The fact that the US spends such an exorbitant amount more on health care per capita (http://www.kff.org/insurance/snapshot/chcm010307oth.cfm), but receives nothing special in return should be reason enough to consider prevention as a serious and important solution to both issues of budget and issues of quality of life.
I don't think you are a serious poster L. I think you are a child (or youth..whatever), who just wants to have a kick on the internet. There are a lot of people who disagree with me on TL which I like. Some are smart and serious (like Jibba), but a lot are just little kids like you. I'm tired of arguing with children so I am going to focus more on the more serious posters.
I think your nutrition based defence got completely demolished, seeing as you admittedly ran out of arguments, and are now resorting to rage when some of your very false statements have been called out as such. Okay. Fair enough. I'd be angry too if I was in your position.
you could have just pointed out that savio is overly attached to the principle of "letting people do what they want", and is applying said principle to a random program. it is a minor grip and an ideological one at that. i dont think savio is quite motivated to solve poverty from the ground up to tackle reforming food stamps, which would only make sense as a part of a grand strategy raising living standards and thus enabling healthier lifestyles.
to be fair, that peculiar attachment to an egotistic conception of freedom has a strong tradition, but it is entirely counter to the dominant welfare/utilitarian framework used in policy analysis. while savio wishes to argue the welfare superiority of a direct transfer scheme, i suspect that he really wants to argue for the kind of freedom represented by such programs, and others like school vouchers or 'free market' slogans, a freedom that is qualitatively absent in 'state directives.' personally i think labeling one program as 'more free' is not a simple matter of degrees of government involvement. for example, private school vouchers may be seen as offering a choice, but public schools offer choices too, in the form of the choice of the desired residential neighborhood. nevertheless, the voucher system is seen to offer qualitatively distinct freedom, rather than just a different slate of choices with different items. the point is again seen in the choice of slogans. instead of 'better schools,' we have school choice, as if the latter is a different calculation than the former. would making available worse schools to people be considered choice? or is the former slogan unpopular due to the often disingenuous actualities. perhaps the emphasis on the health of the entire education system found in a collective reading of the former is entirely lost on the latter.
in the case of food stamps, why do i say savio is concerned with its unfree nature, rather than its welfare impact? because of the way he frames the alternative: if we take the food stamp money and relax restrictions. the existence of food stamps does not preclude direct welfare payments. knowing nothing of the political tradeoffs, we do not know how much food stamp is equivalent to how much welfare checks. from a policy view, there is no basis to make savio's alternative the rival case, because they are not presented as actual choices within the political framework. rather, food stamps is seen as one of many ways government tries to actively infringe or constrain personal choice and thus lives. what is in need of neutralizing, for the sake of a free humanity, is the creeping hand of government, rather than lost degrees of welfare.
i believe the impression that there is some higher sense of freedom in 'free choice' programs that cannot be captured by welfare analysis is illusionary until proven otherwise. such programs only enpower the choosers insofar as they provide more options, a situation that is perfectly captured by the worth of the best option. we are not really talking about government regulation of a hitherto private sphere of life, but essentially two kinds of government programs. so before looking at the specifics, there is no need to settle on a particular solution by ideological labeling. without knowing any empirical facts of the matter at hand, i am still able to mock yer position. har har har etc
you don't have to invalidate his claims. sometimes people make claims not to make truthful claims, but to advance ideologies, satisfy psychological needs or generate entertaining responses. whether you choose to engage with the dance is a perfectly open question.
On February 04 2009 18:14 oneofthem wrote: you could have just pointed out that savio is overly attached to the principle of "letting people do what they want", and is applying said principle to a random program. it is a minor grip and an ideological one at that. i dont think savio is quite motivated to solve poverty from the ground up to tackle reforming food stamps, which would only make sense as a part of a grand strategy raising living standards and thus enabling healthier lifestyles.
to be fair, that peculiar attachment to an egotistic conception of freedom has a strong tradition, but it is entirely counter to the dominant welfare/utilitarian framework used in policy analysis. while savio wishes to argue the welfare superiority of a direct transfer scheme, i suspect that he really wants to argue for the kind of freedom represented by such programs, and others like school vouchers or 'free market' slogans, a freedom that is qualitatively absent in 'state directives.' personally i think labeling one program as 'more free' is not a simple matter of degrees of government involvement. for example, private school vouchers may be seen as offering a choice, but public schools offer choices too, in the form of the choice of the desired residential neighborhood. nevertheless, the voucher system is seen to offer qualitatively distinct freedom, rather than just a different slate of choices with different items. the point is again seen in the choice of slogans. instead of 'better schools,' we have school choice, as if the latter is a different calculation than the former. would making available worse schools to people be considered choice? or is the former slogan unpopular due to the often disingenuous actualities. perhaps the emphasis on the health of the entire education system found in a collective reading of the former is entirely lost on the latter.
in the case of food stamps, why do i say savio is concerned with its unfree nature, rather than its welfare impact? because of the way he frames the alternative: if we take the food stamp money and relax restrictions. the existence of food stamps does not preclude direct welfare payments. knowing nothing of the political tradeoffs, we do not know how much food stamp is equivalent to how much welfare checks. from a policy view, there is no basis to make savio's alternative the rival case, because they are not presented as actual choices within the political framework. rather, food stamps is seen as one of many ways government tries to actively infringe or constrain personal choice and thus lives. what is in need of neutralizing, for the sake of a free humanity, is the creeping hand of government, rather than lost degrees of welfare.
i believe the impression that there is some higher sense of freedom in 'free choice' programs that cannot be captured by welfare analysis is illusionary until proven otherwise. such programs only enpower the choosers insofar as they provide more options, a situation that is perfectly captured by the worth of the best option. we are not really talking about government regulation of a hitherto private sphere of life, but essentially two kinds of government programs. so before looking at the specifics, there is no need to settle on a particular solution by ideological labeling. without knowing any empirical facts of the matter at hand, i am still able to mock yer position. har har har etc
anyway, carry on.
That is definitely part of what I am saying. I DO generally believe that giving people more choice is a good thing because I reject the idea that the government (or any group of people) understand each individuals preferences or needs as well as that person does. For this reason, I would much rather see the stimulus money handed out to people than spent of what Obama decides it should be spent on. Because it could be that the Jones family WOULD benefit from that road construction somewhat but what they REALLY need is a new car. Or the Smith family is having trouble making mortage payments and while that nice new library is nice, what they REALLY need is some extra cash so they don't lose their house.
When you want to help people, it is always more efficient (economic efficiency, readers should google if they have not taken classes) to give money rather than a set of goods/services that was chosen by someone else.
So my reasons against food stamps and for monetary payments are:
1. Intrinsic value in giving people choices and freedom 2. Billions of dollars of lost benefit due to inherent inefficiency of food transfers
In your post you understood well my first point, but a HUGE factor in my view is inneficiency.
If government spends 3 billion dollars on food stamps, they could have instead given people the same benefit by giving them ~2 billions dollars in cash and then that extra billion dollar could be used for anything else. Heck, if it went to the poor than they would be WAY better off than they were under the food stamp program for the same cost to government. And we will have been valuing their freedom as well.
Food stamps inherently lose around 30 percent of their value (people value each dollar at about 70 cents or so) when you give them to people but they still cost the full dollar to governemnt.
One other side thought your post made me think of oneofthem is that even though there is inherent choice in public schools (since you can choose the district you live in), one benefit to vouchers is it gives you the freedom of not only choosing a different school but also escaping the teachers unions. As it is, only the rich kids have been able to escape the problems caused by unions in our educational system and the poor kids are stuck with teachers who can't be fired if they suck and can't be pressured to work harder.
One side benefit of vouchers is more kids can escape the effects of teachers unions. But the teachers unions are VERY against vouchers so it has been hard to pass since the democratic party is strongly influenced by unions.
On February 05 2009 05:04 Savio wrote: One other side thought you post made me think of oneofthem is that even though there is inherent choice in public schools (since you can choose the district you live in), one benefit to vouchers is it gives you the freedom of not only choosing a different school but also escaping the teachers unions. As it is, only the rich kids have been able to escape the problems caused by unions in our educational system and the poor kids are stuck with teachers who can't be fired if they suck and can't be pressured to work harder.
Just so we're clear, the government would also need to step in and provide transportation for everyone that wants to choose. It happens to some degree right now, but the effort would be ramped up quite considerably.
Its a real bomb of a package. I think the dems got overzealous and thought they could pass a huge wishlist of democratic desires while the people were all caught up in Obamamania and economic fear, and call the bill a "stimulus" but they overestimated their support and their majority.
Also, from same Rasmussen article:
"A stimulus plan that includes only tax cuts is now more popular than the economic recovery plan being considered in Congress. Forty-five percent (45%) favor a tax-cut only plan while 34% are opposed. Those figures reflect a modest increase in support over the past week."
On February 05 2009 05:04 Savio wrote: One other side thought you post made me think of oneofthem is that even though there is inherent choice in public schools (since you can choose the district you live in), one benefit to vouchers is it gives you the freedom of not only choosing a different school but also escaping the teachers unions. As it is, only the rich kids have been able to escape the problems caused by unions in our educational system and the poor kids are stuck with teachers who can't be fired if they suck and can't be pressured to work harder.
Just so we're clear, the government would also need to step in and provide transportation for everyone that wants to choose. It happens to some degree right now, but the effort would be ramped up quite considerably.
If they didn't provide transportation, then yes, there would still be a cost for poor kids in the ghetto to get to the nice private school, but at LEAST the total cost of switch to private will have been greatly reduced to merely the time and $$$ to transport the kid. Thats a lot better than they have to deal with now.
It is still expanding choice. Just because it is not 100% free (transportation costs), that does not mean the choice isn't there.
EDIT: I don't actually know if some form of government transportation is a part of most voucher bills but what I am saying is that vouchers are good even if it didn't exist.
On February 05 2009 05:04 Savio wrote: One other side thought you post made me think of oneofthem is that even though there is inherent choice in public schools (since you can choose the district you live in), one benefit to vouchers is it gives you the freedom of not only choosing a different school but also escaping the teachers unions. As it is, only the rich kids have been able to escape the problems caused by unions in our educational system and the poor kids are stuck with teachers who can't be fired if they suck and can't be pressured to work harder.
Just so we're clear, the government would also need to step in and provide transportation for everyone that wants to choose. It happens to some degree right now, but the effort would be ramped up quite considerably.
If the didn't provide transportation, then yes, there would still be a cost for poor kids in the ghetto to get to the nice private school, but at LEAST the total cost of switch to private will have been greatly reduced to merely the time and $$$ to transport the kid. Thats a lot better than they have to deal with now.
It is still expanding choice. Just because it is not 100% free (transportation costs), that does not mean the choice isn't there.
I assume you're a Hayekian and even if you want the market controlling things, you need to allow government to be a referee. If the parents of low income families are working 3 jobs and 1) don't have the money or 2) don't have the time to drive their kids an hour away, then it's not a level playing field.
On February 05 2009 05:04 Savio wrote: One other side thought you post made me think of oneofthem is that even though there is inherent choice in public schools (since you can choose the district you live in), one benefit to vouchers is it gives you the freedom of not only choosing a different school but also escaping the teachers unions. As it is, only the rich kids have been able to escape the problems caused by unions in our educational system and the poor kids are stuck with teachers who can't be fired if they suck and can't be pressured to work harder.
Just so we're clear, the government would also need to step in and provide transportation for everyone that wants to choose. It happens to some degree right now, but the effort would be ramped up quite considerably.
If the didn't provide transportation, then yes, there would still be a cost for poor kids in the ghetto to get to the nice private school, but at LEAST the total cost of switch to private will have been greatly reduced to merely the time and $$$ to transport the kid. Thats a lot better than they have to deal with now.
It is still expanding choice. Just because it is not 100% free (transportation costs), that does not mean the choice isn't there.
I assume you're a Hayekian and even if you want the market controlling things, you need to allow government to be a referee. If the parents of low income families are working 3 jobs and 1) don't have the money or 2) don't have the time to drive their kids an hour away, then it's not a level playing field.
Of course, its not a level playing field as it is now is it? Voucher without transportation wouldn't level it completely, but would make it more level.
But I am not against some form of transportation being provided.
On February 05 2009 08:36 oneofthem wrote: what if a less costly improvement project to a public school achieves the same result as a private voucher program?
Blasphemy :O
Public money can't be as efficient than a private program !
On February 05 2009 08:36 oneofthem wrote: what if a less costly improvement project to a public school achieves the same result as a private voucher program?
Its hard to define improvement. Some politicians may think that simply a new building means the school has been pulled out of mediocrity. The best way to tell which schools are actually "good" is to see where parents want to put their children (since parents generally want what is best for their children). To gain that knowledge, parents have to be able to move their children around if they want.
Also, politicians have been trying for decades (centuries?) to improve the public school and yet the best successes have been in the private market (no big surprise there). If they couldn't do it in the past 60 years (even with Bush doubling education spending), then why would they all of a sudden be able to do it now?
But maybe if we broadened your question. If we could somehow eliminate teachers unions at public schools, that may make us able to reach some of the benefits that have eluded us. Superintendents and school boards really DO have their students best interests in mind, and if they could fire bad teachers, reward successes and pressure teachers without unions choking them, we might see big gains and the need for vouchers would diminish.
Parents want what's best for their children but it doesn't mean they actually know what's best. Look at any school board across the country and you'll see that they're pretty shitty judges when it comes to curricula and how to measure students.
You're right that it's not about the spending. I know I've made that point in the past against you and I was definitely off base. It's interesting that the big push for education reform started in the early 1980s with the "nation in crisis" talk, and we acted on it, but those people were completely wrong at the time. Today, partly because of the actions we've taken, it's become a problem.
There are still many issues with schools of choice that need to be resolved. Shutting down "failing" or unpopular schools, means people will go without education or other schools will become overcrowded. I'm beginning to lean towards this, but there's still many other sides to education reform that need to be addressed.
I also think you're giving too much credit to superintendents and administrators. They're a huge part of the problem in nearly every school district. If you look at them as managers and teachers as employees, then most of the blame is deserved at the managerial level.
About the stimulus plan thing, I just want to point this out for you, Savio.
Republicans are calling for a plan with more tax cuts and less spending. They also want more emphasis on helping homeowners. One Republican proposal could double the tax credit for home buying from $7,500 to $15,000.
That's the welfare directed at the upper-middleclass I was talking about. We can debate all day about whether the poor or middle class deserve it more, but that's what that statement represents. Spending = welfare for poor, tax credit = welfare for middle/upper
And just giving them money (my plan) = welfare for both.
Thats the great thing about money it is always equally helpful to everybody....1 dollar given my gov't is 1 dollar recieved by the person that they can spend however they want.
EDIT: Also, I am not so sure helping homeowners trying to sell (by giving people incentive to buy) and people looking to buy a home is just "upper middle class". Lower middle class and many (if not most poor people) own a house or a trailer (both of which are homes). So whether you are selling or buying, this helps you.
Most people are holding on to their money, and the only people who can really afford to buy, even in the current terrible housing market, are those with large amounts of money. I'm glad you're up for cash for all though. I was just trying to show that we're already giving out money, but it's mostly in the form of tax breaks and other things NOT directed at the working class.
On February 05 2009 10:46 Savio wrote: And just giving them money (my plan) = welfare for both.
Thats the great thing about money it is always equally helpful to everybody....1 dollar given my gov't is 1 dollar recieved by the person that they can spend however they want.
EDIT: Also, I am not so sure helping homeowners trying to sell (by giving people incentive to buy) and people looking to buy a home is just "upper middle class". Lower middle class and many (if not most poor people) own a house or a trailer (both of which are homes). So whether you are selling or buying, this helps you.
But cash is still better imo.
Giving people money is a good way to go but the benefit that it gains dollar to dollar depends on who gets it so targeting is important.
What would you think of the German idea floating around that says that you should give people gift vouchers that expire meaning that people wont save they will go straight out and spend it. They are not going to do this becuase the dont think it would inspire much confidence.
Anyone hear about the new Buy American provision in the new stimulus package? You think they would have learned something from the Great Depression. God I hate how America is our #1 exporter. If it is passed we are going to be severely fucked, not to mention trade protectionist policy doesn't even create jobs, it just reshuffles them. I can't believe there are still idiots like this running a country. I hope Obama isn't one of them, I did hear in our news that he is against it.
Asked by ABC News anchor Charles Gibson about the provision, Obama replied, “I don’t want provisions that are going to be a violation of World Trade Organization agreements or in other ways signal protectionism. I think that would be a mistake right now. That is a potential source of trade wars that we can't afford at a time when trade is sinking all across the globe.”
On February 05 2009 11:22 rushz0rz wrote: Anyone hear about the new Buy American provision in the new stimulus package? You think they would have learned something from the Great Depression. God I hate how America is our #1 exporter. If it is passed we are going to be severely fucked, not to mention trade protectionist policy doesn't even create jobs, it just reshuffles them. I can't believe there are still idiots like this running a country. I hope Obama isn't one of them, I did hear in our news that he is against it.
The provision only applies to steel and it would only apply to the public works that the bill would fund. It's bad, but there is no reason to overstate the impact it would have.
The Bush Administration did this in 2002 and guess what, it doesn't work. While it does increase output and employment, it jacks up the price of everything that requires steel: trucks, automobiles, and heavy appliances. As a result, people didn't buy these protects due to raised prices and these companies laid workers off. Also, American steel container producers, which had previously dominated the world market, sharply curtailed their employment because they were unable to compete with foreign firms purchasing steel at lower prices. Protectionist policy is terrible for economy, terrible, terrible, no matter if its just for one industry and only "public works" that the bill would fund. I'm glad Obama is against it, thank god.
On February 05 2009 11:22 rushz0rz wrote: Anyone hear about the new Buy American provision in the new stimulus package? You think they would have learned something from the Great Depression. God I hate how America is our #1 exporter. If it is passed we are going to be severely fucked, not to mention trade protectionist policy doesn't even create jobs, it just reshuffles them. I can't believe there are still idiots like this running a country. I hope Obama isn't one of them, I did hear in our news that he is against it.
The provision only applies to steel and it would only apply to the public works that the bill would fund. It's bad, but there is no reason to overstate the impact it would have.
Im pretty sure Obama has turned around and is not doing the protectionist bill however even if he did I doubt it would have any real impact anyway. What would make an impact is if America started to protect lower level manufactures which China and others produce that could create a whole world of problems, literally. But realistically I dont think there is any real threat of a protectionist problem.
On February 05 2009 11:22 rushz0rz wrote: Anyone hear about the new Buy American provision in the new stimulus package? You think they would have learned something from the Great Depression. God I hate how America is our #1 exporter. If it is passed we are going to be severely fucked, not to mention trade protectionist policy doesn't even create jobs, it just reshuffles them. I can't believe there are still idiots like this running a country. I hope Obama isn't one of them, I did hear in our news that he is against it.
The provision only applies to steel and it would only apply to the public works that the bill would fund. It's bad, but there is no reason to overstate the impact it would have.
On February 05 2009 11:22 rushz0rz wrote: Anyone hear about the new Buy American provision in the new stimulus package? You think they would have learned something from the Great Depression. God I hate how America is our #1 exporter. If it is passed we are going to be severely fucked, not to mention trade protectionist policy doesn't even create jobs, it just reshuffles them. I can't believe there are still idiots like this running a country. I hope Obama isn't one of them, I did hear in our news that he is against it.
The provision only applies to steel and it would only apply to the public works that the bill would fund. It's bad, but there is no reason to overstate the impact it would have.
in the case of food stamps, why do i say savio is concerned with its unfree nature, rather than its welfare impact? because of the way he frames the alternative: if we take the food stamp money and relax restrictions. the existence of food stamps does not preclude direct welfare payments. knowing nothing of the political tradeoffs, we do not know how much food stamp is equivalent to how much welfare checks. from a policy view, there is no basis to make savio's alternative the rival case, because they are not presented as actual choices within the political framework. rather, food stamps is seen as one of many ways government tries to actively infringe or constrain personal choice and thus lives. what is in need of neutralizing, for the sake of a free humanity, is the creeping hand of government, rather than lost degrees of welfare.
I think that this type of analysis would make sense in the context of a broader approach to determining which policy outcome would be superior, but my aims weren't so large. My aims were to show that a series of unfounded and false assumptions were being made, and I did so to inject a much needed sense of reality towards the issue being discussed.
It wasn't an issue of a choice between stamps and liquid cash in the general sense, because that case is not one I find worth making in the general sense; if the argument had been for government stamps in the sector of washing machines, rolling pins and gold plated toilet seat covers I'd have fully agreed with Savio's position on the relative value between freedom of choice and government deciding what's in your best interest. That said, the issue wasn't on such frivolities, it was on food. Using the same set of basic assumptions for washing machines and food 'works' in the context of broad policy, which is the angle that you seem to be attacking at, but that doesn't solve the real problem with the targeted decision making, or debate surrounding the issue. The real issue is that the assumptions made are factually incorrect, which lead to a materially poorer conclusion. The main remedy in this case, in my view, isn't to attack the policy on ideological grounds, but to display the practical, rather than political, tradeoffs.
"The main remedy in this case, in my view, isn't to attack the policy on ideological grounds, but to display the practical, rather than political, tradeoffs."
yes, that is my point as well.
with that buy american stuff, i think america's political isolation is really hitting home. seriously guys
killing the teachers union will also kill teacher motivation. i dont see why that is an imperative. labor has as much right as administration in getting a better deal, since the generation of value in the case of teaching is largely on the teachers' side anyway. faced with structures like school districts, obviously labor suffers from an organizational deficiency.
On February 05 2009 10:46 Savio wrote: And just giving them money (my plan) = welfare for both.
Thats the great thing about money it is always equally helpful to everybody....1 dollar given my gov't is 1 dollar recieved by the person that they can spend however they want.
EDIT: Also, I am not so sure helping homeowners trying to sell (by giving people incentive to buy) and people looking to buy a home is just "upper middle class". Lower middle class and many (if not most poor people) own a house or a trailer (both of which are homes). So whether you are selling or buying, this helps you.
But cash is still better imo.
Giving people money is a good way to go but the benefit that it gains dollar to dollar depends on who gets it so targeting is important.
What would you think of the German idea floating around that says that you should give people gift vouchers that expire meaning that people wont save they will go straight out and spend it. They are not going to do this becuase the dont think it would inspire much confidence.
Americans have very low savings rate and I think most economist agree that increasing that savings rate would be good since savings-->investment and we would not have to rely so much on foreign investment. Also during recessions, trade balance in the US tends to shift toward smaller deficits which means we will not be receiving as much foreign investment.
I don't see people saving some of their money as a bad thing at all. It may stabilize banks a bit as well as providing domestic investment.
On February 05 2009 11:22 rushz0rz wrote: Anyone hear about the new Buy American provision in the new stimulus package? You think they would have learned something from the Great Depression. God I hate how America is our #1 exporter. If it is passed we are going to be severely fucked, not to mention trade protectionist policy doesn't even create jobs, it just reshuffles them. I can't believe there are still idiots like this running a country. I hope Obama isn't one of them, I did hear in our news that he is against it.
On February 05 2009 11:22 rushz0rz wrote: Anyone hear about the new Buy American provision in the new stimulus package? You think they would have learned something from the Great Depression. God I hate how America is our #1 exporter. If it is passed we are going to be severely fucked, not to mention trade protectionist policy doesn't even create jobs, it just reshuffles them. I can't believe there are still idiots like this running a country. I hope Obama isn't one of them, I did hear in our news that he is against it.
Obama is for a protectionists stance on the economy, he reconsidered the degree of protectionism when the EU complained and threatened a trade war. The policies will still be enacted, just to a smaller degree.
Edit: It's shocking that people find Obama's policies shocking. He made them pretty clear throughout the campaign.
killing the teachers union will also kill teacher motivation.
So you think that teachers in private schools aren't as motivated like teachers in public schools?
faced with structures like school districts, obviously labor suffers from an organizational deficiency.
The same could be said of workers at enormous car plants. And yet American workers in Japanese car factories here in the states are doing just fine with their "organization deficiency". And teachers at private school are doing just fine without unions.
The truth is that the idea that unions have to step in to make things fair, is most tempting when it is accompanied by a lack of understanding of how markets function. Unions did some good a long time ago when companies could collude and essentially create a monopoly (market failure) of jobs. However, anti trust law has come a long way and this type of collusion is prosecuted now a days so we don't see the same problems arise when companies could cheat the market through collusion.
In other words, unions had their time. Now we get only the problems they bring and none of the benefits they brought back when we needed them.
On February 05 2009 11:22 rushz0rz wrote: Anyone hear about the new Buy American provision in the new stimulus package? You think they would have learned something from the Great Depression. God I hate how America is our #1 exporter. If it is passed we are going to be severely fucked, not to mention trade protectionist policy doesn't even create jobs, it just reshuffles them. I can't believe there are still idiots like this running a country. I hope Obama isn't one of them, I did hear in our news that he is against it.
Edit: It's shocking that people find Obama's policies shocking. He made them pretty clear throughout the campaign.
Back in the campaign, people were too caught up in his pretty face and "hope" (or was it "change") to bother listening to his actual policies.
So you think that teachers in private schools aren't as motivated like teachers in public schools?
lol? teacher unions are a plus for teachers, taking them away will have to be compensated for. the desired objective is raising teachers' compensation, and unions are not in the way of that.
unions are not designed structures imposed from the outside, they are something that people do. the argument is labor rights, not efficiency. just like the autoworker example, you see detroit unions as a problem because they exist while japanese companies play with the advantage of not dealing with unions. but the problem could be precisely the reverse, that the japanese should deal with the same type of labor power. this argument can be replicated in case of international labor standards.
Republicans are calling for a plan with more tax cuts and less spending. They also want more emphasis on helping homeowners. One Republican proposal could double the tax credit for home buying from $7,500 to $15,000.
That's the welfare directed at the upper-middleclass I was talking about. We can debate all day about whether the poor or middle class deserve it more, but that's what that statement represents. Spending = welfare for poor, tax credit = welfare for middle/upper
You are completely wrong. There's an AGI phaseout for the $7500 tax credit and by the time you hit upper middle, you don't qualify for anything. Plus the fact that this is ONLY for first time buyers purchasing primary residences, so this does in fact favor people who are not wealthy. Most affluent individuals/families already have a primary residence. Lastly, it's not even a tax credit. It's just a $7500 cash upfront loan by the government that the couple has to pay off over 15 years at no interest.
If you're talking about in general, you are also completely wrong. The "tax break to 98% of americans" Obama spouted during his campaign is calculated from Obama considering tax credits as "tax breaks." To have 98% of the population fit into his tax cutting scheme, he included tax credits for a lot of random shit--even for really affluent individuals/families--so that he could call it a "tax break." Look it up. Bottom line is that tax credits are merely one way to control cash flow by the government regardless of wealth.
On February 05 2009 11:22 rushz0rz wrote: Anyone hear about the new Buy American provision in the new stimulus package? You think they would have learned something from the Great Depression. God I hate how America is our #1 exporter. If it is passed we are going to be severely fucked, not to mention trade protectionist policy doesn't even create jobs, it just reshuffles them. I can't believe there are still idiots like this running a country. I hope Obama isn't one of them, I did hear in our news that he is against it.
Edit: It's shocking that people find Obama's policies shocking. He made them pretty clear throughout the campaign.
Back in the campaign, people were too caught up in his pretty face and "hope" (or was it "change") to bother listening to his actual policies.
That and Mccain was mired with the anti-Bush stigma.
Personally, I voted Obama because (1) my vote doesnt really matter (I live in California), and (2) he's young and smart enough to learn, make decisions on the current situation, and not be completely rigid about his policies. Fortunately this is turning out to be somewhat true with his opposing stance on the Buy American provision and stalling his proposed tax hikes.
On February 05 2009 09:31 Jibba wrote: About the stimulus plan thing, I just want to point this out for you, Savio.
Republicans are calling for a plan with more tax cuts and less spending. They also want more emphasis on helping homeowners. One Republican proposal could double the tax credit for home buying from $7,500 to $15,000.
That's the welfare directed at the upper-middleclass I was talking about. We can debate all day about whether the poor or middle class deserve it more, but that's what that statement represents. Spending = welfare for poor, tax credit = welfare for middle/upper
If you're talking about in general, you are also completely wrong. The "tax break to 98% of americans" Obama spouted during his campaign is calculated from Obama considering tax credits as "tax breaks." To have 98% of the population fit into his tax cutting scheme, he included tax credits for a lot of random shit--even for really affluent individuals/families--so that he could call it a "tax break." Look it up. Bottom line is that tax credits are merely one way to control cash flow by the government regardless of wealth.
I'm not talking about Obama's tax proposal, I'm talking about tax breaks in general and how they've operated in the last few decades. If you have a friend who's an accountant, ask them where people are getting the most money back. It's on things for homeowners like replacing windows, or the environment, and so on. Most are designed for the people in the middle and up because we want the strong middle class.
BTW, the Senate is going to lighten the Buy American clause.
It's fucking ridiculous that CNN has Trump on to talk about this stuff. What a joke of a news station.
Jibba, I am an accountant. Tax credits were originally created as another way to implement in the tax structure things that the government wanted done (ie. create incentive to get higher education, polution reduction, have more children, etc). Since then, they've been a method for the government to withold giving out cash as tax breaks as soon as possible (much like electronics rebates). It's not so bad at the federal level, but at the state level, most states manipulate credits and deductions so that they can get cash in as quickly as possible while giving out rebates and credits as late as possible. This happens regardless of wealth.
In fact, of the tax credits that do have clauses in them for wealth related reasons, most have an income phaseout against wealthy people (that is, they get less and less of the credit if their income is increasingly higher than a certain threshold). Take a look at the child tax credit--phase out begins for individuals making mor ethan $75,000; homebuyer's credit--$75,000; hope and lifetime education--$48,000; childcare--$43,000; and the list goes on. From a psychological standpoint, you could even argue that tax credits favor the poor through giving lower income individuals/families cash without their even realizing it. Higher net worth taxpayers generally have a loose idea about what things they can get credits and deductions for and they incorporate this into their tax planning in the beginning of the year; lower net worth taxpayers a lot of times have no idea what things are irrelevant in taxation--they just look at, at the end of the day, whether they are getting back cash or giving back cash. Thus, when the government gives back money to them through credits or rebates, they look a lot more positively at it. I know this from first hand experience working both with high net worth taxpayers and low income taxpayers.
Yes, there are certain credits for things like the environment that loosely correlate with more wealth individuals, but they were not created for the purpose of giving back money to the wealthy. They were created, much like most credits are, because the government wanted to do something about an important topic to the public regardless of who it would affect. Tax credits are just one of the easier ways to implement it.
they are functionally welfare for the wealthy. it is a rather common way of looking at things and i am surprised that you've never encountered it before.
On February 06 2009 03:01 oneofthem wrote: they are functionally welfare for the wealthy. it is a rather common way of looking at things and i am surprised that you've never encountered it before.
I'm not sure if JSTOR would be happy with my posting pictures, but his argument is based on the huge payouts for tax expenditures like home mortgage interest, real estate, charitable contributions, child care, extraordinary medical expenses, etc. At times these payouts have almost equaled visible welfare, and in 1991 they were effectively targeted at people making over $50k. I'm not sure what his updated figures are.
On February 05 2009 11:22 rushz0rz wrote: Anyone hear about the new Buy American provision in the new stimulus package? You think they would have learned something from the Great Depression. God I hate how America is our #1 exporter. If it is passed we are going to be severely fucked, not to mention trade protectionist policy doesn't even create jobs, it just reshuffles them. I can't believe there are still idiots like this running a country. I hope Obama isn't one of them, I did hear in our news that he is against it.
Edit: It's shocking that people find Obama's policies shocking. He made them pretty clear throughout the campaign.
Back in the campaign, people were too caught up in his pretty face and "hope" (or was it "change") to bother listening to his actual policies.
Obama IS against it.
His speech tonight was pretty awesome. Not because it was soaring or beautiful, but basically it was "You guys are being retards delaying this super important bill to score political points. Stop being retards"
accounting has nothing to do with the way he misunderstood the phrase. it is not that they are intentionally designed as a reverse robin hood scheme, but that it works the same way. whether the scale of that transfer is large or small does not matter. libertarians frequently employ the same rhetoric, that should be familiar enough if welfare state does not ring a bell.
i could walk into a bookstore and grab you a few sensationalist books with the phrase plastered on the cover.
I'm not sure if JSTOR would be happy with my posting pictures, but his argument is based on the huge payouts for tax expenditures like home mortgage interest, real estate, charitable contributions, child care, extraordinary medical expenses, etc. At times these payouts have almost equaled visible welfare, and in 1991 they were effectively targeted at people making over $50k. I'm not sure what his updated figures are.
I just took a cursory glance at the articles, but it seems to be that there is a misunderstanding about what are "tax credits"--as you originally argued was for the wealthy--and tax deductions. The things you listed, mortgage interest, charitable contributions, medical expenses, etc are deductions, not credits. That is, amounts you spend on them reduce how much income can be taxed. Tax credits, on the other hand, are essentially checks the government gives out to the people. In this case, then yes, I would agree with you that tax deductions favor the wealthy, but tax credits certainly do not. Most high networth do intentionally try to get into a lower tax bracket by having lots of deductibles, but something to keep in mind is that Congress has largely changed the ability for these individuals/families to do that. There's actually a separate tax code written for something called alternative minimum tax which essentially puts a 25% or 28% flat tax rate on the richest 25% in the country.
On February 06 2009 11:53 oneofthem wrote: accounting has nothing to do with the way he misunderstood the phrase. it is not that they are intentionally designed as a reverse robin hood scheme, but that it works the same way. whether the scale of that transfer is large or small does not matter. libertarians frequently employ the same rhetoric, that should be familiar enough if welfare state does not ring a bell.
i could walk into a bookstore and grab you a few sensationalist books with the phrase plastered on the cover.
It's not so much as I "misunderstood the phrase" as it is you misunderstand how taxes work. See my previous post about tax credits and tax deductions. And yes, tax deductions do end up favoring the wealthy, but the government also creates them to encourage spending in things that the government thinks is important (like charity, health care, house purchases, capital investments, and so on). That doesn't seem so bad to me. Most of these things provide an immediate domestic benefit and if charities were truly reliant on only the charity of people (without the tax benefits), I'm sure there would be a lot fewer charities around.
But before this whole thread got derailed to how the tax code works, /my/ point is that the original post about how taxes are welfare for the wealthy simply isn't true. The tax code is simply a means for the government to encourage/discourage spending on specific things important to that specific administration. The argument /should/ be about what policies the party in power want and whether they will be effective--not about the tax code.
i understand the stated purpose just fine, you are just too impatient with the reading business. calling the credits welfare is typically a response to those who think that only the poor and unproductive receive welfare, or that only these people rely on the government. you can call them benefit packages if you like, the point is that a vast portion of government 'welfare' outlay is for the well off, and people benefit from special treatment by the government more often than they'd like to admit. given that pretty much everyone's income is taxed, and the government is heavily involved in healthcare education financial security etc, whether the government is giving out directly or adjusting the rate of taking away ceases to be a meaningful distinction. we would just call lessening the tax burden welfare, and so on. given how political these decisions are, it is no surprise that the well off are leveraged to fight for more benefits. just ask the aarp and social security.
make no mistake, regardless of behavioral incentives, the recipients of tax credits are benefiting from government largess. using the term welfare is just a technical designation for special benefits, it is not necessarily to say that they should be abolished or that they are perverse.
Ok, firstly, never did I once say that credits were welfare. The very first argument I made was that I thought the tax code as an entity by itself, is simply a mechanism, not an end solution (like welfare).
And secondly, your definition of welfare is absurdly broad. You're basically saying that any form of "benefit" is "welfare." I'm not even going to argue this point as it completely derails from the topic and it is a matter of semantics.
Thirdly, with your definition of welfare, you simply state the obvious. Of course people benefit from the government. Thats why it's there. They're called "public goods."
since you are responding to jibba and his usage of welfare, a sense with which you are apparently unfamiliar, whatever you believe it to mean is irrelevant. the only thing you can do is to ask for a clarification of what he meant, and only then can you even disagree. i just said that you are misunderstanding what he meant by welfare, and i ventured a guess to the general direction of that meaning.
i have no idea how you manage to produce three separate and nonsensical responses to the situation. im done with this for now.
On February 09 2009 19:36 a-game wrote: so it looks like they are really half-assing the stimulus.
2009 is going to be a really rough year
yeah
the things republicans have been trying to cut....well they're retarded
People really think school renovation is a bad thing?
Both sides are retarded. It's nice that Obama is still being thoughtful, but this was a time to start pushing the GOP around. Pelosi is also on a major power trip and needs to be put in her place.
The school issue is far too complicated to be solved in the stimulus package. It's a bill that needs to be completed immediately, but that also means it's going to be sloppy and the education stuff is really unnecessary, and will just be wasted unless done correctly.
so obama's commerce secretary nominee withdrew (again)
what a gong show. that's like what, the 6th big name nomination fuckup? it seems the stuttering oath of office was an insubstantial omen of things to come for this administration.
On February 09 2009 19:36 a-game wrote: so it looks like they are really half-assing the stimulus.
2009 is going to be a really rough year
Most economists agree that around a trillion dollars per year of real, well targeted stimulus is the minimum acceptable level. What we are seeing is around half of that, one trillion over two years, and it is likely to become even smaller. You would think with an economy loosing 500,000 jobs in a single week the Republicans could pull their heads out of their asses but evidently not. Rough year indeed.
To those worried about public sector debt America still has the theoretical capacity to borrow probably something like 5 Trillion dollars on top of what they already have, mind boggling numbers ofcourse but it means America atleast has the theoretical capacity to do what must be done if the Republicans would let them.
On February 09 2009 19:36 a-game wrote: so it looks like they are really half-assing the stimulus.
2009 is going to be a really rough year
yeah
the things republicans have been trying to cut....well they're retarded
People really think school renovation is a bad thing?
Both sides are retarded. It's nice that Obama is still being thoughtful, but this was a time to start pushing the GOP around. Pelosi is also on a major power trip and needs to be put in her place.
The school issue is far too complicated to be solved in the stimulus package. It's a bill that needs to be completed immediately, but that also means it's going to be sloppy and the education stuff is really unnecessary, and will just be wasted unless done correctly.
Ill agree on that. We have a similar problem in Australia and ill wager most if not all of the west. We have short term, medium and long term policies all being pushed through as one article this is stupid it slows things down and makes it more difficult to actually make beneficial changes to the detail. What they should do is have one bill to be passed asap with immediate short term stimulus including increased unemployment payments etc, then you can work on the longer term policies like education funding reform etc when you have the time to actually get it worked out properly.
On February 09 2009 19:36 a-game wrote: so it looks like they are really half-assing the stimulus.
2009 is going to be a really rough year
yeah
the things republicans have been trying to cut....well they're retarded
People really think school renovation is a bad thing?
Both sides are retarded. It's nice that Obama is still being thoughtful, but this was a time to start pushing the GOP around. Pelosi is also on a major power trip and needs to be put in her place.
The school issue is far too complicated to be solved in the stimulus package. It's a bill that needs to be completed immediately, but that also means it's going to be sloppy and the education stuff is really unnecessary, and will just be wasted unless done correctly.
Ill agree on that. We have a similar problem in Australia and ill wager most if not all of the west. We have short term, medium and long term policies all being pushed through as one article this is stupid it slows things down and makes it more difficult to actually make beneficial changes to the detail. What they should do is have one bill to be passed asap with immediate short term stimulus including increased unemployment payments etc, then you can work on the longer term policies like education funding reform etc when you have the time to actually get it worked out properly.
What they need to do is take all the Republican congressmen and shoot them. Not that the Democrats are so great, but their ineptness pales next to blatant Republican obstructionism, politicking and in general, jackassery.
California Democratic senator Dianne Feinstein introduced the amendment to the stimulus package currently being debated on Capitol Hill. The clause would allow internet service providers (ISPs) to carry out packet inspection under the guise of network management.
I think Republican congressman have plenty of rightful concerns, although they're largely just protecting their own asses. In this case, vague laws = discretion of bureaucrats = less liberty, and the stimulus package is chock full of vagueness.
right but the repubs aren't just protesting bad parts, most of them are opposed to the whole concept of using government spending to stimulate the economy.
do you think obama would of hesitated for a second to block that networking amendment? nobody would of resented the republicans forcing that action, what we resent them for is forcing obama to concede huge chunks of the transfer to state governments and other substantive stimulative measures and put in junk tax cuts.
by the time this thing gets passed it's barely even going to be relevant.
btw even if nothing happens on friday it was still pretty impressive that he was only one day off (he said monday but the market dropped tuesday) when he gave the prediction a few months ago.
On February 13 2009 12:31 oneofthem wrote: why is that even remotely interesting?
Because if the prediction is correct, that implies that the reasoning behind it is probably also correct. Especially since would be the third correct prediction (to the day), made months in advance.
plus fridays are always interesting in a market like this. I take it you don't check the market daily?
On February 13 2009 12:31 oneofthem wrote: why is that even remotely interesting?
Because if the prediction is correct, that implies that the reasoning behind it is probably also correct.
Uh... that is a huge fallacy.
Well since we are splitting hairs....So if someone comes up with a model which can make predictions, yet it conflicts with the current model, they should be dismissed. Instead, the phenomena should be explained after the fact in terms of the current model. Sounds like the standard application scientific method to me (unfortunately).
Yet you did not say that just as I did not say that his prediction proves anything.
Can someone explain to me why school renovations are being challenged on principle when infrastructure spending in general has been accepted? I can understand that there's issues with the fact that the legislation is being pushed through the door with fairly general terms, but that's somewhat understandable, given the urgency of the situation and the scope of the legislation.
On February 13 2009 12:31 oneofthem wrote: why is that even remotely interesting?
Because if the prediction is correct, that implies that the reasoning behind it is probably also correct.
Uh... that is a huge fallacy.
Well since we are splitting hairs....So if someone comes up with a model which can make predictions, yet it conflicts with the current model, they should be dismissed. Instead, the phenomena should be explained after the fact in terms of the current model. Sounds like the standard application scientific method to me (unfortunately).
Yet you did not say that just as I did not say that his prediction proves anything.
While his inference predicted an accurate date, it still does not justify his method. The scientific method is based upon repeatability, which may in fact exist, but is certainly not proved by him guessing a date correctly.
I could design a crude model that will conclude the Lions will win the Super Bowl next year, and it could very well happen (no, it couldn't), but anyone that knows anything about football will be able to spot that my model is completely absurd based on current information.
I'm just saying, what you said was a pretty standard logical fallacy.
On February 13 2009 14:47 L wrote: Can someone explain to me why school renovations are being challenged on principle when infrastructure spending in general has been accepted? I can understand that there's issues with the fact that the legislation is being pushed through the door with fairly general terms, but that's somewhat understandable, given the urgency of the situation and the scope of the legislation.
The money will be misspent and renovations do not necessarily equal success. Assuming our school system is actually in dire straits (which is debatable), it is due to a fundamental issue and not because some buildings are falling down.
On February 13 2009 12:31 oneofthem wrote: why is that even remotely interesting?
Because if the prediction is correct, that implies that the reasoning behind it is probably also correct.
Uh... that is a huge fallacy.
Well since we are splitting hairs....So if someone comes up with a model which can make predictions, yet it conflicts with the current model, they should be dismissed. Instead, the phenomena should be explained after the fact in terms of the current model. Sounds like the standard application scientific method to me (unfortunately).
Yet you did not say that just as I did not say that his prediction proves anything.
While his inference predicted an accurate date, it still does not justify his method. The scientific method is based upon repeatability, which may in fact exist, but is certainly not proved by him guessing a date correctly.
I could design a crude model that will conclude the Lions will win the Super Bowl next year, and it could very well happen (no, it couldn't), but anyone that knows anything about football will be able to spot that my model is completely absurd based on current information.
I'm just saying, what you said was a pretty standard logical fallacy.
fight_or_flight: If P, then Q. Q Therefore, P.
Well I understand what you are saying, and I actually do genuinely appreciate your effort to point out logical fallacies when you see them. Its my fault for not being clear in the first place.
while throwing money in the general direction of education wont do much in the long run, it is still spending. i don't think it is the only example of wasteful spending in the bill, and even if it is, fighting it seems like stalling. personally i think the stronger position bears more responsibility for the control of the situation, so democrats are at fault for attaching pet projects to this bill. we'll have to see whether obama can rein in the temptation
Long time since i dont visit this thread, how do you guys feel about most of the spending that is targeted not at creating job but at sustaining demand so current ones dont keep droping ?
On February 13 2009 10:06 Mindcrime wrote: I wonder why Gregg sought the nomination in the first place.
Because his position is up for re-election next year and New Hampshire looks like they will be voting democratic instead. Having a Secretary of Commerce position for 8 years is better than having a Senate position for 1 year.
This is an interesting story about the Japanese boom and bust from the mid 80s to today. The eerie part though is that it was written in 2002, and if you replace all the parts about Japan with USA and yen with USD, we get a very similar picture of what the US faces today.
Yes, its conclusions are quite conservative, and yes, it is not exactly what the US faces today, but the similarities are definitely there. I also do think that the scale of speculation/overextension in the Japan one, when isolated to the nation itself, was a lot larger than the US one. Another factor too that differs between Japan and the USA is their economic structure--Japan basically revolves around several oligopolistic companies across the board while USA has a lot more small business growth. That makes Americans a lot more greedier and willing to take advantage of opportunities that did not occur in the Japan incident (resulting in a prolonged recession). Lastly, I think Geithner recognizes the lesson learned from the Japan and is using TARP 2.0 to buy up the bad liabilities from the books of the large banks. While I disagree with bailing out to get out of a recession in principal, at least part of the bailout is targetting the right sectors.
The U.S. banking system is close to being insolvent, and unless we want to become like Japan in the 1990s -- or the United States in the 1930s -- the only way to save it is to nationalize it.
As free-market economists teaching at a business school in the heart of the world's financial capital, we feel downright blasphemous proposing an all-out government takeover of the banking system. But the U.S. financial system has reached such a dangerous tipping point that little choice remains. And while Treasury Secretary Timothy Geithner's recent plan to save it has many of the right elements, it's basically too late.
The subprime mortgage mess alone does not force our hand; the $1.2 trillion it involves is just the beginning of the problem. Another $7 trillion -- including commercial real estate loans, consumer credit-card debt and high-yield bonds and leveraged loans -- is at risk of losing much of its value. Then there are trillions more in high-grade corporate bonds and loans and jumbo prime mortgages, whose worth will also drop precipitously as the recession deepens and more firms and households default on their loans and mortgages.
Last year we predicted that losses by U.S. financial institutions would hit $1 trillion and possibly go as high as $2 trillion. We were accused of exaggerating. But since then, write-downs by U.S. banks have passed the $1 trillion mark, and now institutions such as the International Monetary Fund and Goldman Sachs predict losses of more than $2 trillion.
But if you think that $2 trillion is high, consider our latest estimates at the financial Web site RGE Monitor: They suggest that total losses on loans made by U.S. banks and the fall in the market value of the assets they are holding will reach about $3.6 trillion. The U.S. banking sector is exposed to half that figure, or $1.8 trillion. Even with the original federal bailout funds from last fall, the capital backing the banks' assets was only $1.4 trillion, leaving the U.S. banking system about $400 billion in the hole.
Two important parts of Geithner's plan are "stress testing" banks by poring over their books to separate viable institutions from bankrupt ones and establishing an investment fund with private and public money to purchase bad assets. These are necessary steps toward a healthy financial sector.
But unfortunately, the plan won't solve our financial woes, because it assumes that the system is solvent. If implemented fairly for current taxpayers (i.e., no more freebies in the form of underpriced equity, preferred shares, loan guarantees or insurance on assets), it will just confirm how bad things really are.
Nationalization is the only option that would permit us to solve the problem of toxic assets in an orderly fashion and finally allow lending to resume. Of course, the economy would still stink, but the death spiral we are in would end.
Nationalization -- call it "receivership" if that sounds more palatable -- won't be easy, but here is a set of principles for the government to go by:
First -- and this is by far the toughest step -- determine which banks are insolvent. Geithner's stress test would be helpful here. The government should start with the big banks that have outside debt, and it should determine which are solvent and which aren't in one fell swoop, to avoid panic. Otherwise, bringing down one big bank will start an immediate run on the equity and long-term debt of the others. It will be a rough ride, but the regulators must stay strong.
Second, immediately nationalize insolvent institutions. The equity holders will be wiped out, and long-term debt holders will have claims only after the depositors and other short-term creditors are paid off.
Third, once an institution is taken over, separate its assets into good ones and bad ones. The bad assets would be valued at current (albeit depressed) values. Again, as in Geithner's plan, private capital could purchase a fraction of those bad assets. As for the good assets, they would go private again, either through an IPO or a sale to a strategic buyer.
The proceeds from both these bad and good assets would first go to depositors and then to debt-holders, with some possible sharing with the government to cover administrative costs. If the depositors are paid off in full, then the government actually breaks even.
Fourth, merge all the remaining bad assets into one enterprise. The assets could be held to maturity or eventually sold off with the gains and risks accruing to the taxpayers.
The eventual outcome would be a healthy financial system with many new banks capitalized by good assets. Insolvent, too-big-to-fail banks would be broken up into smaller pieces less likely to threaten the whole financial system. Regulatory reforms would also be instituted to reduce the chances of costly future crises.
Nationalizing banks is not without precedent. In 1992, the Swedish government took over its insolvent banks, cleaned them up and reprivatized them. Obviously, the Swedish system was much smaller than the U.S. system. Moreover, some of the current U.S. financial institutions are significantly larger and more complex, making analysis difficult. And today's global capital markets make gaming the system easier than in 1992. But we believe that, if applied correctly, the Swedish solution will work here.
Sweden's restructuring agency was not an out-of-control bureaucracy; it delegated all the details of the cleanup to private bankers and managers hired by the government. The process was remarkably smooth.
Basically, we're all Swedes now. We have used all our bullets, and the boogeyman is still coming. Let's pull out the bazooka and be done with it.
This is an interesting story about the Japanese boom and bust from the mid 80s to today. The eerie part though is that it was written in 2002, and if you replace all the parts about Japan with USA and yen with USD, we get a very similar picture of what the US faces today.
Yes, its conclusions are quite conservative, and yes, it is not exactly what the US faces today, but the similarities are definitely there. I also do think that the scale of speculation/overextension in the Japan one, when isolated to the nation itself, was a lot larger than the US one. Another factor too that differs between Japan and the USA is their economic structure--Japan basically revolves around several oligopolistic companies across the board while USA has a lot more small business growth. That makes Americans a lot more greedier and willing to take advantage of opportunities that did not occur in the Japan incident (resulting in a prolonged recession). Lastly, I think Geithner recognizes the lesson learned from the Japan and is using TARP 2.0 to buy up the bad liabilities from the books of the large banks. While I disagree with bailing out to get out of a recession in principal, at least part of the bailout is targetting the right sectors.
Edit: the article is pretty macroeconomics heavy.
this is really interesting. when im done with my school and debate reading i'll try to get around to this. thanks gchan.
in retrospect dont u think all of this shit is pretty straight-forward (for the wayman)? just wondering (since what little i've read it appears that way)
On February 16 2009 12:21 Kerensky wrote: in retrospect dont u think all of this shit is pretty straight-forward (for the wayman)? just wondering (since what little i've read it appears that way)
i'm assuming you're talking to me.
a lot of it can be hard to understand for people without training in economics and finance.
i tried to write it in a manner that could help people visualize the process. in retrospect a lot of it is factually flawed and my analysis has a lot of problems, but i haven't had time to write an update (but I plan to eventually).
On February 16 2009 12:21 Kerensky wrote: in retrospect dont u think all of this shit is pretty straight-forward (for the wayman)? just wondering (since what little i've read it appears that way)
It is really quite straight forward. Professionals so often confuse the issue focusing on over complicating issues which ultimately are irrelevant (or more accurately not that relevant). For example people analyze in massive depth the financial sector using all this confusing mumbo jumbo etc. When in truth what has happened in the financial sector and why can be summed up in two sentences.
In order to prevent recession the federal reserve started to increase the availability of credit (constantly over more than a decade and at an increasing pace), this lead to a huge increase in the level of debt held by individuals. Debt keeps rising while incomes keep fall creating and this created the financial crisis as people simply no longer have the physical capacity to service that debt.
I honestly believe further analysis of the financial sector is irrelevant, the real answer to what is going on today lies in the policies which created the recessionary environment in the first place. And again this is quite straight forward and is something that is largely being ignored.
Alright guys. Looks like we're headed for a deep Depression, probably as bad as the Great Depression.
Obama just signed a Buy American provision, and even though it's relatively small on what it's asking for, the US will go further. The world is going to hit a Depression some time next year. Even my History teacher said that sometime next year lots of malls would quickly have less stores and there will be literally no work. My teacher said we're kind of lucky because he said we'll be going through college/university while it happens.
On February 21 2009 19:59 rushz0rz wrote: Alright guys. Looks like we're headed for a deep Depression, probably as bad as the Great Depression.
Obama just signed a Buy American provision, and even though it's relatively small on what it's asking for, the US will go further. The world is going to hit a Depression some time next year. Even my History teacher said that sometime next year lots of malls would quickly have less stores and there will be literally no work. My teacher said we're kind of lucky because he said we'll be going through college/university while it happens.
I know this is a bit drastic, but I think I'm joining the army if it get's as bad as most predict. The sad this is, wars are the only thing that brought us out of the Great Depression.
Eh, are you trying to suggest that Obama's Buy American provision is similar to the result of the 20s in the war of protectionism between countries? It isn't that much of a leap in logic, I suppose, but the situation today and the situation before the great depression has changed significantly. Krugman wrote in his column (or rather, blog) a few weeks ago concerning the stance taken by the Obama Administration on the issue. He proposed that it was the second best option given a lack of globally coordinated action, as protectionism would allow the capital investment to be contained within individual regions. Should he prove to be right, the issue simply falls to the dismantling of such policy when the economy gets back into normal gear again, and protectionism as a temporary measure becomes a valuable object. Personally, I agree with his take of the situation. This isn't the time of the Napoleonic Wars when foreign trade policy is dictated by immediate need, nor is it a time when we have sharply contracted money supply creating further shocks in the economy. Given the international body's inability to coordinate effective measures, it would be best if the money spent from each nation to be restricted within the nation, the area that they are meant for. In that case, light protectionism, or even a cascade of increasing protectionist measures, would be the best way to allow government investment to remain packed.
Your teacher is right though, undergrad at this time would be awesome, with luck you'll graduate as the economy is booming and have an easy environment for grad too :p
On another note, good job GM, shedding Saab when it became obvious that we can't extort money from the Swedes. Seriously, we think the financial sector is bad?
It's not as bad as the great depression at all. In the great depression, everywhere you went, you saw people lining up to get food; you saw people sleeping on benches using newspapers as cover; you saw people freezing to death because their clothes were inadequate. To compare the two is absurd. Not only are the times completely different, but the standards are too. Most unemployed people in the United States still have a roof over their heads, still have food on the table, still have clothes. Comparing the two really just undermines how much more harder times were back then.
It's not as bad as the great depression at all. In the great depression, everywhere you went, you saw people lining up to get food; you saw people sleeping on benches using newspapers as cover; you saw people freezing to death because their clothes were inadequate. To compare the two is absurd. Not only are the times completely different, but the standards are too. Most unemployed people in the United States still have a roof over their heads, still have food on the table, still have clothes. Comparing the two really just undermines how much more harder times were back then.
I agree that the current situation can't really be considered as bad as the Great Depression. I will say, however, that one of the (perhaps THE) biggest difference between today and the 1930's, in terms of mitigating the amount of human suffering, is the social safety net put in place by FDR. Without it, we would be seeing a whole lot more people without the basic necessities of life.
I just say this because FDR seems to be the target du jour of Republicans. Not only do most of them believe that the New Deal didn't help to stave off an even worse economic situation, but it seems these days that some of them even think he _caused_ the Great Depression.
No one ever mentions it, but it's really hard for almost anyone to argue that things like social security, unemployment assistance, disability, etc, are extremely important to help prevent the worst kinds of human suffering in times like this.
Republicans make that attack for political purposes. It's liberalists who have made a strong attack against the New Deal/social policy and 99% of congress people, independent of party, are not liberalists. They haven't read Hayek/Friedman and they certainly wouldn't agree with them.
Does anyone have an idea what percentage of homeowners took loans they can't afford versus the amount who are in trouble because of the economy and losing their jobs? Is this even possible to sort out?
I just say this because FDR seems to be the target du jour of Republicans. Not only do most of them believe that the New Deal didn't help to stave off an even worse economic situation, but it seems these days that some of them even think he _caused_ the Great Depression.
There is a strong case that many elements of the New Deal increased economic inefficiency, and therefore delayed recovery. The charge isn't that Roosevelt caused the Great Depression- that was due to the stock speculation of the roaring 20s backed by credit-driven consumption, but that the New Deal delayed economic recovery.
Relative to the World, the United States took a fairly long time to recover from the depression- not until around 1940. In comparison, Germany, equally hard-hit by the depression, and which like America used massive spending programmes faced labour shortages by 1938 simultaneously with rising disposable incomes.
Roosevelt's attempts to subsidize farmers to decrease agriculture production, subsidize wages, discourage competition, and regulate labour were all harmful to American economic recovery. His policy of trying to maintain high wages not supported by increased production is astonishingly similar to what we see in today's political arena, with the caveat that American confidence through the Roosevelt years remained relatively sound, whereas today this essential faith in the political system is questionable. Even after freezing the dollar's convertibility into Gold, the value of government bonds remained steady throughout the 30's. A good indication of whether we are heading for something worse than the depression is to see if the safe haven of the bonds market collapses under the inflationary pressures of the present policies.
No one ever mentions it, but it's really hard for almost anyone to argue that things like social security, unemployment assistance, disability, etc, are extremely important to help prevent the worst kinds of human suffering in times like this.
Let us not forget that the American citizen, by any modern standard of "human suffering," has, in both peace and war, seemed blessedly fortuitous to the rest of the world. Had the Okies been migrating through Europe with their automobile in the 30s, they would not have been taken for economic refugees, but for well-to-do elite. When you speak of mitigating worst kinds of human suffering, you are referring to, more or less, the maintenance of the structure of the American middle-class and preserving their relative social dignity in unfortunate times. In 1919, daughters of respectable middle-classed families were seen prostituting themselves on the streets of Vienna, as the spiritual integrity of a whole nation was crushed. America has never experienced anything like this, and the middle-classes, which really came into existence in it's modern form in the United States in the 20's, has become recognizable no longer by their behaviour, breeding or even material prosperity, but by their prescription to certain fashions of consumption which they believe to be essential to their social dignity.*
The kind of welfare then, we are talking about, is no longer about the direct material needs of a person, but the degree to which his needs are inflated by a democratic social structure. That those needs will keep inflating, and will become increasingly decoupled from a person's purely material interests, seems clear. Meanwhile, the bureaucratization of society, including of welfare probably aids and accelerates this inflation by depersonalizing all social institutions where non-material personal needs may otherwise be met in an organic society, and increasing the individual's dependence on a public, symbolic, socially insensitive and emotionally unsatisfying means of cultivating respectability.
*The 19th century was probably the only century of materialism, if we can call it that in the modern age. During the 20th century, the decreasing value (and solidity) of money, and the inflated needs of social vanity across the broad spectrum of society means that spending has become more important than earning, and what being wealthy means today is something different than it was a hundred years ago. Surely there is a psychological cause of our present debt-driven crisis that is worth speculating about.
On February 21 2009 19:59 rushz0rz wrote: Alright guys. Looks like we're headed for a deep Depression, probably as bad as the Great Depression.
Obama just signed a Buy American provision, and even though it's relatively small on what it's asking for, the US will go further. The world is going to hit a Depression some time next year. Even my History teacher said that sometime next year lots of malls would quickly have less stores and there will be literally no work. My teacher said we're kind of lucky because he said we'll be going through college/university while it happens.
This is not true.
There's a fundamental difference between now and the Great Depression, in terms of preventative methods taken by government bodies around the world -- pouring money into the system.
Eventually, the economy will stop falling because the central bankers will use available money to seduce consumers and businesses to increase spending, and the governments are also increasing spending significantly. This increases aggregate demand, which in turn will pull up output.
There is a reason why your history teacher is not teaching economics...
It is true that those who are still in school are more fortunate and those who are not.
On February 21 2009 19:59 rushz0rz wrote: Alright guys. Looks like we're headed for a deep Depression, probably as bad as the Great Depression.
Obama just signed a Buy American provision, and even though it's relatively small on what it's asking for, the US will go further. The world is going to hit a Depression some time next year. Even my History teacher said that sometime next year lots of malls would quickly have less stores and there will be literally no work. My teacher said we're kind of lucky because he said we'll be going through college/university while it happens.
This is not true.
There's a fundamental difference between now and the Great Depression, in terms of preventative methods taken by government bodies around the world -- pouring money into the system.
Eventually, the economy will stop falling because the central bankers will use available money to seduce consumers and businesses to increase spending, and the governments are also increasing spending significantly. This increases aggregate demand, which in turn will pull up output.
There is a reason why your history teacher is not teaching economics...
It is true that those who are still in school are more fortunate and those who are not.
Just because we are doing something different this time does not necessarily mean it won't be as bad. In fact, I'd say if these measures currently being taken don't work, it will be far worse. As Moltke pointed out, a collapse in the bond market may be what is in store for us if this doesn't work.
We are in uncharted waters here. There are a lot of fundamental differences between now and the Great Depression.
It's interesting (but not surprising) that most people are unaware of the consequences of the original NIRA and what exactly FDR tried to get pushed through. Aside from the fact that it removed race from American politics for several decades, the US government also tried to fix prices and wages on certain items, like poultry - a nice massive dose of collectivism before we fought the Nazis/Russians.
Obama is using the crisis to make structural changes to American society, something you can really only do during crisis. I can't say I'm totally against the Sweden-ification (it's not France) of America. Republicans can complain all they want about him passing a social agenda disguised as an economic agenda but they'd be doing the exact same thing, just as they did under Bush and Reagan. It's amazing that he's still trying to negotiate and be civil about it, when he could really ram it down their throats like FDR did.
Moltke, I'm curious what your solution, if you have one, to the bureaucratization problem might entail. Weber never came up with an answer for Prussia, and Hayek/Lowi's response is simply impractical and is arguably less democratic than what we have now.
On March 01 2009 16:11 fight_or_flight wrote: We are in uncharted waters here. There are a lot of fundamental differences between now and the Great Depression.
This might be the best thing anyone has said in this thread. We're not headed towards the Great Depression, but we don't know where we're headed.
In 1933 25% of the workforce was unemployed, rising from only 3% average in 1929. Between 1929 and 1932 the income of the average American family was reduced by 40%. Between 1929 and 1933, U.S. GDP fell around 30%, the stock market lost almost 90% of its value.
These are from wikipedia, cited from other sources.
These are the projections for 2009 and 2010, taken from the NYT:
Projections are wonderful things, and give us some considerable satisfaction and security when living into the future, as the modern dissatisfied generation often tries to do. There were ages when the chief intellectual pursuits of men were predominantly reflective; believing that although we live forward, we can only think backward; that all our knowledge about the future cannot but be the reflections of our knowledge about the past. Today, it is comforting to know that the empirical sciences have advanced to such great sophistication, that understanding of the causal relationships of the physical and psychological universes so thoroughly improved, year on year, that clairvoyance is at last liberated from its temporal impediments.
Lest anyone doubt me, I give as exhibition the following information:
I'm looking at the Federal Reserve Board's report from November 2007 on GDP growth projections for 2008 and 2009:
2008: 1.8-2.5% 2009: 2.3-2.7% 2010: 2.5-2.6%
Unemployment rate projections by the same source:
2008: 4.8-4.9% 2009: 4.8-4.9% 2010: 4.7-4.9%
Let us ook at how some of these other sources hold up taken a little further back, to Febuary 2007:
GDP growth in 2008 (Moody's): 3.2% GDP growth in 2008 (Blue chip): 3.0%
The wisdom of economic prophets live after them, their mistakes are often interred in their bones. So let it be with these figures. My noble friend warding has told you of economic recovery, and if it will be so, it will be a blessed joy, and blessedly will we meet it. I show these figures not to disprove what wardo has said, but to show what is known. My only question remains to wardo is: how has the science of economic prophecy advanced in the past twenty-four months to such an astonishing degree, that they have aroused such confidence in you? I ask these questions of him, for my friend warding is a wise man, and the persons from whom his information flows, all wise men, come I to rejoice in our economic recovery.
Moltke, I'm curious what your solution, if you have one, to the bureaucratization problem might entail. Weber never came up with an answer for Prussia, and Hayek/Lowi's response is simply impractical and is arguably less democratic than what we have now.
I weary to say that I view the increasing bureaucratization and depersonalization of society as inevitable.
I am not as great a seer as my friend warding, and I cannot project the future with similar certainty. I only extrapolate the reasonings of others and combine them with my own observations. Tocqueville, who foresaw the possibility of the devolution of American democracy into a kind of despotism "extensive and mild....degrading men without tormenting them..." (he did not use the word bureaucracy) also considered by his time, that the transition of of Aristocratic societies into democratic societies was inevitable, but that the fortunes of democratic society, whether they led servitude or freedom, barbarity or knowledge, were largely dependent on the people themselves. He also did not believe that this could be determined by institutional policies: “My greatest complaint against democratic government as organized in the United States is not, as many Europeans think, its weakness, but rather its irresistible strength… I am not asserting that at the present time in America there are frequent acts of tyranny. I do say that one can find no guarantee against it there and that the reasons for the government’s moderation must be sought in circumstances and in mores rather than in the laws.”
There may yet be a reaction similar to the Romantic reaction of the 18th century, again bring to public consciousness a desperate need for an authentic kind of individuality created by inner self-fulfilment, and based on organic relationships to family, nature and community. As it is, society's relationship to government as of today resembles that of a psychopathic child, being increasingly dependent on it but increasingly resenting it all the same, and like him, there is little chance that it is willing to shed either attribute in the long-run. There are certain institutional changes which may be better or worse for a certain situation, but its success or failure is in my view rooted in circumstancial factors. In the democratic age we can no longer think like Plato, about idealized synthetic commonwealths, even though that doesn't stop modern politicians from trying.
well now, the so called democratic spirit in america takes both active and passive/negative forms. the active current calls for positive, democratic actions social and political, and is exemplified by the democratic pragmatism of dewey and community organizations on the left. it is a vision of an active political society that has the people as the agent, even though a great portion of its energy is dispersed through government institutions. on the other hand, we have the rights based, negative reaction to government exemplified by libertarians and jeffersonians of old. their view of society is that of a well ordered space of personal development, and the governmental authority is only found in the law, not in bureaucrats sitting behind desks. i will say that this current is reactionary, and it is an attitude found not exclusively among libertarians etc. at the very least, the rhetoric of lower taxation, less bureaucratic waste, spending our money for ourselves etc holds great purchase with the public at large.
most people will take either of the two attitudes toward government depending on whether the policy in question is agreeable to them. on an issue like social programs for immigrants, the real point of departure is over people's attitudes toward immigrants, not their attitude toward welfare. since government actions affect different groups differently, many of the debates over government are in fact mirroring social attitudes toward different groups of people.
in any case, quantifying government control is not as simple as looking at the size of the government sector, nor is it merely dependent on how many regulations are on the books. spending a trillion on f-22s is not the same kind of government presence as spending it on social programs, given the same method of taxation.
as for the future of the administrative state in america, im tempted to understate the changes. the reason obama won is not due to a large groundswell for the scandinavian model (and it is far from that really), and the general perception of government has not changed too much. if anything, libertarians are increasing, on the internets. public perception of how well the government does still depends on the handling of individual issues, and for most it is a judgment of competence, not ideological victory. nevertheless, the chorus of "omg socialism!" is more fun to listen to than the assorted liberal chatter.
What's fun to listen to is the way people partition the mass of public opinions and beliefs into arbitrary categories to which they can apply moral approval or outrage. There's nothing too funny about this if they are not taken too seriously, but it becomes comical when our narrator becomes no longer interested in analysing anything but the object of his fantasies.
as arbitrary categories go, antiquated ones are the more oblivious. then again, all of political philosophy is just random people voicing random opinions, with no commonality to be found. pity the fool who thinks otherwise!
On March 01 2009 09:59 MoltkeWarding wrote: Had the Okies been migrating through Europe with their automobile in the 30s, they would not have been taken for economic refugees, but for well-to-do elite.
ur pushing it man.. owning a truck did not save some of them from starving and it definitively did not qualify them as European well-to-do elite
So Aristotle's categories which have been applied in political thought for over two millenia are more oblivious than dichotomies conjured on the basis of the political landscape of the year 2009?
This obviously seems so, and would confirm my earlier suspicions that the intellectual evolution of man has outpaced his need for learning. Whether the common facility of this modern man is as great at those philosphers of that surprising sect who are honourably mentioned by Dr. Swift four centuries ago as having, by mere force of genius alone, without the least assistance of any kind of learning, or even reading, discovered that profound and invaluable secret, that there is no G__, I do not presume to guess.
I can only presume that the forces of reaction, overeducated, overcivilized and underimaginative, remains ignorant of the perpectually expoential increase of human potential unlocked by our evolutionary progress, and therefore block these avenues in lethargic cynicism, distrusting the roads to greater happiness as they are effectively established and proven by the machine of the human intellect. The poor Hellenes, our cultural forefathers only conceived of a notion of time as a struggle against decay; they did not (how could they, being two millenia more primitive than we on the social evolutionary scale) conceive of turning their reason, which they otherwise exercised with such genius, to the miracles of progress. Perhaps they were less self-confident than modern man, perhaps they were more prone to self-deception, perhaps they secretly suspected their Gods of being false idols and lacked the courage to sprint for that ultimate truth.
ur pushing it man.. owning a truck did not save some of them from starving and it definitively does not qualify you as European well-to-do elite
In 1933, during which 25% of Americans were unemployed, there was one automobile for every five inhabitants of the USA. In Britain there was one for every twenty-three. In Italy one for every 108, in the USSR, one for every 5 000. The partition is even greater than it seems due to the pyramidal structure of European societies compared to American societies. In America the automobile was a middle-class possession. In Europe it was by and large until the 1960s, not.
Moltke, I only posted information from other sources, they are not my 'prophecies', nor did I claim that an economic recovery is under way.
The implicit message is that, as far as we know, the expectations for this recession are nowhere near as bad as the great depression. This was in response to some posters claiming that this seemed like it was going to be comparable to the great depression. I'm only comparing their expectations to the expectations of economists who understand the subject better.
Of course you can disregard these forecasts on the basis that economists have been wrong before. We'll, economists have always admitted a great deal of uncertainty in their forecasts. They are aware of the unpredictability of recessions. However difficult it may be to predict future economic events, it may still be useful. A great deal of economists are employed for this purpose across numerous industries and institutions you know.
That America had/has poor conditions is undisputed. You have to look at relatively, and in that light America was a great place to live, which is why it received so many immigrants
As far as the future of the Economy, based on my knowledge of economics, it's only going to get worse. Obama is trashing it -- he even admits it when he says that the government has to become bigger to make up for the weak private sector. Well, the private sector IS the economy. If the government is going to get bigger, it has to take resources from the private sector. The government can only take wealth, not create it. And by taking more, it only makes us poorer.
On March 02 2009 06:29 oneofthem wrote: well now, the so called democratic spirit in america takes both active and passive/negative forms. the active current calls for positive, democratic actions social and political, and is exemplified by the democratic pragmatism of dewey and community organizations on the left. it is a vision of an active political society that has the people as the agent, even though a great portion of its energy is dispersed through government institutions. on the other hand, we have the rights based, negative reaction to government exemplified by libertarians and jeffersonians of old. their view of society is that of a well ordered space of personal development, and the governmental authority is only found in the law, not in bureaucrats sitting behind desks. i will say that this current is reactionary, and it is an attitude found not exclusively among libertarians etc. at the very least, the rhetoric of lower taxation, less bureaucratic waste, spending our money for ourselves etc holds great purchase with the public at large.
most people will take either of the two attitudes toward government depending on whether the policy in question is agreeable to them. on an issue like social programs for immigrants, the real point of departure is over people's attitudes toward immigrants, not their attitude toward welfare. since government actions affect different groups differently, many of the debates over government are in fact mirroring social attitudes toward different groups of people.
in any case, quantifying government control is not as simple as looking at the size of the government sector, nor is it merely dependent on how many regulations are on the books. spending a trillion on f-22s is not the same kind of government presence as spending it on social programs, given the same method of taxation.
as for the future of the administrative state in america, im tempted to understate the changes. the reason obama won is not due to a large groundswell for the scandinavian model (and it is far from that really), and the general perception of government has not changed too much. if anything, libertarians are increasing, on the internets. public perception of how well the government does still depends on the handling of individual issues, and for most it is a judgment of competence, not ideological victory. nevertheless, the chorus of "omg socialism!" is more fun to listen to than the assorted liberal chatter.
It's more than this. The US is structurally a weak state with strong interest group liberalism. This isn't surprising because collective action is the best way to get things done if you're a citizen, but it presents problems on the whole even if you take out K street corruption. This isn't simply a divide between Big letter Liberals and Conservatives, but liberalism and conservatism themselves. Bureaucratization has several nasty, anti-democratic consequences such as specialization and eventually secretization which take place for rational, pragmatic reasons, but put the bureaucratic machine in charge, not the politicians and certainly not the citizens.
I can basically guarantee you none of the people writing the stimulus bill were elected and that presents a legitimate concern. I don't think bureaucrats actually work with malintent or simply to boost corporate earnings - that's just a shitty framing that politicians and the media use to make themselves exempt from blame, but as they say, "the road to hell is paved with good intentions." Who do you hold responsible when something goes wrong? The elected official is a slave to the specialist's work, yet no one really gets held accountable when something goes wrong because the specialist is shielded and the politician just claims the execution, not the proposal, was botched.
On March 02 2009 08:53 shmay wrote: The government can only take wealth, not create it. And by taking more, it only makes us poorer.
Not really Things are a bit more complex.
Of course things are more complex, but as a heuristic it actually fares quite well (there are more detailed reasons for my belief, but that would take too long).
Checkout the economic freedom index (level of capitalism) -- wealth is very strongly inversely correlated to size of government.
On March 02 2009 08:36 warding wrote: We'll, economists have always admitted a great deal of uncertainty in their forecasts.
This is what causes the most anger in the social sciences - they haven't. Social quantification is still alive and well, and constantly being misused.
OK I made a sweeping statements there. I'll put it like this: economic forecasts are always coupled with a great deal of uncertainty, which must always be taken into account when analysing them. I would say most academic economists usually admit this uncertainy and act with caution upon it. It is probably less so as they go on TV, write editorial articles or work in wallstreet.
Checkout the economic freedom index (level of capitalism) -- wealth is very strongly inversely correlated to size of government.
Highly subjective and oversimplified measuring and ranking system by a group of people who are looking for any reason possible to place France between Uganda and Romania. Oh, and Saudi Arabia is ahead of France as well. Yeah, Heritage is always a trustworthy source of information.
And what does a measure of 'wealth' entail anyways? Massive income polarization and little social mobility? Would you really rather live in Jamaica, where IMF's free trade regulations and shitty loans have raped local businesses and where gang violence is rampant, or "economically oppressed" Cuba which has much higher living standards and quality of life for most of its population?
On March 02 2009 06:29 oneofthem wrote: well now, the so called democratic spirit in america takes both active and passive/negative forms. the active current calls for positive, democratic actions social and political, and is exemplified by the democratic pragmatism of dewey and community organizations on the left. it is a vision of an active political society that has the people as the agent, even though a great portion of its energy is dispersed through government institutions. on the other hand, we have the rights based, negative reaction to government exemplified by libertarians and jeffersonians of old. their view of society is that of a well ordered space of personal development, and the governmental authority is only found in the law, not in bureaucrats sitting behind desks. i will say that this current is reactionary, and it is an attitude found not exclusively among libertarians etc. at the very least, the rhetoric of lower taxation, less bureaucratic waste, spending our money for ourselves etc holds great purchase with the public at large.
most people will take either of the two attitudes toward government depending on whether the policy in question is agreeable to them. on an issue like social programs for immigrants, the real point of departure is over people's attitudes toward immigrants, not their attitude toward welfare. since government actions affect different groups differently, many of the debates over government are in fact mirroring social attitudes toward different groups of people.
in any case, quantifying government control is not as simple as looking at the size of the government sector, nor is it merely dependent on how many regulations are on the books. spending a trillion on f-22s is not the same kind of government presence as spending it on social programs, given the same method of taxation.
as for the future of the administrative state in america, im tempted to understate the changes. the reason obama won is not due to a large groundswell for the scandinavian model (and it is far from that really), and the general perception of government has not changed too much. if anything, libertarians are increasing, on the internets. public perception of how well the government does still depends on the handling of individual issues, and for most it is a judgment of competence, not ideological victory. nevertheless, the chorus of "omg socialism!" is more fun to listen to than the assorted liberal chatter.
It's more than this. The US is structurally a weak state with strong interest group liberalism. This isn't surprising because collective action is the best way to get things done if you're a citizen, but it presents problems on the whole even if you take out K street corruption. This isn't simply a divide between Big letter Liberals and Conservatives, but liberalism and conservatism themselves. Bureaucratization has several nasty, anti-democratic consequences such as specialization and eventually secretization which take place for rational, pragmatic reasons, but put the bureaucratic machine in charge, not the politicians and certainly not the citizens.
I can basically guarantee you none of the people writing the stimulus bill were elected and that presents a legitimate concern. I don't think bureaucrats actually work with malintent or simply to boost corporate earnings - that's just a shitty framing that politicians and the media use to make themselves exempt from blame, but as they say, "the road to hell is paved with good intentions." Who do you hold responsible when something goes wrong? The elected official is a slave to the specialist's work, yet no one really gets held accountable when something goes wrong because the specialist is shielded and the politician just claims the execution, not the proposal, was botched.
oh i didn't mean to say that bureaucraticisation is all good because it is liberal or whatnot. just making a comment on the political culture. but the way this issue is raised in this thread makes it out to be a new phenomenon, or being brought to qualitatively new heights by obama's doing. admittedly, the level of reliance on expert and academic methods of decisionmaking is something to watch out for in obama. the problem with relying on academic experts, besides the lack of a decent review system for policy advise, is the strength of consensus in some areas, and also overt ideological stubbornness, that may lead to great mistakes before they are recognized.
this lack of pluralism makes accountability for experts difficult. if there are various camps of experts, and each are evaluated on their track record, then we may have some parallel to democratic accountability.
Of course it's subjective, it's made by humans. What incentive does it have to place France low? Or to rank any country high? If it measures France low, and France is seen as a Good Country, then it hurts their argument that economic freedom is good. I too have my doubts about their graph, but I think it captures a general trend.
On March 02 2009 07:38 MoltkeWarding wrote: So Aristotle's categories which have been applied in political thought for over two millenia are more oblivious than dichotomies conjured on the basis of the political landscape of the year 2009?
my examples were historical and not at all aimed at being critical of one side. it is just a description, even the reactionary comment. of course, the movement that seeks the protection of traditional ideas ranging from liberty to political community (classical liberalism, classical legalism, classical rights theory, classical economics, classical etc were not termed by my personal authority) is reactionary. it does not mean that they are necessarily the cranky and unreasonable type, but it is exceedingly fair to observe the traditional structure of that movement.
On March 02 2009 11:23 shmay wrote: Of course it's subjective, it's made by humans. What incentive does it have to place France low? Or to rank any country high? If it measures France low, and France is seen as a Good Country, then it hurts their argument that economic freedom is good. I too have my doubts about their graph, but I think it captures a general trend.
I'd have to visit Jamaica and Cuba before I decided where to live.
Look, I'm not saying the index is the end-all-be-all of greatness of countries, just look at the trends.
Both Cato and Heritage have very specific agendas and they're going to use the numbers and define economic freedom as they please, in order to represent those interests. The Cato one is much, much, more sound, but what do the numbers really tell you about the country? Do most people in Sierra Leone (119) live better lives than people in Ukraine (121)? Does market capitalism precede or follow wealth? Iceland is (was) rated very highly as open to foreign trade and economic freedom, but they got smashed by the banking problems more than anyone else in the world.
Is there even a correlation between size of government and economic freedom? Here's the top 10 rated countries for size of government: Hong Kong, Albania, Bangladesh, El Salvador, Honduras, Kyrgyz Republic, Jamaica, Panama, Peru, Zambia. How many of those have any relevance in the international political economy? The US is 42, Sweden is 134, South Korea is 65, Israel (133), Japan (77), Mexico (31), Canada (53), China (111), France (128), Germany (90).
So the US is expanding our government (significantly), but does that necessarily mean the economy will be significantly tightened or such actions will be detrimental to our economy?
The White House graph doesn't really project government intervention, just spending (two hugely different concepts), and China has blown that indicator out of the water since 8% growth is a bad year for them.
The point is you can't draw any meaningful inferences from the numbers. We know what Hayek thinks should happen, but we're stuck in a social-democracy hybrid no matter what and our shift towards a freer market in the 1980s didn't turn out so well.
i think its true the the government (in the last few years especially) but ever since the creation of the central bank in 1913, has more or less been a funnel of money from poor to rich.
isnt it true that the econmic problems we are having is the result of an entirely debt based dollar, and the fact that our trade deficit just keeps on swelling? i mean, we dont hardly produce anything except our own food. outsourcing of jobs has weakened our economy, and this "free trade" ideology america forces on the rest of the world has done nothing but weaken the global economy.
its good to listen to ron paul talk about these issues, i am by no means a republican, but i think he has a 100% realistic assesment of the situation.
On March 02 2009 12:29 cUrsOr wrote: i think its true the the government (in the last few years especially) but ever since the creation of the central bank in 1913, has more or less been a funnel of money from poor to rich.
This is not entirely true, the economic growth of the post war period up to 1980 was 'high quality growth' meaning it did not come at the cost of increasing income inequality. The growth of this period was maintained and preserved through the economy proper and it created significant tangible increases in standards of living. The deterioration of income inequality after this period is a symptom of serious deficiencies in economic policy including deunionisation which pushes down wages (bad news) and changes in trade policy combined with the terrible miss use of fiscal policy (cut teachers pay, give corporate tax cut)
isnt it true that the econmic problems we are having is the result of an entirely debt based dollar, and the fact that our trade deficit just keeps on swelling? i mean, we dont hardly produce anything except our own food. outsourcing of jobs has weakened our economy, and this "free trade" ideology america forces on the rest of the world has done nothing but weaken the global economy.
It isnt true that our economic problems are caused by an entirely debt based dollar as such (thought its not all that inaccurate to say so), we operated in a similar way in the past without bad consequences but this will become a serious problem (which it is) if combined with deteriorating incomes resulting from bad macro economic policy including the deindustrialisation of the west caused to a large extent by the free trade ideology.
People said for a time don't worry about structural unemployment because jobs will be created else where in the economy and it will work out better in the end but in reality those jobs were not created so at the same time that we were buying more and more imports our capacity to pay for those imports declined. This is an unsustainable position with dangerous consequences.
It will not be helpful to change trade policy today but once the recessionary cycle has been tackled (through fiscal policy) then we absolutely must move away from universal free trade to 'mutually beneficial bilateral trade'.
Was there something wrong with the trade of ancient Athens or ancient Rome or of the great Chinese empire of ages past. Ofcourse not trade brought great prosperity to these people at no cost to themselves. Any trade policy which imposes a cost to a country is bad trade policy. Ideology is once again to blame.
Edit: Did you know that in 1970 the average worker in the United States earned 30% more than they do today and worked 2 weeks less. This is a very important symptom of the economic problems of the United States today. As long as wages are falling there is nowhere your economy can go but backwards.
On March 02 2009 08:53 shmay wrote: The government can only take wealth, not create it. And by taking more, it only makes us poorer.
Not true. The government is responsible for investments in infrastructure such as transport networks and education. Both these examples qualify as investments which create wealth rather than government spending that does not create any returns.
In the case of trasnportation networks, we can see why the government is necessary. Building a road is too expensive and time consuming for one person to do. The only way to justify its cost is for a group of people to share the costs and share the benefits. And that's exactly how a government works.
What I was rallying against was the idea that government can just become bigger without consequences on the private sector -- where are the resources coming from? It's like trying to fill up a pool by taking water from one end and pouring it into the other.
On March 02 2009 07:49 MoltkeWarding wrote: In 1933, during which 25% of Americans were unemployed, there was one automobile for every five inhabitants of the USA. In Britain there was one for every twenty-three. In Italy one for every 108, in the USSR, one for every 5 000. The partition is even greater than it seems due to the pyramidal structure of European societies compared to American societies. In America the automobile was a middle-class possession. In Europe it was by and large until the 1960s, not.
There's little doubt that, on balance, Americans fared far better than others during the 20th century. This is especially true of our European counterparts who weathered the full brunt of two devastating wars. It's likely this trend will hold through the current economic crisis, but that's neither here nor there.
John Steinbeck, Dorothea Lang and Woody Guthrie, among others, popularized the myth that the Dust Bowl exodus from Oklahoma to California was a source of immense suffering and hardship. Because of the permanence and power of art, this myth has become a part of our national lore and a dominant theme of the Great Depression.
Yes, the exodus was a difficult and uncertain journey for many, but Steinbeck et al. exaggerated the scope of the tragedy. It was not the white farmer's "Trail of Tears," as I think some have portrayed it. That said, the Great Depression was certainly life-altering for a whole generation of Americans, and, speaking as an Okie, I can attest to the fact that many did, indeed, experience Steinbeck's tragedy. Their suffering was no less painful because some of them owned automobiles -- starvation and hopelessness have a funny way of afflicting everyone, equally.
The victims of the Great Depression who are often overlooked were those most vulnerable to the crisis: farmers, blacks, Mexicans, the vast communities of immigrants from Central, Southern and Eastern Europe (who primarily resided in the cities). Unfortunately, their suffering was very real and I would wager was comparable with what was going on in Europe at the time.
edit: I'll have to tell my grandma she grew up in an "elite" household because they had a truck. LOL. she'll get a kick out of that. to this day, she won't eat cornbread or pinto beans because that's all they had... every day... for three years... when she was a kid.
On March 02 2009 15:31 shmay wrote: What I was rallying against was the idea that government can just become bigger without consequences on the private sector -- where are the resources coming from? It's like trying to fill up a pool by taking water from one end and pouring it into the other.
There will definitely be consequences, but it isn't a case of the government sucking up all the jobs the private sector ought to be doing. Like in the case of building roads, the government simply creates a department to hand out contracts to private companies. Of course, the more roads need to be commissioned, the bigger that department needs to be, but that isn't really sucking up money as much as needing more administrators.
I think what you're railing against is more nationalisation, when the government does the building itself instead of outsourcing. I agree that in most cases that is a very bad idea, and should only be done as a drastic, temporary solution.
I think it's more a matter of deciding which areas of government to grow and which to trim, rather than big government = bad private sector.
On March 02 2009 12:29 cUrsOr wrote: i think its true the the government (in the last few years especially) but ever since the creation of the central bank in 1913, has more or less been a funnel of money from poor to rich.
isnt it true that the econmic problems we are having is the result of an entirely debt based dollar, and the fact that our trade deficit just keeps on swelling? i mean, we dont hardly produce anything except our own food. outsourcing of jobs has weakened our economy, and this "free trade" ideology america forces on the rest of the world has done nothing but weaken the global economy.
its good to listen to ron paul talk about these issues, i am by no means a republican, but i think he has a 100% realistic assesment of the situation.
I thought Ron Paul was a staunch supporter of free trade. Unilateral free trade even.
On March 02 2009 13:15 Choros wrote:if combined with deteriorating incomes resulting from bad macro economic policy including the deindustrialisation of the west caused to a large extent by the free trade ideology.
You're referring to free trade as an ideology merely for rhetorical reasons.
A great number of economists are supportive of free trade, both on the left and on the right (at least according to Mankiw* and a survey by Klein & Stern). Paul Krugman, who won a Nobel Prize for his work on trade and sits politically on the leftside of the spectrum, is supportive of free trade. This is not an ideology specific to a certain section of the political spectrum.
On March 02 2009 13:15 Choros wrote: This is not entirely true, the economic growth of the post war period up to 1980 was 'high quality growth' meaning it did not come at the cost of increasing income inequality. The growth of this period was maintained and preserved through the economy proper and it created significant tangible increases in standards of living. The deterioration of income inequality after this period is a symptom of serious deficiencies in economic policy including deunionisation...
one of the main reasons for the american revolution was the fact that our currency was controlled by a British privately owned bank. since 1913 we have had a central bank in the US, that proffits off of things like inflation and debt. i agree with you about a lot of things, but i think looking at the banking foundation for our money system, and mainly who controls it, is a good place to start.
Free Trade
ron paul has said on many occasions that the "free trade" we have now is set up only to bennifit a few large corporations and international banking institutions. + Show Spoiler +
http://www.youtube.com/watch?v=prtR-h8oKqU i hate loudobbs btw
im just going to say something else really quick. a lot of people see outsourcing of jobs as one of the main problems with free trade, and i dont think i would argue with them. i would just like to point out who really bennifits from "free" trade, and its not the citizens of any country. its the companies who get to move wherever they want without restriction, and polute where its easiest, sell where its easiest, exploit where it is easiest... even setting asside the pressures put on leaders of foreign countries too "open themselves" to the WTO's version of free trade. which basically means that large international corporations can come in, and buy your whole country. buy your water, buy your oil and all of your food producing facilities. when other countries subscribe to "free" trade, their local producers cannot compete with the influx of US subsidized foods like corn and rice- which is why many countries like Haiti succomed to the food crisis. the local growers cant compete with huge agri-business, subsidized and even GMO cheaply produced foods. and we all know about what happens in china and many other countries, with sweatshops- also leads me to the idea of "wage slavery"- where you have no say in how the company you work for opperates. you just sell yourself to it.
its funny how america talks about freedom so much, but its only personal freedom. you have that in many dictatorships. the idea of civic freedom is much different. that is the voice in the opperation of your countries primary institutions. just look at the US for example.. is our education system run democratically? how about our Economic infrastructure? is that privately controlled? and the media? is the media privately owned and controlled? the businesses we work for? ALL bureaucracies... as if the idea of Democracy can only be used for elections (which is another debate entirely). top to bottom, our society here isnt exactly wrought with democracy.
EDIT: i never wanted to be one of those people with long "ranty" posts. i hope its an easy read and not too tangent by the end. its nice to have a place to talk longer than a 5 word youtube comment.
I agree with some of what you say, but I don't think you should treat democracy as a "pure" good. Market driven activity can be disasterous in many areas as well.
Also, people really need to stop referencing Ron Paul. Even if you support Austrian economics, why don't you read an actual Austrian economist rather than the work of a politician who does not do research, and is not trained in economics. He has a M.D., if you have an ailment look to his advice. Believing him is only a few steps above believing Matt Damon when it comes to politics.
i dont think its safe to assume that being a vegetarian is bad because hitler was one.
so, even though Ron Paul isnt a world renound economist, neither is Dennis Kucinich... but I think they are the best informed people we currently have in politics. i really like what both of them had to say about the first "bailout bill", or wave of money appoved for the banks.
On March 03 2009 07:43 cUrsOr wrote: you know hitler was a vegetarian?
i dont think its safe to assume that being a vegetarian is bad because hitler was one.
so, even though Ron Paul isnt a world renound economist, neither is Dennis Kucinich... but I think they are the best informed people we currently have in politics. i really like what both of them had to say about the first "bailout bill", or wave of money appoved for the banks.
edit: btw Matt Damon <3<3<3 omg fanboy
If there's a problem with the American economy, it's the unimaginable quantities of people who have no capacity for recognizing cognitive dissonance even as it surges out of their mouth like so much regurgitated meat loaf. I'll give you the benefit of the doubt and assume you were heavily inebriated from consuming large quantities of hallucinogenic drugs, or maybe you were trolling to see how many people with higher mental functions you could coax out of teamliquid, because I can't imagine how else you might not recognize the logical contradictions inherent in endorsing the policies of both Kucinich and Ron Paul at once.
I'm really not trying to be an ass (not that I haven't been on many occasions in this thread), but how much effort does it really take to think sceptically about some crackpot theory fed to you by politicians with no form of training in economics, however "radical" they may be? I'm not expecting everyone to devote their lives to studying economics, but it doesn't hurt to spend half an hour reading about comparative advantage on wikipedia.
On March 02 2009 13:15 Choros wrote: This is not entirely true, the economic growth of the post war period up to 1980 was 'high quality growth' meaning it did not come at the cost of increasing income inequality. The growth of this period was maintained and preserved through the economy proper and it created significant tangible increases in standards of living. The deterioration of income inequality after this period is a symptom of serious deficiencies in economic policy including deunionisation...
one of the main reasons for the american revolution was the fact that our currency was controlled by a British privately owned bank. since 1913 we have had a central bank in the US, that proffits off of things like inflation and debt. i agree with you about a lot of things, but i think looking at the banking foundation for our money system, and mainly who controls it, is a good place to start.
Free Trade
ron paul has said on many occasions that the "free trade" we have now is set up only to bennifit a few large corporations and international banking institutions. + Show Spoiler +
http://www.youtube.com/watch?v=prtR-h8oKqU i hate loudobbs btw
im just going to say something else really quick. a lot of people see outsourcing of jobs as one of the main problems with free trade, and i dont think i would argue with them. i would just like to point out who really bennifits from "free" trade, and its not the citizens of any country. its the companies who get to move wherever they want without restriction, and polute where its easiest, sell where its easiest, exploit where it is easiest... even setting asside the pressures put on leaders of foreign countries too "open themselves" to the WTO's version of free trade. which basically means that large international corporations can come in, and buy your whole country. buy your water, buy your oil and all of your food producing facilities. when other countries subscribe to "free" trade, their local producers cannot compete with the influx of US subsidized foods like corn and rice- which is why many countries like Haiti succomed to the food crisis. the local growers cant compete with huge agri-business, subsidized and even GMO cheaply produced foods. and we all know about what happens in china and many other countries, with sweatshops- also leads me to the idea of "wage slavery"- where you have no say in how the company you work for opperates. you just sell yourself to it.
its funny how america talks about freedom so much, but its only personal freedom. you have that in many dictatorships. the idea of civic freedom is much different. that is the voice in the opperation of your countries primary institutions. just look at the US for example.. is our education system run democratically? how about our Economic infrastructure? is that privately controlled? and the media? is the media privately owned and controlled? the businesses we work for? ALL bureaucracies... as if the idea of Democracy can only be used for elections (which is another debate entirely). top to bottom, our society here isnt exactly wrought with democracy.
EDIT: i never wanted to be one of those people with long "ranty" posts. i hope its an easy read and not too tangent by the end. its nice to have a place to talk longer than a 5 word youtube comment.
Protectionists like to make free-trade out into some kind of boogey monster, a kind of Lord Sauron of global economics whose favorite delight is the unchecked rape and pillage of otherwise content 3rd world citizens who, had they only been left alone by the hegemonic and imperialist pigs of the terrible Mordor of the West, would live self-sustaining lives farming off the land and singing Kum-Bah-Yah.
But that is such bullshit. So much bullshit in fact, not even a lifetime supply of genuine bull manure could compare.
I'm not going to waste your time explaining the theory behind comparative advantage to you, since you can just google it anyway. Suffice it to say, the idea that free trade is anything but essential to economic growth and wealth creation is mathematically flawed.
My time is better spent denying everything you claim through empirics. Far from oppressing the poor, globalization has improved the lives of billions of people in developing economies across the world. Pew Global Research reported last week that, for the first time, more than half the world can now be considered the "middle class", meaning that they have at least a third of their income left for discretionary spending. Two decades ago, before the advent of the GATT and later, the WTO, that number was approximately a third. Significantly, most of that growth has occurred in the 3rd world, the countries protectionists would have you believe are being exploited for their "sweatshop labor" and natural resources. None of this would have been possible without free trade.
Take the Eastern Asia "Tigers" for instance. China's rate of growth expanded several hundred percent after rapproachment with the US, a period during which it began experimenting with free-market reform. After entering the WTO, growth nearly doubled, after having slackened off from the Asian financial crisis. Similar stories abound throughout the region: South Korea experienced double digit growth after switching course to an export oriented strategy after experimenting with protectionism.
To drive the point home, observe the extraordinary growth of wealth and the closure of the income gap in China from 1980-2009:
Three decades is all it took. Three decades after two centuries of colonialism, and free-trade has transformed China into an economic powerhouse.
But what of America you say? Shouldn't we protect our industries at home? But we don't produce anything ourselves! More bullwinkle. I don't want to look up the figures for this exactly, but manufacturing is far from dead in America. Some 60% of private sector GDP is manufacturing still. But that's irrelevant, since there is nothing wrong with service sector growth at all. What happens when manufacturing jobs get outsourced to China is that the money that's being saved is being invested in high profit-margin and high tech industries, most of which are impossible to develop elsewhere because the US has such a competitive edge in technology and skilled labor. Far from hurting US interests, free trade is the only avenue for ensuring continued US competitiveness and growth. For all the talk about China's manufacturing growth, its high tech exports have gradually shrunk in proportion with the rest of the economy over time, largely due to lax intellectual property enforcement and a broken patent system.
Here is the bottom line: There exist zero historical instances of protectionist states that have made any real, sustainable progress in economic development. Commodity exporting countries led by socialist leaders like Venezuela, Iran, or Bolivia are a unique exception, but their success is equivalent to winning the lottery. Unless the immediate gains are consolidated through investment in free-enterprise, such growth is unsustainable. The important point is that no state has ever become a developed economy through protectionism. When states have reverted to protectionism after a prolonged period of open trade, it has only hurt every country involved. The Buy American clause in the stimulus package, for example, is probably going to cost more steel jobs than it protects as nations reciprocate our steel subsidies and international demand falls. But the most infamous case of protectionism gone horribly bad are the Smoot-Hawley tariffs, which increased the average tariff barrier to something like 40-50%. By destroying international demand, it threw the world economy into a cycle into a deflationary cycle: a situation in which cuts in prices discourages spending, which encourages further price cuts, etc. The Smoot-Hawley tariffs are largely credited with turning the recession of the 30's into a depression.
So I don't eat my own words later, I would point out that your diatribe of a post is right about two things -- the wealth that's created from the sale of commodities rarely goes into the development of more sustainable and job-creating industries like it should. Countries like Russia, the Congo, and Sudan has seen little of the growth in standard of living the rest of the world has experienced. Moreover, pollution is a serious concern because it could incur serious costs for both developed and developing economies if left unchecked. But the idea that trade "exploits" the poor is just such a stupid idea.
Ok.
I spent way too much time on this post. But I will not have bad economics in my thread, so help me fucking god.
Uh... the Asian Tigers are exceptional in every sense of the word, but they also had massive amounts of foreign aid, particularly from the US, and they're not as open as you think. In fact, aside from Singapore, the rest of the Tigers all execute relatively moderate forms of protectionism (moreso than Western countries), with import tariffs, export incentives and loads of other government help for their own industries. In other places, free trade has demolished countries who cannot compete and who basically have to take gambles on where to specialize, and these countries were much more rigorous in enforcing free trade than even the US is today. That is not to say it is or isn't bad in any situation, but there is no iron clad law that dictates the performance of a nation's economy based on the level of free trade it executes. It simply doesn't exist, the geopolitics are too complicated, so different levels are appropriate for different countries. That is why they call it "strategic trade policy" these days, not protectionism.
Off the top of my head, I can think of four countries that did "sort of" well with functioning protectionist legislation - Britain, the United States, Germany and Japan. By the time the British became gung ho about free trade, they were able to do so because they already led the world in technology and industry and it was beneficial for them, but all of these countries were extremely protective of infant industries before their economic revolutions. As they tout the benefits of it now, they do so with massive advantages over countries who are not as far "advanced," and even still they're not in complete compliance.
Economy of scale destroys the comparative advantage (this is actually what Kruger worked on.) There's not a single farmer in Central or South America that can legitimately compete with much larger farmers from the US (even without the huge subsidies they receive) in a free market, so the country's domestic base deteriorates and then socialism seems like a good alternative.
That is not to say the "Buy American" clause is a good idea. For a country this size, and for a number of other factors, it is a terrible idea, but don't paint an overarching picture of protectionism when almost all of the developed world has relied on it at some point.
You've also dangerously (and stupidly) oversimplified the issue of development. Protectionism or not, Sudan and Congo would not see the same growth as the rest of the world. I'm not sure where the environment fits into this, but I think it's naive to think the problem will be solved without regulatory intervention.
And trade DOES exploit the poor. Perhaps not long term but nearly every single country has encountered major problems with economic polarization when they began to industrialize. That is generally standard fare.
For what it's worth, during the Depression while Southern Democrats favored internationalism (the more buyers, the better) they weren't actually against government intervention. Conservatives have characterized themselves as historically having been against federal government expenditure, but that simply isn't true. They were all for social programs (and voted that way) as long as the issues of race and labor unions weren't brought up. Their voting patterns were due to pragmatic cultural influence, not ideology.
On March 02 2009 13:15 Choros wrote: Edit: Did you know that in 1970 the average worker in the United States earned 30% more than they do today and worked 2 weeks less. This is a very important symptom of the economic problems of the United States today. As long as wages are falling there is nowhere your economy can go but backwards.
personal income grew 0.4% last month in the US heck , you can't have hyperinflation without higher personal income and i think that is where the US is heading considering Obummers 2 trillion dollar budget.who does he expect to buy all those bonds?
"None of this would have been possible without free trade." thats a bit presumptious dont you think? that free trade is the sole entity driving development? there havent been any other factors that have made this possible?
"China's rate of growth expanded several hundred percent after rapproachment with the US..." as did its rates of autism. some several hundred percent. (im really glad you mentioned the pollution at the end.) as if a bigger GDP and population (especially in Chinas case >.< ) are the sole indicators that society is now "better off".
"There exist zero historical instances of protectionist states that have made any real, sustainable progress in economic development." I would say that Venezuela is in stark contrast to this statement, but Im sure I probably shouldnt bring that country up.
Ive been through the sweatshops arent all bad argument. I know youre not saying child labor is good, or that sweatshops are good. believe me im not accusing you of that. do they lead to eventual rise in income? yes. is it proportonate to the rise in income of the wealthy in the country, or the owners of the businesses? and finally, there is no other way? i mean, we have to accept that there will be a 50 year phase of virtual slavery in a country before there can be any sort of standard of living? i say its a horrible way to assume the world has to work.
i would not quallify my post as bad economics. food production has declined in every country that we have "free trade" agreements with. why grow food for X amount when the US can import it for .6X??? im sure you can google it to find that this is the case.
there are better ways to do things. to think that free trade is the model that all countries should accept is not exactly self-determination. any time people try to tell the US what to do, people throw fits around here. the whole concept, like any Agreement or Constitution is concieve, and designed to benifit the authors. these are the ideas of the international corporations that want access to resources with minimal hassle. (edit: yes Labor is a resource) The wto and imf are designed to make these desires attainable for the owners. so business can proffit and benifit- and a few people can make money. these are not democratic institutions. they do not have our best intrests as even a concern... why would they?
when left to "free" markets, everythign will be bought and owned and controlled by the wealthy. and thats not the kind of world i want to live in. while they make billions now, we get to see a 4% increase in income over the next 20 years.
lets not assume, stay with me, that Free-Trade is the idea that has lead to the Growth in the 3rd world. these people would "develop" reguardless. american companies arent there facilitating it. i would say, more properly, that growth has occured despite Free Trade rather than because of it.
On March 03 2009 11:25 Jibba wrote: Uh... the Asian Tigers are exceptional in every sense of the word, but they also had massive amounts of foreign aid, particularly from the US, and they're not as open as you think. In fact, aside from Singapore, the rest of the Tigers all execute relatively moderate forms of protectionism, with import tariffs, export incentives and loads of other government help for their own industries. In other places, free trade has demolished countries who cannot compete and who basically have to take gambles on where to specialize. That is not to say it is or isn't bad in any situation, but there is no iron clad law that dictates the performance of a nation's economy based on the level of free trade it executes. It simply doesn't exist, the geopolitics are too complicated, so different levels are appropriate for different countries. That is why they call it "strategic trade policy" these days, not protectionism.
I can't think of a single instance of an industry without geopolitical implications (defense, for example) that can benefit the economy in the long run if it's protected. And you're right that I was wrong about the Tigers. But the important thing, and the point I was making, is that they pursued a strategy based on trade with other nations, and did not rely solely on domestic demand. This contrasts with policies elsewhere that attempted to nurture domestic industries. You also ignore the distortionary impacts of such protective policies -- China's currency manipulation adversely impacts the manufacturing sectors of competing nations. While China is still chugging along at 6% growth, for example, Taiwan's currency has skyrocketed and GDP fell at an annual rate of 2% last year.
Off the top of my head, I can think of four countries that did "sort of" well with functioning protectionist legislation - Britain, the United States, Germany and Japan. By the time the British became gung ho about free trade, they were able to do so because they already led the world in technology and industry and it was beneficial for them to do so, but all of these countries were extremely protective of infant industries before their great revolutions. Even as they tout the benefits of it now, they do so with massive advantages over countries who are not as far "advanced," and even still they're not in complete compliance.
The problem with your examples is that each did not operate in a globalized world. When your competition is not benefiting from free trade, it's meaningless to cite your own protectionist policies as a boon. Britain had the benefit of an empire that allowed it to extract the natural resources it needed for England's industrial machine. Free-trade within its empire, as with all empires, gave it a competitive edge. There's no knowing how much faster growth may have progressed in an 19th century were trade barriers lower between empires. Protective policies intended to nurture domestic industries would be disastrous in today's globalized world, where such industries would never be able to compete, even if you could somehow overcome the political resistence to "unprotecting" any such industry.
Granted, I'm not as well informed on history, but what protectionist tendencies are you talking about in US history that was unique from the rest of the world and was not a consequence of natural trade barriers arising from the oceans? And isn't the fact that the US had large tracts of undeveloped and unexploited land unique?
Economy of scale destroys the comparative advantage (this is actually what Kruger worked on.) There's not a single farmer in Central or South America that can legitimately compete with much larger, heavily subsidized farmers from the US in a free market, so the country's domestic base deteriorates and then socialism seems like a good alternative.
Agreed. Agricultural subsidies are shit. Fuck greedy American farmers. They're a disincentive for agricultural investment across the world and exacerbate the food crisis. But free-trade relieves that problem to an extent by lowering prices and granting access to a global market of food commodities. Nor are US subsidies the unique cause of today's food shortage -- sometimes it is just much more expensive and difficult to develop agriculture in tropic areas, because disease is more common, and yields are less consistent. Free-trade at least creates generates non-sustenance labor and creates incentive for further agricultural development world wide.
As for the economies of scale thing, I'm not sure what you're getting at. It's true developing nations can't compete in a global market, but they retain a comparative advantage because sustenance farming is always less productive, and because wages are cheaper. Say I have a choice between producing a shitty tshirt for $1 or farm .50 cents worth of food. My overseas competitor, in the same period of time, produces the same tshirt for $10 and $50 of food. It is advantageous for me to sell him tshirts and for him to sell me food. Foreign investment also improves technology.
That is not to say the "Buy American" clause is a good idea. For a country this size, and for a number of other factors, it is a terrible idea, but don't paint an overarching picture of protectionism when almost all of the developed world has relied on it at some point.
You've also dangerously (and stupidly) oversimplified the issue of development. Protectionism or not, Sudan and Congo would not see the same growth as the rest of the world. I'm not sure where the environment fits into this, but I think it's naive to think the problem will be solved without regulatory intervention.
I think I was agreeing that free-trade has done little for development in these countries largely due to the political problems caused by dependence on commodities exports. I don't know what the argument is here.
Free-trade to some extent makes it harder to reduce carbon emissions globally. This is a problem, was what I was getting at.
And trade DOES exploit the poor. Perhaps not long term but nearly every single country has encountered major problems with economic polarization when they began to industrialize. That is generally standard fare.
I've never denied there is a cost in the short-run. But the long-run benefits always outweigh because they are perpetual.
At the end of the day I'm not persuaded that a world with free-trade is not a good thing. Fair-trade provisions have only ever distorted the market, and while they may be in the immediate best interests of particular nations, such policies hinder global growth and detract from the cause of human welfare.
On March 03 2009 10:40 ahrara_ wrote: If there's a problem with the American economy, it's the unimaginable quantities of people who have no capacity for recognizing cognitive dissonance even as it surges out of their mouth like so much regurgitated meat loaf. I'll give you the benefit of the doubt and assume you were heavily inebriated from consuming large quantities of hallucinogenic drugs, or maybe you were trolling to see how many people with higher mental functions you could coax out of teamliquid, because I can't imagine how else you might not recognize the logical contradictions inherent in endorsing the policies of both Kucinich and Ron Paul at once.
oh. without a bunch of derogetory attacks. here is a comparison of what Ron Paul and Dennis Kucinich both had to say about the recent Bailout, the first one approved back in October.
ill try to stay sober for the next couple of sentences. they both agreed the bill is WAY too much. the both attack the idea that more debt is the answer to the problem. they agree, and both state, that the federal reserve needs oversight (one of the main themes of my post so far about the central bank) and that its in the intrest of a "few people", the banks.
and most importantly, they both agree that their should have been more time for discussion. and they both agree that the idea of making this the Taxpayers problem, even more than it already is, is a very bad idea.
On March 03 2009 12:06 cUrsOr wrote: "None of this would have been possible without free trade." thats a bit presumptious dont you think? that free trade is the sole entity driving development? there havent been any other factors that have made this possible?
No. Not significantly. Read below, I talk about it at the bottom.
"China's rate of growth expanded several hundred percent after rapproachment with the US..." as did its rates of autism. some several hundred percent. (im really glad you mentioned the pollution at the end.) as if a bigger GDP and population (especially in Chinas case >.< ) are the sole indicators that society is now "better off".
A few thousand autistic kids is worse than half a billion people out of poverty? What?! These minor factors are negligible in the long run. Moreover, economic growth facilitates cheaper health care, generally improving the quality of life.
"There exist zero historical instances of protectionist states that have made any real, sustainable progress in economic development." I would say that Venezuela is in stark contrast to this statement, but Im sure I probably shouldnt bring that country up.
Chavez has considerably reduced poverty rates in Venezuela, true, but the money to do that has nearly all been derived from oil exports. This creates a litany of problems that make such growth unsustainable. First, oil reserves will eventually run out, and production is already in decline. Second, it makes the national vulnerable to schizophrenically unstable energy prices. Finally, Chavez's protectionism has discouraged growth in manufacturing (in fact I believe it has shrunk), which is key to sustained growth. Why not follow the more moderate policies of Lula de Silva in Brazil, whose anti-poverty programs have made considerable progress as well?
Ive been through the sweatshops arent all bad argument. I know youre not saying child labor is good, or that sweatshops are good. believe me im not accusing you of that. do they lead to eventual rise in income? yes. is it proportonate to the rise in income of the wealthy in the country, or the owners of the businesses? and finally, there is no other way? i mean, we have to accept that there will be a 50 year phase of virtual slavery in a country before there can be any sort of standard of living? i say its a horrible way to assume the world has to work.
I love child labor when the alternative is child prostitution. It brings tears of joy to my Eustace Tilley monocled eye and touches my blackened heart dearly. Because that is the alternative, provided you're attractive enough, and if you're not, you're going to live miserably and starve. Why are you asking me if there is a better alternative? I don't have one besides free-trade. I've never argued that capitalism is perfect. In fact I've acknowledged that there are serious humanitarian costs to which even my worn sense of compassion is not immune, but it is infinitely better than perpetual poverty.
Now, 50 years is a huge exaggeration, considering the statistics coming out of China, but I will eagerly debate you on that premise. If the long run benefits persist forever, I will happily pay a short term cost of "wage slavery".
i would not quallify my post as bad economics. food production has declined in every country that we have "free trade" agreements with. why grow food for X amount when the US can import it for .6X??? im sure you can google it to find that this is the case.
Why does food have to be grown locally? Depending only on local crops is risky. In small countries especially, a single bad yield could lead to famine. In a global market, such bad years can be covered for by tapping the global market. Now that will increase prices, but it is better than starving to death. Increased prices, moreover, give a signal for the market to invest more in agriculture. (Admittedly, this does not always work as quickly as it ought to. There are serious problems with today's food market, and it may actually be worthwhile to develop strategically protected reserves of agriculture for political reasons, but in the long run, the benefits of free-trade outweigh).
there are better ways to do things.
Like?
to think that free trade is the model that all countries should accept is not exactly self-determination.
I don't care about abstract, intangible moral principles when the lives of billions are at stake. If I know ten people will die unless I shoot another man, I will happily shoot that man whether he likes or not. (Maybe not happily... but you get the point)
any time people try to tell the US what to do, people throw fits around here. the whole concept, like any Agreement or Constitution is concieve, and designed to benifit the authors. these are the ideas of the international corporations that want access to resources with minimal hassle. the wto and imf are designed to make these desires attainable for the owners. so business can proffit and benifit- and a few people can make money.
Did you completely ignore my analysis about how globalization has benefited hundreds of millions in China? Or the point about how more than half of the world has become part of the middle class since the GATT and WTO?
lets not assume, stay with me, that Free-Trade is the idea that has lead to the Growth in the 3rd world. these people would "develop" reguardless. american companies arent their facilitating it. i would say, more properly, that growth has occured despite Free Trade rather than because of it.
This. Is. Factually. Incorrect. The fastest growing sector, and the one that has fueled nearly all its GDP growth in most developing economies is exports. Do you understand? Exports. Exports are not possible without free trade. In a world of high trade barriers, growth is much slower because there is no domestic market to buy those products, because they are all incredibly poor. I really don't want to go into detail about how comparative advantage works (PLEASE read up on it some before debating this again, it makes this entire post moot if you don't understand the basic theory), but maybe a simple example will illustrate the concept.
Say Bob has a tract of land on which he can grow 4 apples or 2 bananas a day. To live, he needs one of each every day. So he splits his time: every day he grows 2 apples and 1 banana.
Say there is another farmer Jim that has land suited for growing 2 apples and 4 bananas a day. To live, he needs one of each every day. So he grows 1 apple and 2 bananas.
In a world without free trade, together Bob and Jim grow 6 pieces of fruit a day. But say they meet up one day and decide to specialize and focus on what they produce best. Bob grows 4 apples a day, Jim grows 4 bananas a day. They trade so that each have enough fruit to live on, but they are now growing 8 fruits total. Instead of 2 leftover fruits, they have 4. They can take the surplus and sell it so they can buy more land or hire employees. This creates wealth twice as fast.
(I know this is absolute advantage but comparative advantage is similar)
On March 03 2009 11:25 Jibba wrote: Uh... the Asian Tigers are exceptional in every sense of the word, but they also had massive amounts of foreign aid, particularly from the US, and they're not as open as you think. In fact, aside from Singapore, the rest of the Tigers all execute relatively moderate forms of protectionism, with import tariffs, export incentives and loads of other government help for their own industries. In other places, free trade has demolished countries who cannot compete and who basically have to take gambles on where to specialize. That is not to say it is or isn't bad in any situation, but there is no iron clad law that dictates the performance of a nation's economy based on the level of free trade it executes. It simply doesn't exist, the geopolitics are too complicated, so different levels are appropriate for different countries. That is why they call it "strategic trade policy" these days, not protectionism.
I can't think of a single instance of an industry without geopolitical implications (defense, for example) that can benefit the economy in the long run if it's protected. And you're right that I was wrong about the Tigers. But the important thing, and the point I was making, is that they pursued a strategy based on trade with other nations, and did not rely solely on domestic demand. This contrasts with policies elsewhere that attempted to nurture domestic industries.
Ohhhh I just realized how stupid this sentence I wrote is. And I'm sure you've noticed it also. Ignore me. The second part about distortion is more important anyway.
briefly, the problem with food not being grown locally is that, when there is a crisis, only the rich people get to buy food, and imports to the non produing nations will stop. this was the staple of the food crisis in late 2007 that is still going on.
better ways to do things? everything local. every apple that comes from the other side of the planet also carries with it a certain amount of polution and unnecisary labor, etc. its just not efficient.
"Did you completely ignore my analysis about how globalization has benefited hundreds of millions in China? Or the point about how more than half of the world has become part of the middle class since the GATT and WTO?"
no. i think youre confusing industrialization with free trade. the rising standar of living has more to do with proliferation of inustrial farming and manufacturing than it does with Free Trade. again, if economy is kept local rather than global, the benifits of work done in china would all bennifit them, rather then them reaping a very small percentage of the work they actually do, which is now the case.
On March 03 2009 13:04 cUrsOr wrote: briefly, the problem with food not being grown locally is that, when there is a crisis, only the rich people get to buy food, and imports to the non produing nations will stop. this was the staple of the food crisis in late 2007 that is still going on.
better ways to do things? everything local. every apple that comes from the other side of the planet also carries with it a certain amount of polution and unnecisary labor, etc. its just not efficient.
"Did you completely ignore my analysis about how globalization has benefited hundreds of millions in China? Or the point about how more than half of the world has become part of the middle class since the GATT and WTO?"
no. i think youre confusing industrialization with free trade. the rising standar of living has more to do with proliferation of inustrial farming and manufacturing than it does with Free Trade. again, if economy is kept local rather than global, the benifits of work done in china would all bennifit them, rather then them reaping a very small percentage of the work they actually do, which is now the case.
Ignorance, how you reek. You have never read a primer on economics. Yes, it is that obvious. Until you have, I will likely make more progress persuading Rekrul to feel shame or an elephant that he has wings and can fly. So I am off to better pursuits. May I recommend "Naked Economics" as an excellent introduction to the dismal science?
im not advocating no trade. im condemning free trade. tariffs, and other protectionst policies, make sense to protect local economies.
and, yes, i have studied economics, though it was only required courses in college and high school.
if you dont wish to discuss anymore, that is fine. but, if i may insult your pallet with one last bite of meatloaf. its in the vein of Industrialism vs Free Trade okay, and what is responsible for real gains. just because we have more pie, doesnt mean that our percentage of that pie is bigger, it could in fact be less. the whole pie is now bigger, and even though we have more "pie"... we actually have less of it as a percentage. the wealth distributions in the world now, are, worse than they have ever been, and continue to widen.
The problem with your examples is that each did not operate in a globalized world. When your competition is not benefiting from free trade, it's meaningless to cite your own protectionist policies as a boon. Britain had the benefit of an empire that allowed it to extract the natural resources it needed for England's industrial machine. Free-trade within its empire, as with all empires, gave it a competitive edge. There's no knowing how much faster growth may have progressed in an 19th century were trade barriers lower between empires. Protective policies intended to nurture domestic industries would be disastrous in today's globalized world, where such industries would never be able to compete, even if you could somehow overcome the political resistence to "unprotecting" any such industry.
Some people (Adam Smith included) believed globalization began in 1492. I think that position is overstating the significance of inter-connectedness but I think there's a fair amount of evidence that point to a big boom happening in the early 19th century, and it certainly didn't start with Thomas Friedman. Look at the Civil War, for instance. Who is one of the main producers of cotton in the world today? Do you know when and why they rose to dominance? When the South was getting its ass kicked and because the rest of the world wanted a new source. Then it bounced back to further weaken the Southern economy during reconstruction.
Granted, I'm not as well informed on history, but what protectionist tendencies are you talking about in US history that was unique from the rest of the world and was not a consequence of natural trade barriers arising from the oceans? And isn't the fact that the US had large tracts of undeveloped and unexploited land unique?
The most famous was the Tariff of Abominations, which led to the Nullification Crisis which led to Andrew Jackson kicking some serious ass in Congress. The South took issue with it, not because they were actually in great support of free trade, but because it was hurting their economy. They were forced into buying Northern goods rather than cheaper British goods and it hurt their own cotton trade with Europe.
As for the economies of scale thing, I'm not sure what you're getting at. It's true developing nations can't compete in a global market, but they retain a comparative advantage because sustenance farming is always less productive, and because wages are cheaper. Say I have a choice between producing a shitty tshirt for $1 or farm .50 cents worth of food. My overseas competitor, in the same period of time, produces the same tshirt for $10 and $50 of food. It is advantageous for me to sell him tshirts and for him to sell me food. Foreign investment also improves technology.
What if your foreign competitor actually produces everything in a free trade zone in your country and because of economies of scale (competitor is bigger, bigger = cheaper) can sell at lower prices? If a US company sets up a T-shirt shop in a South American country with heavy free trade policies, how much of the profits are actually being invested back into the country?
Lets look at this another way. Developing countries don't have the infrastructure to support high tech jobs as their advantage. Brazil attempted to get in on CPUs but eventually they lost out and it set them back a while. What countries are able to do is supply low quality, often raw goods. Now, their comparative advantage (if it works at all) will work for a short time period, but they quickly need to develop other industries or they'll be a slave to conditions, weather, other countries who produce the same good, etc. It's extremely difficult to build an infrastructure quick enough before these problems start setting in, and very few countries have been able to do it. The Tigers had the US holding their hand on the way through and giving them money, Canada was able to do it on lumber/furs but Canadians were Europeans who already had much of the existing infrastructure and technology in place.
I've never denied there is a cost in the short-run. But the long-run benefits always outweigh because they are perpetual.
I don't think that's provable, but I think it's fairly easy to qualitatively consider things and see that it's not true, or at least not due to free trade. Industrialization widens the gap, and then the government steps in to close it. Singapore might be the only example of the market being used to help polarization, but their government has done some pretty ingenious things and they're got pretty unique characteristics.
I'm certainly not advocating serious protectionism but I think you know that. Again, "strategic trade policy" is what all modern states use because free trade is just an ideal. Japan's massive support for their auto industry is part of the reason our auto industry is hurting right now. A push for freer trade wouldn't help that sector. Look at it using game theory.
Many of the problems might be alleviated if Obama gets his social plan through, but we'll see. Oh, I also learned today that we were incredibly close to getting national health care in the 1940s. The Southern veto stopped it, but their main issue was the fact that they're racist assholes, which is the same reason they almost killed the GI Bill as well. Luckily for veterans (and the US economy) denying black veterans benefits was too much of a stretch, even for Bourbon Southerners, but they were still able to block the health care.
On March 02 2009 13:15 Choros wrote: Edit: Did you know that in 1970 the average worker in the United States earned 30% more than they do today and worked 2 weeks less. This is a very important symptom of the economic problems of the United States today. As long as wages are falling there is nowhere your economy can go but backwards.
personal income grew 0.4% last month in the US heck , you can't have hyperinflation without higher personal income and i think that is where the US is heading considering Obummers 2 trillion dollar budget.who does he expect to buy all those bonds?
The spike in personal income comes from increased pay to federal employees and military personnel that took effect last month. It's not inflation. Also, Choros is right when he says the average American worker earned more in the '70s -- and not in nominal terms. As a percentage of GDP, wages and salaries were much higher then than they are now. In fact, wages are at their lowest share of GDP on record.* Real wages have not kept up with corporate profits or inflation.
*That statement is a couple years dated, but I think still holds.
Now, I think Choros' point was that this shows globalization has eroded real wages in the U.S. While that certainly is partly true, I think this was inevitable to some degree. Our period of post-war prosperity was destined to end (or, at least, lessen) as productivity around the globe began to match ours. That's unfortunate for us, but is it really a bad thing? The success of the Asian Tigers and India and other developing countries has brought millions out of poverty.
Also don't ignore a dramatic redistribution of wealth to the rich in this country through tax policy, deregulation and the demise of the labor movement (among other things). That, more than anything I think, explains why real wages are askew.
And I know I'm a newcomer to this thread -- uh, and board -- but I think Ahara's analysis on globalization is pretty damn accurate.
ya globalization!! more cafta and ftaa... if they are lucky, all of latin america will end up like mexico. if only we can find a way to keep em all from fleeing to the US
I'm actually impressed by ahara's continual commitment to explaining economics to every person posting in here without basic understanding of economics. Especially moreso considering that this is the internet. Having tried my fair share of explanations, I've already given up arguing on this thread because it just takes way too much time to make a 3 page post.
there seems to be quite a bit of discussion about wether or not "globalization" as you call it, or free trade, is actually good for devloping nations on: http://www.nber.org/ perphaps you guys should inform them that the debate is indeed over.
On March 02 2009 13:15 Choros wrote: Edit: Did you know that in 1970 the average worker in the United States earned 30% more than they do today and worked 2 weeks less. This is a very important symptom of the economic problems of the United States today. As long as wages are falling there is nowhere your economy can go but backwards.
personal income grew 0.4% last month in the US heck , you can't have hyperinflation without higher personal income and i think that is where the US is heading considering Obummers 2 trillion dollar budget.who does he expect to buy all those bonds?
Now, I think Choros' point was that this shows globalization has eroded real wages in the U.S. While that certainly is partly true, I think this was inevitable to some degree. Our period of post-war prosperity was destined to end (or, at least, lessen) as productivity around the globe began to match ours. That's unfortunate for us, but is it really a bad thing? The success of the Asian Tigers and India and other developing countries has brought millions out of poverty.
And I know I'm a newcomer to this thread -- uh, and board -- but I think Ahara's analysis on globalization is pretty damn accurate.
Id just like to point out that although at that time it may have appeared that I was claiming globalisation has lead to deteriorating incomes. I believe this is partly true but generally overstated and it has no practical policy impacts for today. The most important reason that wages have been falling is basically what you said.
Also don't ignore a dramatic redistribution of wealth to the rich in this country through tax policy, deregulation and the demise of the labor movement (among other things). That, more than anything I think, explains why real wages are askew.
The most important factor certainly is labor market policy specifically deunionisation. I believe it is not inaccurate to say that this entire crisis is the consequence of deunionisation.
In order for the labor market to function properly you have the power of workers on the one hand and the power of business on the other, they compete with each other and set wages. The economically optimum wage setting is the highest workers can possibly be paid without undermining the profitability of the business. This means workers earn more money, so they spend more money so businesses earn more money. Business and individuals alike benefit from a functioning labor market. Unions are the natural manifestation of the power of workers and are fundamentally important in the functioning of the labor market.
If you impose destructive regulation into the labor market by making it illegal to strike you physically remove the power of workers and throw the entire equation out of balance. Instead of sustained positive wage growth you get the exact opposite, sustained negative wage growth. The second the United States started deunionising wages started falling and they have not looked back since (back in 1980) for some time workers would work longer and longer hours and picking up second jobs to maintain the same income so through the 80's and 90's wages show stagnant growth, but it got to the point around ten years ago where either people could work no longer or there was no demand for those extra hours of labor (probably a bit of both) and wages right across the economy started falling quite severely, I shouldnt need to tell you that this is simply disastrous for an economy.
The debt bubble is partly the consequence of people borrowing to offset these falling wages.
Also don't ignore a dramatic redistribution of wealth to the rich in this country through tax policy, deregulation and the demise of the labor movement (among other things). That, more than anything I think, explains why real wages are askew.
[..]
How exactly can wealth be redistributed to the rich through tax policy? By definition, taxes can only take money from people, not give it to them. So there are really only two possible ways you could skew them as 'redistributing to the rich': You somehow think other people are entitled to the money the rich are now not paying due to tax cuts, or you think that government tends to spend money on projects which help the richer to become much richer due to their political connectedness (which I would agree with, but thats really a whole different issue).
As for deregulation, where exactly has that happened any time recently? Cause I'm not really seeing that: as far as I can tell, government has gotten immensely larger in recent years.
And lastly: unions. Unions *cannot* drive up wages for labor in general, they can only redirect wages to themselves and them members, at the expense of the rest of the economy. For instance, if you have a union (with government afforded privileges, of course) in steel, any sort of action they take to push wages away from the equilibrium price for their labor will drive up costs by at least that amount, thereby increasing the equilibrium price for steel. Such a price increase would increase costs for any industry that utilizes steel, thereby increasing the overhead of all those industries. So really then, unions function as a sort of vampire, stealing income from the rest of the economy and contributing little-to-no value in return. I see no issue with people forming unions voluntarily, or really any voluntary association of people. Unions today, however, are certainly not such an organization, and have been consistently granted government privilege that allows them to coerce and force people to join them or not work in certain industries. These privileges allow them to negatively effect the rest of the economy, and thats a huge, huge issue. Globalization has fortunately allowed people to get around the higher prices caused by unions, but at the expense of the industries the unions hijacked. Want to see real wages rise? Get rid of all that pro-union legislation and maybe then America can start producing things again and generating real wealth.
isnt china, economically, one of the most protectionist nations ever? didnt they vigoursly defend against imports for like the entire 20th centruy? so wouldnt their economic growth actually be an arguement against free trade?
and isnt the crushing of our economy, in some ways, simmilar to that of latin american countries that recieve our cheap food imports?
How exactly can wealth be redistributed to the rich through tax policy? By definition, taxes can only take money from people, not give it to them. So there are really only two possible ways you could skew them as 'redistributing to the rich': You somehow think other people are entitled to the money the rich are now not paying due to tax cuts, or you think that government tends to spend money on projects which help the richer to become much richer due to their political connectedness (which I would agree with, but thats really a whole different issue).
Tax policies in the US have been cutting taxes for the rich and increasing taxes for the poor and middle class for at least 8 years now. Of course he doesnt mean that taxes give money to people, just that current tax policy has been favoring the elite.
On March 03 2009 17:36 tec27 wrote: As for deregulation, where exactly has that happened any time recently?
Clearly the financial sector experienced excessive deregulation, or we wouldn't be facing the current crisis.
On March 03 2009 17:36 tec27 wrote: And lastly: unions. Unions *cannot* drive up wages for labor in general, they can only redirect wages to themselves and them members, at the expense of the rest of the economy. For instance, if you have a union (with government afforded privileges, of course) in steel, any sort of action they take to push wages away from the equilibrium price for their labor will drive up costs by at least that amount, thereby increasing the equilibrium price for steel. Such a price increase would increase costs for any industry that utilizes steel, thereby increasing the overhead of all those industries. So really then, unions function as a sort of vampire, stealing income from the rest of the economy and contributing little-to-no value in return. I see no issue with people forming unions voluntarily, or really any voluntary association of people. Unions today, however, are certainly not such an organization, and have been consistently granted government privilege that allows them to coerce and force people to join them or not work in certain industries. These privileges allow them to negatively effect the rest of the economy, and thats a huge, huge issue. Globalization has fortunately allowed people to get around the higher prices caused by unions, but at the expense of the industries the unions hijacked. Want to see real wages rise? Get rid of all that pro-union legislation and maybe then America can start producing things again and generating real wealth.
What a load of bull. Here you say that unions drive up costs of products and therefore destroy the economy. This is clearly wrong, because, as was posted earlier, wages have fallen behind profits as a share of the economy. US workers earn less than they did 20 years ago. On the other hand, CEOs and other executives earn huge sums (not sure about the exact number, but it's something like 300 times the average employee) and profits have been skyrocketing. Economic growth over the past 20 years has therefore been quite imbalanced. Strong unions would have been able to secure more income growth.
I think the people at the top of the system earning exorbiant sums are vampires, instead of the decent hardworking people who have been pushed around for too long now.
On March 03 2009 17:36 tec27 wrote: How exactly can wealth be redistributed to the rich through tax policy?
check the recent bailouts? check sweetheart government contracts... not limited to but especially in the defense sector? and check the last 8 years of presidential politics as essentially a lesson for driving up the share the top 1% has of the country's wealth.
and unions.... have given us the 8 hour day. overtime. the weekend. i mean... child labor is part of our history in the US. the US has a brutal labor history that isnt really taught in our schools. i think the 1830s saw the first labor laws, but real ground was broken in the early 20th century. its not just about wages, its about workplace safety. its about having a say in how your company is run. its about negotiating with "owners" who dont deserve a 60% cut of proffits in a company. unions heads may give them a bad name, i understand that, but im all for anything that gives workers more of a say in how their company is run. if it were up to any corporation- we would all still be working 7 day weeks, 12 hour days, and in whatever conditions made production absolutely cheapest. its not a pretty thought.
edit (whoa whoa i missed his comment on deregulation. see the removal of the glass-steagal act in 1999 under Clinton. there is some bank De-Regulation that was put into place after the market crash of 1929. kind of ironic?)
the strange thing being that if the current system manages to survive then in 10 years the govt will be privatizing these banks and other things they have bought out , only to need to nationalize them the next time we have a crisis of this scale (usually every 60 years or so)
On March 03 2009 17:29 Choros wrote: Id just like to point out that although at that time it may have appeared that I was claiming globalisation has lead to deteriorating incomes. I believe this is partly true but generally overstated and it has no practical policy impacts for today. The most important reason that wages have been falling is basically what you said.
Ah. My bad.
The most important factor certainly is labor market policy specifically deunionisation. I believe it is not inaccurate to say that this entire crisis is the consequence of deunionisation.
In order for the labor market to function properly you have the power of workers on the one hand and the power of business on the other, they compete with each other and set wages. The economically optimum wage setting is the highest workers can possibly be paid without undermining the profitability of the business. This means workers earn more money, so they spend more money so businesses earn more money. Business and individuals alike benefit from a functioning labor market.
I will go ahead and disagree that the current crisis is entirely the consequence of deunionisation, but a healthy labor movement is certainly beneficial in a society. As Cursor points out, much of the policies we take for granted (minimum wage, 5-day week, workplace safety etc.) come from the labor movement. Unions provide a level of fairness to the system that is good. Of course, if labor forces too many concessions, it can be problematic. It's definitely a balancing act. But I would rather have a viable labor movement than none at all. Unfortunately, organized labor in the U.S. appears all but dead.
On March 03 2009 17:36 tec27 wrote: How exactly can wealth be redistributed to the rich through tax policy? By definition, taxes can only take money from people, not give it to them. So there are really only two possible ways you could skew them as 'redistributing to the rich': You somehow think other people are entitled to the money the rich are now not paying due to tax cuts, or you think that government tends to spend money on projects which help the richer to become much richer due to their political connectedness (which I would agree with, but thats really a whole different issue).
First, when I said we've witnessed a dramatic redistribution of wealth from the poor to the rich, I should've also included the middle class, because they're ones really getting the shaft. Now as for tax policy, the rich have made out like bandits. Seriously, look no farther than TARP and practically all of the bailouts. Ditto to the sweetheart contracts and corporate tax giveaways other posters mentioned. Talk about the rich getting richer due to "political connectedness."
But if you don't buy that, consider this: We have a tax code so riddled with holes, it allows a man like Warren Buffet (one of the richest people in the world) to play a lower marginal tax rate than his secretary. And yes, I do think "other people" are entitled to some of the money rich folks earn. I favor a progressive tax policy, which means I want the rich paying a larger share for the common good (to build infrastructure, provide health care, etc). Bush's tax cuts? They were extremely regressive.
Again, the overarching point is that over the last 10 years, the rich have gotten richer and the middle class is worse off or stagnant. To put it plainly, that's bullshit.
As for deregulation, where exactly has that happened any time recently? Cause I'm not really seeing that: as far as I can tell, government has gotten immensely larger in recent years.
When I said "deregulation," I meant the unraveling of government oversight of private industry, primarily the financial sector.
And lastly: unions. Unions *cannot* drive up wages for labor in general, they can only redirect wages to themselves and them members, at the expense of the rest of the economy. For instance, if you have a union (with government afforded privileges, of course) in steel, any sort of action they take to push wages away from the equilibrium price for their labor will drive up costs by at least that amount, thereby increasing the equilibrium price for steel. Such a price increase would increase costs for any industry that utilizes steel, thereby increasing the overhead of all those industries. So really then, unions function as a sort of vampire, stealing income from the rest of the economy and contributing little-to-no value in return. I see no issue with people forming unions voluntarily, or really any voluntary association of people. Unions today, however, are certainly not such an organization, and have been consistently granted government privilege that allows them to coerce and force people to join them or not work in certain industries. These privileges allow them to negatively effect the rest of the economy, and thats a huge, huge issue. Globalization has fortunately allowed people to get around the higher prices caused by unions, but at the expense of the industries the unions hijacked. Want to see real wages rise? Get rid of all that pro-union legislation and maybe then America can start producing things again and generating real wealth.
A strong labor movement can force capital owners to accept a smaller share of GDP, thereby driving up wages "in general." But I agree the price phenomenon you described can, and does, occur. It really does depend on the market, I think.
I'm not sure what you're talking about with respect to unions enjoying "government privilege." Unions have wanted card checks for a long time, but corporations have been able to block them. If anything, current laws (e.g. so-called "Right to Work" legislation) hinder union growth.
"Unions *cannot* drive up wages for labor in general, they can only redirect wages to themselves and them members, at the expense of the rest of the economy."
This is simply wrong. Unions drive up wages (by redirecting that money away from profits) but by doing so workers earn more money so they spend more money. Businesses then enjoy higher revenues allowing them to increase profits to compensate for the original loss. You do not understand that the economy works through a cyclical system, money flows from one sector to another sector to another sector and onwards. Higher wages do take away from the economy at first, but they speed up the flow of wealth through the economy and as a consequence they end up giving more than they take and at the end of the day the entire economy benefits.
If you keep giving money to the rich at the same time that you are taking money away from the incomes spending cycle it will achieve nothing good for the economy. Why should I invest when I know wages are falling and thus demand will be weak? I will not hire more workers if there is not the demand for the goods and services those workers will produce. This is why there has been so much unproductive investment (in housing and stock market speculation) there are very few opportunities to actually create jobs as the income spending cycle which is at the heart of the economy is so weak.
Higher wages create opportunities for the private sector to take advantage by increasing demand. Thus it will actually increase investment, the lack of investment today is not the consequence of the rich having too little money, it is because there are too few opportunities. Pushing wages down through deunionisation has takes those opportunities away. It is a self defeating policy.
Those people who preach the evils of unionisation completely ignore the fact that unions were fundamental in increasing the quality of the economic growth of the post war period. The economy grew, and unions made sure that workers would get some of that money for themselves. Thus the growth of this period did not lead to deteriorating income inequality and that money was preserved in the incomes spending cycle leading to self perpetuating economic benefit. We started deunionising in 1980 and have been going backwards ever since. At least in all the ways that actually matter.
Monetary policy was used to offset the contractionary force coming out of falling wages but it can only do so at the cost of increasing debt. As wages continued to fall debt continued to rise. The contractionary force never went away so neither could the expansionary monetary policy. We have seen permanently expansionary monetary policy for 18 years now. The United States finally reached a point in 2007 where monetary policy just stopped working. People could increase their levels of debt no further and so this artificial demand keeping the economy afloat disappeared sending it immediately into a rapid and accelerating recession.
Deunionisation was fundamental in creating the contractionary force right at the start and for this reason it deserves considerable blame for the crisis that exists today (the other reason is the misuse of fiscal policy imo).
On March 03 2009 18:26 cUrsOr wrote: isnt china, economically, one of the most protectionist nations ever? didnt they vigoursly defend against imports for like the entire 20th centruy? so wouldnt their economic growth actually be an arguement against free trade?
Yes I would agree on this.
and isnt the crushing of our economy, in some ways, simmilar to that of latin american countries that recieve our cheap food imports?
What is happening in the American economy is very very similar to what happened in South American countries and for the same reasons. Argentina is a good example of this. American economists when to Argentina and directed their economic policy. They told the government to fire most their teachers nurses and public sector workers in general, they reduced unemployment benefits to zero, they completely stopped any infrastructure investment. Basically they followed a small government philosophy aggressively. Then they opened up to free trade, deunionised their labor market (by simply executing and torturing union leaders) and privatised all government industry. The consequence was a dramatic deterioration in the levels of employment (govt fire workers > less demand > more job losses > falling govt revenue > cut spending > less demand > more job losses) wages immediately started to plummet further reducing demand and accelerating the recession, free trade lead to the destruction of many industries making things even worse. They then used expansionary monetary policy to try to create demand but all this did was create very high inflation (I would agree that it is unlikely we will see an inflation crisis in the United States).
This is very similar to what is happening in the United States today, same policies, same consequences. The only difference is that monetary policy has worked very well to cover up this decline, and these policies were carried out much slower leading to a much slower decay.
On March 03 2009 20:40 Choros wrote: "Unions *cannot* drive up wages for labor in general, they can only redirect wages to themselves and them members, at the expense of the rest of the economy."
This is simply wrong. Unions drive up wages (by redirecting that money away from profits) but by doing so workers earn more money so they spend more money. Businesses then enjoy higher revenues allowing them to increase profits to compensate for the original loss. You do not understand that the economy works through a cyclical system, money flows from one sector to another sector to another sector and onwards. Higher wages do take away from the economy at first, but they speed up the flow of wealth through the economy and as a consequence they end up giving more than they take and at the end of the day the entire economy benefits.
You're suggesting that increasing salaries by itself creates economic growth?
First off, if you increase salaries then you're increasing companies' costs too, so they wouldn't have any profit. Worse even, part of that increased pay would go to imports, so american companies would be worse off. You can't create economic growth this way, if you did it would only be nominal, not real. Go look at some macroeconomics models. In the long run, you're always staying with the potential output, and that's not gonna shift with hollow wage increases.
On deunionisation, here's Larry Summers: "Another cause of long-term unemployment is unionization. High union wages that exceed the competitive market rate are likely to cause job losses in the unionized sector of the economy. Also, those who lose high-wage union jobs are often reluctant to accept alternative low-wage employment. Between 1970 and 1985, for example, a state with a 20 percent unionization rate, approximately the average for the fifty states and the District of Columbia, experienced an unemployment rate that was 1.2 percentage points higher than that of a hypothetical state that had no unions." http://www.econlib.org/library/Enc/Unemployment.html
You may also look at what over market-price wages did to the american automobile industry. While supposedly providing america with all this marvelous fairness and "quality growth" (lovely concept btw), they were a major factor for GM, Chrysler and Ford's uncompetitiveness against foreign manufacturers, and a massive burden on the companies leading them to bankruptcy-unless-bailed-out.
Collective bargaining may have made some sense in clearly monopsony labour markets of the industrialisation era, but today's world is much different.
Increasing salaries by itself does not increase economic growth. Higher wages however, are not a bad thing. Growth should be balanced - a linear connection between profits and wages is ideal, as both a system in which labour costs strangle companies and one where workers progressively lose income while the rich enrich themselves even more are bad for the economy (one could argue that the second isn't, but one must also look at wealth in a greater sense than money itself).
Wages exceeding market rate are therefore unideal, and wages below market rate also undermine the system. A healthy state balances the two, and an important factor in this is unionized workers.
Now deunionizating is happening all over the world, not because the corporations are crushing them, but because increasing individuality means less and less workers join the unions. A big factor in the future is how this is going to be solved.
I'd also like to say that the American automobile industry failed largely because it didn't compete with other manufacturers on fuel-efficiency and therefore couldn't export to Europe and Japan, while those cars still were imported to America. The conservative attitude lead to america now having lower fuel efficiency standards than China, of all countries.
On March 03 2009 18:26 cUrsOr wrote: isnt china, economically, one of the most protectionist nations ever? didnt they vigoursly defend against imports for like the entire 20th centruy? so wouldnt their economic growth actually be an arguement against free trade?
and isnt the crushing of our economy, in some ways, simmilar to that of latin american countries that recieve our cheap food imports?
What is happening in the American economy is very very similar to what happened in South American countries and for the same reasons. Argentina is a good example of this. American economists when to Argentina and directed their economic policy. They told the government to fire most their teachers nurses and public sector workers in general, they reduced unemployment benefits to zero, they completely stopped any infrastructure investment. Basically they followed a small government philosophy aggressively. Then they opened up to free trade, deunionised their labor market (by simply executing and torturing union leaders) and privatised all government industry. The consequence was a dramatic deterioration in the levels of employment (govt fire workers > less demand > more job losses > falling govt revenue > cut spending > less demand > more job losses) wages immediately started to plummet further reducing demand and accelerating the recession, free trade lead to the destruction of many industries making things even worse. They then used expansionary monetary policy to try to create demand but all this did was create very high inflation (I would agree that it is unlikely we will see an inflation crisis in the United States).
This is very similar to what is happening in the United States today, same policies, same consequences. The only difference is that monetary policy has worked very well to cover up this decline, and these policies were carried out much slower leading to a much slower decay.
There really are no good arguments against free trade. If you block free trade, you are propping up inefficient industries at the expensve of everyone else in the country, thereby decreasing real wealth. Broken window fallacy, look it up.
What is currently happening in the American economy is not at all the same as any situation in South America. Following a "small government philosophy aggressively" would likely include A) not killing/torturing random people, B) Not having a central bank vastly inflating the money supply, and C) not creating what Robert Higgs termed "regime uncertainty." This is not small government at all, and a totally fallacious argument. Government cannot generate real wealth as you seem to imply, and any demand they might "generate" by employing people is at the expense of the real economy, and with disregard to an actual price system. Government has no money of its own, it can only take other's money and spend it on less efficient usages of resources than would have normally been done. The fact that reducing spending would "cause" a recession in your eyes should only serve to demonstrate the government was far too big in the first place, and therefore created a bubble that needs to be corrected before real economic growth can resume. I will grant that this is somewhat similar to the situation America is currently in, but America's bubble was caused by a much different situation. Recessions normally stimulate recovery due to the lowering of prices, allowing people to buy more with the money they currently have, and therefore increasing demand. In Argentina's case, however, they implemented a bunch of price controls, thereby decreasing the likelihood they would ever recover.
You would do yourself so much good if you read Economics in One Lesson by Henry Hazlitt.
On March 03 2009 16:21 cUrsOr wrote: ya globalization!! more cafta and ftaa... if they are lucky, all of latin america will end up like mexico. if only we can find a way to keep em all from fleeing to the US
Fun fact: Mexico's GDP is on par with Chile's and higher than all other latin american countries.
EDIT: Maybe on par with Venezuela's too. We'll see how long that lasts tho.
On March 03 2009 13:26 Cambium wrote: lol, it's really easy to tell those who've taken econ apart from those who have not
I was going to respond to cursor, but ahrara_, you covered all the key points i wanted to use and hence said exactly what I wanted to say
^^
(i've actually got an econ midterm tomorrow on international trade lol)
International Trade? What models did you guys cover, my professor is being a jerk and TAs horrible and now I am sitting here having no idea how much of the math am I supposed to know at all :p
That said, this thread jumped a ton while I slept 0.o, I'd like people to clear up one thing though on their usage of "Real wealth", especially in regard to trade. Normally the term of real wealth/income in terms of international trade, far as I've seen, is referring to the nominal income without taking into consideration of welfare, which would be denoted by relative price of goods. In turn, real wealth may increase or drop in the country and purchasing power still increase. I am getting the sense that the majority of you are speaking of real wealth/income as if it is represented by purchasing power (which it isn't), if so, please label it clearly.
With the deunionization issue, I agree with Piretes basically in that the American automobile industry is a faulty example to cite, at best we can bring up the dismal performance in 2007, but even that is already jarred by other factors. Marketing direction and external conditions has done far more to harm the big three, though the burden of UAW hardly helped. Though to be fair, some bits of the deunionization around the world is happening because of government policies, and this could be a fair chance to strike at the various unions that has long had a bad reputation.
On March 03 2009 16:21 cUrsOr wrote: ya globalization!! more cafta and ftaa... if they are lucky, all of latin america will end up like mexico. if only we can find a way to keep em all from fleeing to the US
Fun fact: Mexico's GDP is on par with Chile's and higher than all other latin american countries.
EDIT: Maybe on par with Venezuela's too. We'll see how long that lasts tho.
A major benefit of Mexico being next to the United States, in terms of growth potential it doesn't come close to how impressive other SA countries are.
On March 03 2009 18:26 cUrsOr wrote: isnt china, economically, one of the most protectionist nations ever? didnt they vigoursly defend against imports for like the entire 20th centruy? so wouldnt their economic growth actually be an arguement against free trade?
and isnt the crushing of our economy, in some ways, simmilar to that of latin american countries that recieve our cheap food imports?
Not quite, we can start a protectionism war and make everyone suffer, the trade imbalance with China has had its shares of helping us in that China is practically an interest inelastic saver and dumps the money back to us. So really, I wouldn't cite it as an example of argument against free trade so much as I would say that there is no real differences here from how we worked with the Tigers in the past, the benefits derived are different, but allowing them to do pretty much as they will domestically isn't.
On March 04 2009 00:04 tec27 wrote: There really are no good arguments against free trade. If you block free trade, you are propping up inefficient industries at the expensve of everyone else in the country, thereby decreasing real wealth. Broken window fallacy, look it up.
I agree. Free trade has been a big reason for the huge wealth we know in western countries today, and it gives developing countries alot of chances. Total free trade would help these countries anymore. Currently the US and Europe are really strangling the African agricultural sector with our subisidized products, not letting the market mechanism do it's work.
On March 04 2009 00:04 tec27 wrote: Government cannot generate real wealth as you seem to imply, and any demand they might "generate" by employing people is at the expense of the real economy, and with disregard to an actual price system. Government has no money of its own, it can only take other's money and spend it on less efficient usages of resources than would have normally been done.
Well I think you disregard the benefits of government quite naively here. An ideal government keeps the market system running by building infrastructure and educating people to a high standard, as well as providing a decent standard living to everyone (something the market cannot do). Government has it's limits, but denying that is can create wealth means you either see a) wealth in the most narrow sense of the word, i.e. profit, or you b) have never seen a good working government - try Scandinavia. Government employment is not at the cost of the system - some thing are simply better if they are controlled and sheltered from the market - education as the biggest example, and I would argue healthcare (something failing horribly in the US because of the market)..
You might do yourself good if you took some more consideration for the reality instead of dreaming about a perfectly working market system.
On March 03 2009 18:26 cUrsOr wrote: isnt china, economically, one of the most protectionist nations ever? didnt they vigoursly defend against imports for like the entire 20th centruy? so wouldnt their economic growth actually be an arguement against free trade?
and isnt the crushing of our economy, in some ways, simmilar to that of latin american countries that recieve our cheap food imports?
Jesus Christ you are a dumb fuck. You are a dumb stubborn fuck that can't read. All I can do is insult you now because making logical arguments gets me nowhere. You neither acknowledge what I have to say nor bother to do anything about your painful ignorance of economics. I've addressed everything you've posted more than once already. What makes you think you can post in a thread full of people with mental capacities far exceeding yours? And the rhetorical questions, jesus christ. The only poster I know who has earned the right to fill an entire post with that kind of mind-numbing shit is Moltke. And you are not Moltke.
On March 03 2009 17:05 SnK-Arcbound wrote: Ahara, would you update your original post with what you think about the new bailout.
And also about the economy in 1981 and the great depression, and perhaps 1921 if you can find anything about it.
If you're full of shit, it would become quite obvious in your opinions of the other three economic crisis' from our history.
I've been meaning to update the original post for ages, but I'm in the middle of the semester and the original post took something like 5-6 hours to write. It also absorbed about twice as much time as that responding to questions and criticisms and various PMs. I'd really like to get around to it eventually.
Another reason I want to update it is because in retrospect I was quite wrong about a lot of things and my ignorance of economic theory is quite transparent. I've expanded my knowledge of the field considerably since then and I'd hate to be judged based on that one post.
tec27: I think you should expand your understanding of economics past Economics in One Lesson. That book was never meant to explain more profound economic theory, only as a learning tool. Real world economic problems are more infinitely more complex. Everything Hazlitt describes only occurs in the long run, which is what your entire argument is based on. Short-run issues and market failure are things he does not cover (and things you badly need to read up on). For the record, that book was the first book I read on economics and I recommend it to my ignorant friends everywhere.
Jesus Christ you are a dumb fuck. You are a dumb stubborn fuck that can't read. All I can do is insult you now because making logical arguments gets me nowhere...
I really don't think you are helping your case. You admit errors in your original post and confess your own economic ignorance, yet completely bash somebody because they are in a differant place on the learning curve. For the most part this has been an interesting thread, and post like this only diminish its worth. I would think that would be of interest to you considering you created it.
ahrara_ I appreciate your effort and time you've put in to generate a very interesting debate (and to educate a few people). I don't think cUrsOr is an idiot though. He may be uninformed, but even moreso is the general population. It's useful for him and others who might have similar views to post his thoughts on the subject, as long as he remains openminded.
On March 03 2009 19:41 PobTheCad wrote: the strange thing being that if the current system manages to survive then in 10 years the govt will be privatizing these banks and other things they have bought out , only to need to nationalize them the next time we have a crisis of this scale (usually every 60 years or so)
Economics isn't that exact, depressions don't happen on a schedule. Another major recession may happen in just a few years if our recovery from this one isn't sound, it may happen again in 10 years, it may never even happen again. We simply don't understand economic growth and recessions well enough to predict when they will happen in the future.
Increasing salaries by itself does not increase economic growth. Higher wages however, are not a bad thing. Growth should be balanced - a linear connection between profits and wages is ideal, as both a system in which labour costs strangle companies and one where workers progressively lose income while the rich enrich themselves even more are bad for the economy (one could argue that the second isn't, but one must also look at wealth in a greater sense than money itself).
Wages exceeding market rate are therefore unideal, and wages below market rate also undermine the system. A healthy state balances the two, and an important factor in this is unionized workers.
Now deunionizating is happening all over the world, not because the corporations are crushing them, but because increasing individuality means less and less workers join the unions. A big factor in the future is how this is going to be solved.
Market rates are, by definition, decided freely by the market. If it's market rates what you want (and monopolistic or monopsonistic market prices are market prices) then you wouldn't really need any state or unions to achieve them. I don't think this is what you're arguing for, though.
And here's where we are stepping out of positive economics towards normative stuff. This discussion isn't more about 'what is', being instead of 'what ought to be'. I believe I have much less of a problem with income inequality than you do, not because one of us has a better understanding of economics, but because we hold vales/beliefs/morals whatever. We should keep this discussion out of this thread though.
I'd also like to say that the American automobile industry failed largely because it didn't compete with other manufacturers on fuel-efficiency and therefore couldn't export to Europe and Japan, while those cars still were imported to America. The conservative attitude lead to america now having lower fuel efficiency standards than China, of all countries.
- The fact that Asian tigers were protective of their industry and later enjoyed phenomenal growth does not lead to the conclusion that protectionism was essencial to their success. Likewise, China is still protective of its industries, but one can't conclude that protectionism is helping their growth. At the same time all these countries were enjoying a greater openness to the world economy, and I would point that as the desive factor to their growth.
- One of the problems of 'strategic protectionism' or the so called New Trade Theory, is that it suggest we give bureaucrats the role of deciding which industries to foster and protect. This is problematic first because they SUCK at it, and second because they tend to protect industries based on lobbying power.
- At best, strategic protectionism may apply to emerging economies, but not to established, developed economies. Let's just keep that clear.
On March 03 2009 14:17 Jibba wrote: What if your foreign competitor actually produces everything in a free trade zone in your country and because of economies of scale (competitor is bigger, bigger = cheaper) can sell at lower prices? If a US company sets up a T-shirt shop in a South American country with heavy free trade policies, how much of the profits are actually being invested back into the country?
If US company sets up a T-shirt shop in an SA country, the shop itself is helping the SA country. It's a capital inflow (credit) for that country and it generates employment opportunities. US benefits by collecting interest and/or dividends. This is how both countries mutually benefit from each other.
It's impossible to produce "everything" and sell at a cheaper price than domestic price indefinitely (like you suggested) because it would drive down the worth of the currency of the importing country, which in turn, will lower import. This is how it works:
1. Import rises dramatically because everything is produced overseas because it is cheaper 2. Demand for currency rises (importing more), and demand for local currency lowers (there's more of it in the currency market) 3. Currency of exporting country rises (since there is a higher demand for it, since we've increased import from that country, i.e. increased its export) and currency of the importing country depreciates 4. Everything costs more to import purely due to the appreciation and depreciation of currencies 5. Import is forced to decrease
There are only a handful reasons to restrict trade, and all the ones listed in this thread are not it.
Some of these have come up repeatedly and should get addressed.
1. It increases competition and lowers our (American, say) wages, and/or employment opportunities.
But, why should you get paid more than someone in China without being more productive? If you are doing the exact same work, and someone in China can do it cheaper, does it not make sense to ship the work to China?
So your solution is to restrict or end free trade. It's never a problem to create jobs for everyone (look at USSR) and maintain a country especially if its large and has a ton of resources (like America), but would the workers be happy? At the end of the month, you get your paycheque, you cannot buy anything except that what is locally produced, which restricts you from buying what you want. As a result, restrictions produce jobs without offering real rewards.
The goal of the economy is to please consumers, not to protect workers. You should get that around your head. Consumers drive the economy, not workers. Consumers maximize their welfare when they have the maximum freedom of choice to buy products wherever produced (and also, as a consumer, you will NEVER say something is too cheap).
2. To increase national output
Okay... if you import less, ceteris paribus, your national output will increase, which, in theory, is good for your economy. But this lowers the standards of living. For example, you export $100 worth of goods, and import $50 worth of goods, rest you get in "cash" (aka, IOUs). You essentially lost $50 worth of goods. If you didn't know, US runs a HUGE trade deficit, as in, they import much more than that export, this is one reason why standards of living is high.
- The fact that Asian tigers were protective of their industry and later enjoyed phenomenal growth does not lead to the conclusion that protectionism was essencial to their success. Likewise, China is still protective of its industries, but one can't conclude that protectionism is helping their growth. At the same time all these countries were enjoying a greater openness to the world economy, and I would point that as the desive factor to their growth.
Dude it is well known that protectionism and a strong state are really important for developing countries. Seriously make a comparison between African and Asian countries ... Ok you can argue thats also linked to corruption problems or wars but still... When a country has no natural competitive advantages ( hi Japan ) he has to create his own. Thus the need for a big state and protectionism to help the growing industries.
But, why should you get paid more than someone in China without being more productive? If you are doing the exact same work, and someone in China can do it cheaper, does it not make sense to ship the work to China?
Because they haven't the fair Labor Standart Acts.
Miners die everyday in China ( or elsewhere in "low standarts" countries, let's not start a flame war about China :D ) because of pathetic safety measures. Some people want an higher life expectancy thanks.
im not attacking the OP about a bailout plan that has been bashed by numerous nobel prize winning economists. im not going to resort to childish name calling and immature personal attacks.
i saw this thread, and i saw that is, imo, highly skewed towards the big-business models of absoulute free market ideology. i think more needs to be said about places like bolivia, argentina and venezuala, where the "anti-globalization" (i hate that term) movements have really manifested themselves (and for good reason).
i dont know why, to me, it sounds like 90% of the argument on this page comes directly from the IMF and NAFTA websites. maybe thats just the way economic education/study works? i dont know.
i could easily turn my rhetorical questions into statments if you like. im sorry if any opinions different than yours appear in your thread. i really think your lucky you havent seen more.
we could pretend the verdict is already in on globalization. but its not. anyone who is interested in a better read about what has happens in mexico (being that, as i said before, a large GDP says nothing about "quality growth) can read http://www.nber.org/books/harr06-1
cUrsOr you are not making bad points per se, and you are not really decreasing the level of the debate with your opinions, but you simply state them in such a manner that no one will take you seriously. Use capitals for one, and furthermore the rethorical questions were very annoying.
Warding good catch on the automobiles. I didn't know that they were that well rewarded. I think it shows how skewed the union system in america is. It ruins some sectors and has little effect on others (office jobs hellyeah).
Indeed I am not arguing for 'market rate' wages. I meant to say equilibrium rate, if one could call it so.
Ok you can argue thats also linked to corruption problems or wars but still...
You cannot ignore the social effects of an economic policy when determining its effectiveness. If your policy is hyper effective, but no one will suffer it, good. If its 'hyper effective' from an economics point of view but thousands starve to death and there are widespread riots which are more deleterious to the nation's fitness than the economic policy is helpful, you don't net anything in the end.
So yeah, his rebuttal can't ignore those problems, nor can any of the positions in this thread.
Those who have a background in economics should know that people think on the margin, and recognize that there are effects to policy which are social in nature which feed back into the economic condition of the country. Extrapolating policy from the west, in which nearly all countries have social safety nets, different legal systems, different government institutions, etc straight onto developing countries is a poor method of applying a model. Not only is it poor argumentation and logic, but it has severe moral ramifications because there are people dying over it.
The admission here is that economics isn't determinate, despite its models having worth. Wouldn't a better approach to the issue not be to try and 'shut out' those who approach the problems in a different manner, but instead include their concepts and variables into the framework you've already set up?
You're right about the capitals. You're right about the questions. I get most of my information about the world from The Nation magazine, and I see peoples reactions to these policies. I see the revolts and read lots about organized labor. What amazes me the most, is that, I'm being very presumptuous here, in a tread with people that all make less than 100K a year- I'm facing arguments that have been devised by the richest people in the world. They all support that private ownership, and free trade are the best models for- everything. Like I said, it would probaby be easier just to go directly to the www.imf.org
But, why should you get paid more than someone in China without being more productive? If you are doing the exact same work, and someone in China can do it cheaper, does it not make sense to ship the work to China?
Because they haven't the fair Labor Standart Acts.
Miners die everyday in China ( or elsewhere in "low standarts" countries, let's not start a flame war about China :D ) because of pathetic safety measures. Some people want an higher life expectancy thanks.
That's another topic of discussion. But I agree with you completely.
In fact, "protection of life, health and safety" is one of the few accepted reasons for trade restriction.
Surely and inevitably, there are exploits in "free trade", but that's not what we are discussing. We are discussing the fundamental principles of free trade.
Jesus Christ you are a dumb fuck. You are a dumb stubborn fuck that can't read. All I can do is insult you now because making logical arguments gets me nowhere...
I really don't think you are helping your case. You admit errors in your original post and confess your own economic ignorance, yet completely bash somebody because they are in a differant place on the learning curve. For the most part this has been an interesting thread, and post like this only diminish its worth. I would think that would be of interest to you considering you created it.
You are probably right. I'll try to refrain from being an ass. The issue of free-trade is one of those issues, like abortion for some, that gets me heated.
On March 04 2009 03:47 cUrsOr wrote: im not attacking the OP about a bailout plan that has been bashed by numerous nobel prize winning economists. im not going to resort to childish name calling and immature personal attacks.
i saw this thread, and i saw that is, imo, highly skewed towards the big-business models of absoulute free market ideology. i think more needs to be said about places like bolivia, argentina and venezuala, where the "anti-globalization" (i hate that term) movements have really manifested themselves (and for good reason).
i dont know why, to me, it sounds like 90% of the argument on this page comes directly from the IMF and NAFTA websites. maybe thats just the way economic education/study works? i dont know.
i could easily turn my rhetorical questions into statments if you like. im sorry if any opinions different than yours appear in your thread. i really think your lucky you havent seen more.
we could pretend the verdict is already in on globalization. but its not. anyone who is interested in a better read about what has happens in mexico (being that, as i said before, a large GDP says nothing about "quality growth) can read http://www.nber.org/books/harr06-1
"we are argentina, you are enron"
I suppose I owe you an apology for being an ass last night. I stand by the fact that you are woefully ignorant of economics. It is also frustrating when you keep insisting on the same arguments even after they've been addressed multiple times. Your posting is the equivalent of somebody who's only ever watched SC2GG commented games posting in a strategy thread and insisting everyone else is wrong. It's not like there aren't legitimate critiques of globalization and free trade. But it is extremely arrogant to insist on a worldview like yours without a foundational understanding of economics first.
The taxpayers loan money to the banks. But the taxpayers do not have the money. So we have to borrow it from the banks to give it back to the banks. But the banks do not have the money to loan to the government. So they create it into existence (through a mechanism called fractional reserve) and then loan it to us, at interest, so we can then give it back to them.
On March 03 2009 14:17 Jibba wrote: What if your foreign competitor actually produces everything in a free trade zone in your country and because of economies of scale (competitor is bigger, bigger = cheaper) can sell at lower prices? If a US company sets up a T-shirt shop in a South American country with heavy free trade policies, how much of the profits are actually being invested back into the country?
If US company sets up a T-shirt shop in an SA country, the shop itself is helping the SA country. It's a capital inflow (credit) for that country and it generates employment opportunities. US benefits by collecting interest and/or dividends. This is how both countries mutually benefit from each other.
It's impossible to produce "everything" and sell at a cheaper price than domestic price indefinitely (like you suggested) because it would drive down the worth of the currency of the importing country, which in turn, will lower import. This is how it works:
1. Import rises dramatically because everything is produced overseas because it is cheaper 2. Demand for currency rises (importing more), and demand for local currency lowers (there's more of it in the currency market) 3. Currency of exporting country rises (since there is a higher demand for it, since we've increased import from that country, i.e. increased its export) and currency of the importing country depreciates 4. Everything costs more to import purely due to the appreciation and depreciation of currencies 5. Import is forced to decrease
First off Jibba, sorry for not being able to address your post entirely. I'm trying to pry myself away from TL so I can get a paper done.
People who argue that sweat shops are exploitative rarely consider the alternative: Lack of jobs. Demand for labor will eventually improve real wages over time. This creates savings, which generates domestic investment. More importantly, these foreign shops fuel domestic industries as well. For one, companies rarely incorporate in another country and build their own factories, run by managers from home. More often, that work is contracted out to local industry. This facilitates the export of technology and the growth of domestic suppliers that are not directly dependent on the foreign company.
Attempting to implement "fair trade" measures largely undermine the main incentive for these companies to build "outsource" in the first place. China is far from economically liberal, for example. It ranks 132 on HF's index of economic freedom, but cheap labor costs and an undervalued currency override the cost of government interference. Labor is often the most expensive input in any industry.
On March 04 2009 04:19 cUrsOr wrote: You're right about the capitals. You're right about the questions. I get most of my information about the world from The Nation magazine, and I see peoples reactions to these policies. I see the revolts and read lots about organized labor. What amazes me the most, is that, I'm being very presumptuous here, in a tread with people that all make less than 100K a year- I'm facing arguments that have been devised by the richest people in the world. They all support that private ownership, and free trade are the best models for- everything. Like I said, it would probaby be easier just to go directly to the www.imf.org
*^&%^%^#@$$%^
Every single person with minimal knowledge of economics in this thread is arguing for free trade. These ideas weren't devised by the richest people in the world, the fundamental model was developed by David Ricardo, some 200 years ago. Look up Comparative Advantage on wikipedia.
They have been further developed by academics, and the vast majority of academic economists agree that free trade is good. Unfortunately, there is a huge divide in opinion between people with a good understanding of economics and those who don't on this. Krugman, who is a liberal and nobel prize winner for his work on international trade, has even wrote extensively about why comparative advantage is so difficult to understand, even to intellectuals. http://hei.unige.ch/~baldwin/ComparativeAdvantageMyths/RicardoDifficultIdea.htm
Furthermore, you're setting this as a conflict of interests between the rich/wealthy/imf/nafta people and the common good. The powerful vs the people. This is bullshit, and couldn't be further from the truth. The inverse relation is true. In reality, protectionism benefits the few against the many. Free trade benefits everyone by allowing the people access to cheaper goods and making economies more efficient and therefore wealthier. Protectionism only benefits the protected industries at the expense of much higher possible benefits to the whole society.
Like ahrara said, you're deeply ignorant about this. Now you can either read up and try to understand the subject better or remain ignorant, but if you choose the latter please spare us. Thanks.
- The fact that Asian tigers were protective of their industry and later enjoyed phenomenal growth does not lead to the conclusion that protectionism was essencial to their success. Likewise, China is still protective of its industries, but one can't conclude that protectionism is helping their growth. At the same time all these countries were enjoying a greater openness to the world economy, and I would point that as the desive factor to their growth.
Dude it is well known that protectionism and a strong state are really important for developing countries. Seriously make a comparison between African and Asian countries ... Ok you can argue thats also linked to corruption problems or wars but still... When a country has no natural competitive advantages ( hi Japan ) he has to create his own. Thus the need for a big state and protectionism to help the growing industries.
It's not 'well known' that protectionism is important for developing countries.
I don't know what you mean by 'strong state'. I would agree that a country needs the right institutions, in particular to ensure functioning property rights.
cursor: I will take back everything I have ever said about you and kiss your feet if you can articulate how comparative advantage works. You don't even have to believe it. Wouldn't you agree that at a minimum you should understand someone else's beliefs before presuming to critique it?
On March 04 2009 05:00 warding wrote: It's not 'well known' that protectionism is important for developing countries.
So how you create a competitive advantage for a country with no natural advantage ( no oil, no high level education etc ... ) ?
Only sweat shops ? It wouldn't even work if there are no transport infrastructures ...
How is "high level education" a natural advantage?
A country can create dynamic comparative advantage with reasonable ease. Good examples of these are India (IIT) and China (mfg) for the past twenty years.
What's your definition of a "sweatshop"? A place where people make less than American minimum wage?
On March 04 2009 05:00 warding wrote: It's not 'well known' that protectionism is important for developing countries.
So how you create a competitive advantage for a country with no natural advantage ( no oil, no high level education etc ... ) ?
Only sweat shops ? It wouldn't even work if there are no transport infrastructures ...
"Sweat shops" is kind of a pejorative, but yes, countries without abundant natural resources or a highly skilled workforce tend to have cheap labor. They can leverage that advantage to attract low-skill manufacturing jobs (textiles, etc).
If the opportunity warrants it, private investors (and the government if it knows what it's doing) will build the infrastructure as needed.
On March 04 2009 05:00 warding wrote: It's not 'well known' that protectionism is important for developing countries.
So how you create a competitive advantage for a country with no natural advantage ( no oil, no high level education etc ... ) ?
Only sweat shops ? It wouldn't even work if there are no transport infrastructures ...
How is "high level education" a natural advantage?
A country can create dynamic comparative advantage with reasonable ease. Good examples of these are India (IIT) and China (mfg) for the past twenty years.
What's your definition of a "sweatshop"? A place where people make less than American minimum wage?
China, India and Korea aren't good enough examples of high level education being a "natural" advantage? :p
Jokes aside, I think Boblion is pointing at a very specific period of time for the advantage built up to kick in. However, that's really a moot point, such period is time is weathered, there is no real way to soften the blow without aid being provided. However, I would have to agree with him that during that period of time, Protectionism is a valuable tool to keep capital contained within the country to maximize the effects of foreign investment/aid/lending, assuming that's what he is talking about.
On March 04 2009 05:00 warding wrote: It's not 'well known' that protectionism is important for developing countries.
So how you create a competitive advantage for a country with no natural advantage ( no oil, no high level education etc ... ) ?
Only sweat shops ? It wouldn't even work if there are no transport infrastructures ...
How is "high level education" a natural advantage?
A country can create dynamic comparative advantage with reasonable ease. Good examples of these are India (ITT) and China (mfg) for the past twenty years.
What's your definition of a "sweatshop"? A place where people make less than American minimum wage?
When i mean natural adavantage, i mean when the "experience" begins :o
China and India aren't exactly the by the book exemples of free-trade that give economists a boner. Although this Wiki link is really critical of the license Raj and history shows that India's economy produced its best results in the 90's with a bit more free-trade friendly laws, you can argue that some of the Indian firms were helped by this tariff barriers before being competitive enough to be export their products with success. http://en.wikipedia.org/wiki/License_Raj Japan is still the best example imo.
However, i don't argue for a complete protectionism. I just wanted to say that some of its aspects are needed for a growing country.
A country with laws that enslave workers, has a competative advantage over a counry that has laws protecting workers. Laws that protect workers and therfore increase costs, make a country less attractive, to say Coke. This is called a competative dissadvantage then?
On March 04 2009 06:01 cUrsOr wrote: ill try to use only 1 question here.
A country with laws that enslave workers, has a competative advantage over a counry that has laws protecting workers. Laws that protect workers and therfore increase costs, make a country less attractive, to say Coke. This is called a competative dissadvantage then?
Don't even complicate it by bringing up labor issues, please just start by assuming that the countries are perfectly free. Before you even understand the economic principle you seem to be distorting it by your other beliefs.
I mean, even if typically comparative advantage can be described in terms of wage(labor hours for production), that description is just fulled of your own biases.
On March 04 2009 06:01 cUrsOr wrote: ill try to use only 1 question here.
A country with laws that enslave workers, has a competative advantage over a counry that has laws protecting workers. Laws that protect workers and therfore increase costs, make a country less attractive, to say Coke. This is called a competative dissadvantage then?
hahahahahahaha
I have no idea what that gibberish is supposed to mean but it was hilarious.
On March 04 2009 06:01 cUrsOr wrote: ill try to use only 1 question here.
A country with laws that enslave workers, has a competative advantage over a counry that has laws protecting workers. Laws that protect workers and therfore increase costs, make a country less attractive, to say Coke. This is called a competative dissadvantage then?
On March 04 2009 06:01 cUrsOr wrote: ill try to use only 1 question here.
A country with laws that enslave workers, has a competative advantage over a counry that has laws protecting workers. Laws that protect workers and therfore increase costs, make a country less attractive, to say Coke. This is called a competative dissadvantage then?
hahahahahahaha
I have no idea what that gibberish is supposed to mean but it was hilarious.
LoL, that was exactly what I was thinking. I was so speechless... LOL!
On March 04 2009 05:00 warding wrote: Every single person with minimal knowledge of economics in this thread is arguing for free trade.
They have been further developed by academics, and the vast majority of academic economists agree that free trade is good.
and the problem certainly isnt, that everyone arguing for Free Trade is obviously in some sort of higher education economic classes in developed nations, that teach about how the world exists as an economic system. whatever creates more wealth, is better.
i guess i have to take your word for the "vast majority of economists."
On March 04 2009 05:00 warding wrote: It's not 'well known' that protectionism is important for developing countries.
So how you create a competitive advantage for a country with no natural advantage ( no oil, no high level education etc ... ) ?
Only sweat shops ? It wouldn't even work if there are no transport infrastructures ...
"Sweat shops" is kind of a pejorative, but yes, countries without abundant natural resources or a highly skilled workforce tend to have cheap labor. They can leverage that advantage to attract low-skill manufacturing jobs (textiles, etc).
If the opportunity warrants it, private investors (and the government if it knows what it's doing) will build the infrastructure as needed.
I think that sweat shops will last forever so Private investors won't come and say '"I'm gonna build an university, an hi-tech research centre, a bank and an airport " Those things are really profitable for a country and its people ( higher profit margins :p ) whereas the profits made by sweat shops will mostly benefits the foreign firms. Of course the workers of the sweat shop will get paid but on the long term the state should definitly helps its growing industries. Especially if it is clearly evident that with of productivity/tech progress those industries will be competitive enough to flood the foreign countries markets. That the very strategy of Japan and the tigers/dragons.
On March 04 2009 06:01 cUrsOr wrote: ill try to use only 1 question here.
A country with laws that enslave workers, has a competative advantage over a counry that has laws protecting workers. Laws that protect workers and therfore increase costs, make a country less attractive, to say Coke. This is called a competative dissadvantage then?
hahahahahahaha
I have no idea what that gibberish is supposed to mean but it was hilarious.
LoL, that was exactly what I was thinking. I was so speechless... LOL!
I was thinking that he was using enslavement to indicate nearly no wage and protection to point to high real wage, in that case he kind of gets the idea assuming equal production time on a certain good...
On March 04 2009 05:00 warding wrote: It's not 'well known' that protectionism is important for developing countries.
So how you create a competitive advantage for a country with no natural advantage ( no oil, no high level education etc ... ) ?
Only sweat shops ? It wouldn't even work if there are no transport infrastructures ...
"Sweat shops" is kind of a pejorative, but yes, countries without abundant natural resources or a highly skilled workforce tend to have cheap labor. They can leverage that advantage to attract low-skill manufacturing jobs (textiles, etc).
If the opportunity warrants it, private investors (and the government if it knows what it's doing) will build the infrastructure as needed.
I think that sweat shops will last forever so Private investors won't come and say '"I'm gonna build an university, an hi-tech research centre, a bank and an airport " Those things are really profitable for a country and its people ( higher profit margins :p ) whereas the profits made by sweat shops will mostly benefits the foreign firms. Of course the workers of the sweat shop will get paid but on the long term the state should definitly helps his growing industries. Especially if it is clearly evident that with of productivity/tech progress those industries will be competitive enough to flood the foreign countries markets.
But that is why entities like IMF and development banks exist, as well as foreign aid. Such infrastructure really falls under Government expenditure, and are appropriately spent from the funds given to the government to build them. People don't start from needing to resort to sweat shops to a state that justifies the presence of universities, research centers and all, they progress to a state where such investments are viable.
On March 04 2009 05:00 warding wrote: Every single person with minimal knowledge of economics in this thread is arguing for free trade.
They have been further developed by academics, and the vast majority of academic economists agree that free trade is good.
and the problem certainly isnt, that everyone arguing for Free Trade is obviously in some sort of higher education economic classes in developed nations, that teach about how the world exists as an economic system. whatever creates more wealth, is better.
i guess i have to take your word for the "vast majority of economists."
Look, here's the absolute gist of it.
Free trade benefits (exceptions do occur) both parties. Even if you are some small country in South America, why would you trade in the first place if it provides you absolutely no benefits?
when we are considering a long run situation, the decision is not simply 'good' or 'bad' but how quickly the desired conditions are reached, how strong the various feedback effects are, and whether these can be manipulated by either government action or altered corporate behavior. thus, while we may recognize that trade in general is a good direction, leading to, again eventually, the development of less capitalized countries and higher wages for their workers, it is still true that those who are driving for opening markets and labor pools are looking for short term gains, and they are driving hard bargains in trade agreements. the marxian view of this situation is not that ridiculous when we look at the way corporations make investment decisions. here efficiency is really not a simple measurement anymore. the difference in wages for the short term between a worker in india and one in chicago reflects their bargaining power more than productivity. for the firm, that difference is not so much reflected in scaled up production but in the balance sheets and higher stock prices. merely equating what the firms want with efficiency is not a sensible way of going about development.
in any case, the issue here is not trade versus no trade at all, but the rules of the game. when developing countries are competing against each other for capital, their leverage is low without effective international standards or 'collusion' between them. for the people, while it is true that working for nike etc is better than staying on the farm or eeking out a living in the city, their situation is not that good in itself. for people who care about labor conditions etc, their lives would not be held up as shining examples of capitalist success. the movement toward long term prosperity would eventually lead to basic labor regulations being implemented anyway.
Ok, it sounds like you're actually making an effort to learn, and I can respect that. But can you try not to insert your extraordinary personal bias into everything and keep an open mind? Try not to reject ideas before you understand them. Even economists who argue for "fair trade" acknowledge that the concept of comparative advantage tends to generate more value in the long run. But they argue that there are market failures. Nobody, I mean NOBODY, believes that local production is more efficient, and there is sound empirical and theoretical basis for that. You're in good company here and we're not just feeding you capitalist pig propoganda ok, so please quit the cynical remarks about oil and what da fa not.
that said, let's begin with ahrara's lesson in absolute and comparative advantage. sit round ya'll! i've many a tale to tell...
Absolute advantage
Say Bob has a tract of land on which he can grow 4 apples or 2 bananas a day. To live, he needs one of each every day. So he splits his time: every day he grows 2 apples and 1 banana.
Say there is another farmer Jim that has land suited for growing 2 apples and 4 bananas a day. To live, he needs one of each every day. So he grows 1 apple and 2 bananas.
In a world without free trade, together Bob and Jim grow 6 pieces of fruit a day. But say they meet up one day and decide to specialize and focus on what they produce best. Bob grows 4 apples a day, Jim grows 4 bananas a day. They trade so that each have enough fruit to live on, but they are now growing 8 fruits total. Instead of 2 leftover fruits, they have 4. They can take the surplus and sell it so they can buy more land or hire employees. This creates wealth twice as fast.
That is absolute advantage. Once you've digested that, let's move on to
Comparative Advantage
Now let's say Bob has production capacity for
3 apples/day, 2 bananas/day, or some combination of both.
Jim, who is a noob farmer can produce
1 apples/day, 2 bananas/day, or some combination of both.
In a world without trade:
Bob produces 1.5 apples and 1 banana a day (this isn't the mathematical max, but just for example...) Jim produces .5 an apple and 1 banana a day.
Jim can hardly feed himself, since he needs a whole apple a day. Moreover, the total production (their total "GDP") is 4 fruit a day. But if the two traded and specialized in what they can produce best:
Bob produces 3 apples a day Jim produces 2 bananas a day
Jim trades 1 banana for one apple so he has enough to eat, and Bob does as well. Moreover, their GDP is 5 fruit a day, so there is more of value being created in a world of trade. Even though bob has an absolute advantage, the fact that Jim gets to specialize in what he makes the fastest (bananas) means he is creating more wealth for himself and others. That is to say, Jim has a comparative advantage in bananas.
Here's another way of thinking about it. If Bob sacrificed production of apples to produce 1 banana, because he cannot trade for it, he has to give up production of 1.5 apples. That's a .5 net loss in total production.
If Jim were to sacrifice production of 1 apple for bananas, on the other hand, he would be able to produce two bananas. As a result of specialization, Jim would be able to produce one additional piece of fruit a day! But he can't specialize unless he is able to trade for apples he needs, but can't produce as efficiently. Thus, Jim has a comparative, or relative advantage in producing bananas.
Even though the US has an absolute advantage in every respect to most nations with which we trade, other nations could have a comparative advantage. For reasons that have already been described, while some of that wealth is taken back to the home country, much of it remains in the "exploited" country in the form of wages and added productivity.
there is enough elitism on this starcraft site without this. you guys know that.
so... you support free trade 100%. no one should have restrictions. okay. and free markets? or you guys support some sort of regulations on owernship, in these developing countries? im really interested.
I think that sweat shops will last forever so Private investors won't come and say '"I'm gonna build an university, an hi-tech research centre, a bank and an airport " Those things are really profitable for a country and its people ( higher profit margins :p ) whereas the profits made by sweat shops will mostly benefits the foreign firms. Of course the workers of the sweat shop will get paid but on the long term the state should definitly helps its growing industries. Especially if it is clearly evident that with of productivity/tech progress those industries will be competitive enough to flood the foreign countries markets. That the very strategy of Japan and the tigers/dragons.
Well sir you think wrong.
Just look at Shenzen, China. It is a Special Economic Zone, and first started as a bunch of sweatshops using cheap Chinese labour close to the financial centre of Hong Kong. These days, Shenzen rivals Hong Kong in new high-tech and financial developement, and sure as hell has a good airport (by the way, in what country do private investors build universities and airports?).
This process is working in all of China's free trade zones - high economic growth and hightech investments. Sweatshops are moving on further into China, to places which without doubt will soon see the boon of increased wages and education.
On March 04 2009 06:32 cUrsOr wrote: there is enough elitism on this starcraft site without this. you guys know that.
so... you support free trade 100%. no one should have restrictions. okay. and free markets? or you guys support some sort of regulations on owernship, in these developing countries? im really interested.
I never said that. There is a place for governments to step in and correct for market failure, and I do think income inequality is a problem. But I also acknowledge that free markets tend to be more efficient than public management and that savings are necessary for growth.
What I disagree with you on is your entire understanding of trade.
Anyway I don't want to go down this path. I'm honestly trying to teach some basic economic concepts here, and I'm curious if you're just going to ignore me. I updated my post earlier.
On March 04 2009 06:32 cUrsOr wrote: there is enough elitism on this starcraft site without this. you guys know that.
so... you support free trade 100%. no one should have restrictions. okay. and free markets? or you guys support some sort of regulations on owernship, in these developing countries? im really interested.
This is elitism that amounts to you being mocked for not knowing any basic build order at all but try to post in a strategy thread anyway. If you take the time to try to understand the concept then that's one thing, if you are trying to sum up the posts here to fit your own view without even trying to educate yourself in anyway that's another. Ahara took a lot more time than I am willing to spend to try to explain to you the concept of Comparative Advantage upon which the theories about trade is based on, you refuse to learn, you continue to then go on about the opinions expressed in our posts. Yet you expect your opinions to be taken with any degree of seriousness and to be responded to politely?
EDIT - If possible, cursor, stop posting on this thread about that matter for a bit, PM me about what you are trying to get at with your examples. It'll save a lot of frustration.
Ahara, I would have to disagree with this part
while some of that wealth is taken back to the home country, much of it remains in the "exploited" country in the form of wages and added productivity.
That much is uncertain and is pending the government of that country as well as other factors, the only thing that I can say for sure is that purchasing power increases definitely under the Ricardian model, whether Investment and such follow is another affair. If that was simply meant to address the fact that regardless of real wage value the "exploited" country has a higher purchasing power then ignore this.
The problem is that in real world apples and bananas, like sweat shops and high tech firms don't lead to the same profit margins.
So Bob who is a noob ananas farmer but a smart guy might want to borrow some money and make his own automatic pruning shears thus gaining a lot of productivity and making more ananas and profit than the poor and corny Jim. But Bob is even smarter. He knows that he can make even more if he sells this gear to his pathetic neighbours. So he chops down all his ananas trees and build a pruning shears factory instead. Then he teachs the notion of competitive advantage to his dear Jim. And when Jim finally understand that he can make more money making pruning shears, Bob is already producing his own farm tractor robots each with twelve automatic pruning shears.
On March 04 2009 06:46 Boblion wrote: The problem is that in real world apples and bananas, like sweat shops and high tech firms don't lead to the same profit margins.
So Bob who is a noob ananas farmer but a smart guy might want to borrow some money and make his own automatic pruning shears thus gaining a lot of productivity and making more ananas and profit than the poor and corny Jim. But Bob is even smarter. He knows that he can make even more if he sells this gear to his pathetic neighbours. So he chops down all his ananas trees and build a pruning shears factory instead. Then he teachs the notion of competitive advantage to his dear Jim. And when Jim finally understand that he can make more money making pruning shears, Bob is already producing his own farm tractor robots each with twelve automatic pruning shears.
That's how real world works.
Again, Boblion, that's why IMF and Development banks exist. The examples here are meant to describe a simple principle in the Ricardian model, one that has yet to be proven wrong even though the Ricardian model is now viewed as somewhat too simplistic to describe the proper nuances of International Trade. The point driven at here is that no matter who profits more, at least the two are both better than the non-trade state, that one person can ramp a higher I than another and resulting in overall higher A is another matter completely. At that, I fail to see how that deals with the principles behind the support of free trade at all.
i was dead serious. isnt that comparative advantage? the could grow wheat to feed themselves, but opium makes much much more money. so they grow opuim for lots of money, they can buy all the wheat they want, and other things too. i think it was the taliban that really started this.. but the fact that they get more Value from the opium, isnt that comparative advantage?
Again, Boblion, that's why IMF and Development banks exist.
Some would argue that the IMF and Development banks have been incredibly disruptive and have proliferated Boblion's scenario.
There are elements at play, like elements of real and percieved power, elements that you conceed that make the ricardian model 'too simplistic' for ignoring them. These last few pages have largely been an attack against a strawman. No one's stated that trade is bad. Trade is fine. Even cursor's shitty ability to debate has brought up a bunch of valid questions: Is 100% 0 barrier trade the BEST option for developing countries? Why? You've admitted his fundamental premise in acknowledging Bob's argument that there's a need for institutional regulation of trade.
I think that sweat shops will last forever so Private investors won't come and say '"I'm gonna build an university, an hi-tech research centre, a bank and an airport " Those things are really profitable for a country and its people ( higher profit margins :p ) whereas the profits made by sweat shops will mostly benefits the foreign firms. Of course the workers of the sweat shop will get paid but on the long term the state should definitly helps its growing industries. Especially if it is clearly evident that with of productivity/tech progress those industries will be competitive enough to flood the foreign countries markets. That the very strategy of Japan and the tigers/dragons.
Well sir you think wrong.
Just look at Shenzen, China. It is a Special Economic Zone, and first started as a bunch of sweatshops using cheap Chinese labour close to the financial centre of Hong Kong. These days, Shenzen rivals Hong Kong in new high-tech and financial developement, and sure as hell has a good airport (by the way, in what country do private investors build universities and airports?).
This process is working in all of China's free trade zones - high economic growth and hightech investments. Sweatshops are moving on further into China, to places which without doubt will soon see the boon of increased wages and education.
You neglect two things: - China has an endless pool of candidates for sweat shops and the governement don't really care that much of their fate. ( or at least can't really do a lot for them ). - But this government is smart and favors joint venture between foreign firms and his own ( or even constrain ). And they want technology transferts each time we sell them a nuclear plant or planes. They even want to build the planes themselves. And i don't even talk about commercial intelligence/spying or forgeries. http://www.china.org.cn/english/features/investment/36752.htm
Listen. They don't have the same standarts than us and they probably can't have the same standart of living for 1+ billion people atm. So some have to work in sweatshops to buy their everyday meal, but you miss the big picture. Their governement is trying hard to get educated citizens and high tech firms, because they know they will gain waaaaaaaaaaayyyyyyyy more if they can sell cars and planes instead of shirts.
edit: i talked about universities and airports because a large city needs it for business and education and again it can only be built by and with state's money. A really poor country won't have enough money to pay foreign firms in order to get a perfect modern airport so it will get a third rate airport built by his own civil servants or a local firm. It is not really China's situation though :p.
Again, Boblion, that's why IMF and Development banks exist.
Some would argue that the IMF and Development banks have been incredibly disruptive and have proliferated Boblion's scenario.
There are elements at play, like elements of real and percieved power, elements that you conceed that make the ricardian model 'too simplistic' for ignoring them. These last few pages have largely been an attack against a strawman. No one's stated that trade is bad. Trade is fine. Even cursor's shitty ability to debate has brought up a bunch of valid questions: Is 100% 0 barrier trade the BEST option for developing countries? Why? You've admitted his fundamental premise in acknowledging Bob's argument that there's a need for institutional regulation of trade.
Wrong target, it might've got lost somewhere, but I also stated that protectionism isn't a complete evil and could be highly useful. At that, I don't think anyone has written off protectionism wholly either.
As for the value of IMF and such though, well, it is really all still questionable, though at the moment I'd have to say the overall impact isn't great. Here though, I look at them as having been a relative success in the role of a capital pump into the countries that need them. There are, as I've also mentioned, other factors to be considered on top of that.
Boblion/Piretes, one of you mind highlighting what you are arguing here, I am getting increasingly confused as to what that train of discussion is getting to.
On March 04 2009 06:46 Boblion wrote: The problem is that in real world apples and bananas, like sweat shops and high tech firms don't lead to the same profit margins.
So Bob who is a noob ananas farmer but a smart guy might want to borrow some money and make his own automatic pruning shears thus gaining a lot of productivity and making more ananas and profit than the poor and corny Jim. But Bob is even smarter. He knows that he can make even more if he sells this gear to his pathetic neighbours. So he chops down all his ananas trees and build a pruning shears factory instead. Then he teachs the notion of competitive advantage to his dear Jim. And when Jim finally understand that he can make more money making pruning shears, Bob is already producing his own farm tractor robots each with twelve automatic pruning shears.
That's how real world works.
Again, Boblion, that's why IMF and Development banks exist. The examples here are meant to describe a simple principle in the Ricardian model, one that has yet to be proven wrong even though the Ricardian model is now viewed as somewhat too simplistic to describe the proper nuances of International Trade. The point driven at here is that no matter who profits more, at least the two are both better than the non-trade state, that one person can ramp a higher I than another and resulting in overall higher A is another matter completely. At that, I fail to see how that deals with the principles behind the support of free trade at all.
I agree with the Ricardian model too. But on long term i don't think it is really accurate It is a simplification. oh and IMF assessments in many countries are kinda bad. Especially because of their "conditionalities" ( hi Structural Adjustment Programs ). Oh and they also support military dictatorships ( free-trade people can be evil sometimes )
On March 04 2009 06:46 Boblion wrote: The problem is that in real world apples and bananas, like sweat shops and high tech firms don't lead to the same profit margins.
So Bob who is a noob ananas farmer but a smart guy might want to borrow some money and make his own automatic pruning shears thus gaining a lot of productivity and making more ananas and profit than the poor and corny Jim. But Bob is even smarter. He knows that he can make even more if he sells this gear to his pathetic neighbours. So he chops down all his ananas trees and build a pruning shears factory instead. Then he teachs the notion of competitive advantage to his dear Jim. And when Jim finally understand that he can make more money making pruning shears, Bob is already producing his own farm tractor robots each with twelve automatic pruning shears.
That's how real world works.
Again, Boblion, that's why IMF and Development banks exist. The examples here are meant to describe a simple principle in the Ricardian model, one that has yet to be proven wrong even though the Ricardian model is now viewed as somewhat too simplistic to describe the proper nuances of International Trade. The point driven at here is that no matter who profits more, at least the two are both better than the non-trade state, that one person can ramp a higher I than another and resulting in overall higher A is another matter completely. At that, I fail to see how that deals with the principles behind the support of free trade at all.
Uh... the Ricardo model is seen as nothing but a theory in the development community, since it's usually not applicable in real economics. Capital liquidity is extremely high and from a rational choice perspective, it simply doesn't play out that they will or can develop a comparative advantage. When it is developed, it is only temporary and is often not sustained long enough to stimulate full industrial growth. Again, I beg of you, stop looking at it in terms of economics theory (which as Moltke pointed out is not as much of a hard science as it would like to believe) but in terms of public policy from the US and other countries involved. Theoretically, if every country engages in free trade it should be beneficial for all, but the first country that puts a protectionist policy in place is immediately going to become richer than its counterparts. Thus we have a giant fucking game theory model in which free trade cannot exist, and every single country uses modified levels of "strategic trade policy" to outdo eachother.
Again, Boblion, that's why IMF and Development banks exist.
Some would argue that the IMF and Development banks have been incredibly disruptive and have proliferated Boblion's scenario.
Among them is William Easterly who, even as a heavy pro-free trader, thinks the IMF/World Bank/WTO have done a wonderful job fucking up third world development.
On March 04 2009 06:46 Boblion wrote: The problem is that in real world apples and bananas, like sweat shops and high tech firms don't lead to the same profit margins.
So Bob who is a noob ananas farmer but a smart guy might want to borrow some money and make his own automatic pruning shears thus gaining a lot of productivity and making more ananas and profit than the poor and corny Jim. But Bob is even smarter. He knows that he can make even more if he sells this gear to his pathetic neighbours. So he chops down all his ananas trees and build a pruning shears factory instead. Then he teachs the notion of competitive advantage to his dear Jim. And when Jim finally understand that he can make more money making pruning shears, Bob is already producing his own farm tractor robots each with twelve automatic pruning shears.
That's how real world works.
Again, Boblion, that's why IMF and Development banks exist. The examples here are meant to describe a simple principle in the Ricardian model, one that has yet to be proven wrong even though the Ricardian model is now viewed as somewhat too simplistic to describe the proper nuances of International Trade. The point driven at here is that no matter who profits more, at least the two are both better than the non-trade state, that one person can ramp a higher I than another and resulting in overall higher A is another matter completely. At that, I fail to see how that deals with the principles behind the support of free trade at all.
Uh... the Ricardo model is seen as nothing but a theory in the development community, since it's usually not applicable in real economics. Capital liquidity is extremely high and from a rational choice perspective, it simply doesn't play out that they will or can develop a comparative advantage. When it is developed, it is only temporary and is often not sustained long enough to stimulate full industrial growth. Again, I beg of you, stop looking at it in terms of economics theory (which as Moltke pointed out is not as much of a hard science as it would like to believe) but in terms of public policy from the US and other countries involved. Theoretically, if every country engages in free trade it should be beneficial for all, but the first country that puts a protectionist policy in place is immediately going to become richer than its counterparts. Thus we have a giant fucking game theory model in which free trade cannot exist, and every single country uses modified levels of "strategic trade policy" to outdo eachother.
Except I agree with you and never said anything about free trade being wholly good in every possible scenario, the posts thus far are addressing the principles rather than the practicalities of the situation. Also, such a world model is seen in how we have largely bilateral trade agreements rather than an international agreement due to the interest groups in question and the want to continue to use some degrees of protectionist policy, I certainly don't mean to disagree with that, and if my post read that way my apologies.
Now, about the Ricardo model, I've said already that it fails to address the proper nuances of international trade, the point here is to educate someone else about the concept of comparative advantage rather than to say "Because Ricardo model says comparative advantage would result in trade being profitable to the parties involved 100% free trade w/o trade barriers of any kind is vital".
EDIT - The more I type the more I feel that this thread is moving too quickly among different tracks and I am missing something as to what's being discussed.
Also, about the IMF/etc, I've mentioned a few post earlier that I was only bringing them up as the organizations that pumps capital, as the original reason I brought them up was to address Boblion's part about infrastructure being built. For a more practical evaluation of their successes and failures I can't say I am educated enough to say anything.
On March 04 2009 07:34 Jibba wrote: Uh... the Ricardo model is seen as nothing but a theory in the development community, since it's usually not applicable in real economics. Capital liquidity is extremely high and from a rational choice perspective, it simply doesn't play out that they will or can develop a comparative advantage. When it is developed, it is only temporary and is often not sustained long enough to stimulate full industrial growth. Again, I beg of you, stop looking at it in terms of economics theory (which as Moltke pointed out is not as much of a hard science as it would like to believe) but in terms of public policy from the US and other countries involved. Theoretically, if every country engages in free trade it should be beneficial for all, but the first country that puts a protectionist policy in place is immediately going to become richer than its counterparts. Thus we have a giant fucking game theory model in which free trade cannot exist, and every single country uses modified levels of "strategic trade policy" to outdo eachother.
Hold on.... Why would the first country engaging in protectionism become richer than its counterparts?
On March 04 2009 07:34 Jibba wrote: Uh... the Ricardo model is seen as nothing but a theory in the development community, since it's usually not applicable in real economics. Capital liquidity is extremely high and from a rational choice perspective, it simply doesn't play out that they will or can develop a comparative advantage. When it is developed, it is only temporary and is often not sustained long enough to stimulate full industrial growth. Again, I beg of you, stop looking at it in terms of economics theory (which as Moltke pointed out is not as much of a hard science as it would like to believe) but in terms of public policy from the US and other countries involved. Theoretically, if every country engages in free trade it should be beneficial for all, but the first country that puts a protectionist policy in place is immediately going to become richer than its counterparts. Thus we have a giant fucking game theory model in which free trade cannot exist, and every single country uses modified levels of "strategic trade policy" to outdo eachother.
Hold on.... Why would the first country engaging in protectionism become richer than its counterparts?
On March 04 2009 08:10 warding wrote: At the expense of the internal consumer. Overall long-run welfare would be negative.
Not if the new industries are flooding foreign markets :p You seriously need to take a look at Japan's history.
I guess we will end up in an ideological argument but i'm convinced that some apects of protectionism are needed, at least for developing countries. You don't agree and that's fine. Anyway i can't really make the kind of posts i would like because of my poor English so it's a waste of effort It would be off topic anyway.
Well there's also the example of Portugal. We had a lot of protectionism until we joined trade organisations in the 50's and 60's, and later the EU in 86. Our industries were protected, and were miles behind other nations because they didn't have to face international competition. When we finally started opening up, there was a flood of foreign capital and knowledge, and finally our industries were forced to compete internationally and adopt more efficient practices. In the second half of the 20th century we were the second fastest economy in the world, behind Japan, if I'm not mistaken.
OK let's leave it at that. I'd still like to hear from Jibba on why there would be a clear advantage in adopting protectionism though.
Obama wants to raise taxes on the wealthy and is met with opposition from both parties. Why is it such a bad proposition?
there isnt really much of a differance between Dem and Rep in this counrty, although a lot of effort is put forth to make it seem so.
though the ideas themselves dont look too bad to me, but the lobbying intrests in washington start to get pretty active when people start talking about things like taxing pollution and big business more. i think that is something most people would support, but that is why most people are insulated from the decision making process
On March 04 2009 06:55 cUrsOr wrote: i was dead serious. isnt that comparative advantage? the could grow wheat to feed themselves, but opium makes much much more money. so they grow opuim for lots of money, they can buy all the wheat they want, and other things too. i think it was the taliban that really started this.. but the fact that they get more Value from the opium, isnt that comparative advantage?
seriously.
ah sorry, i thought you were making a cynical remark.
it's not really comparative advantage. afghanistan is uniquely equipped to grow opium for a bunch of different reasons. that's absolute advantage. it's obviously that afghanistan (my motherland) has much to gain from exporting its opium.
an example of comparative advantage is if the US was better equipped to grow opium than afghanistan. afghanistan retains the comparative advantage even thought it does not have an absolute advantage because the US, instead of growing opium, could spend that effort and money on something much more productive. in order to grow opium, the US has to give up much more.
okay so it has to be produced more efficently. like we can produce more for the same cost. lemme ask you something also serious. does a country with cheaper labor have a comparative advantage over ones without? or is that considered a resource or something?
On March 04 2009 08:34 warding wrote: Well there's also the example of Portugal. We had a lot of protectionism until we joined trade organisations in the 50's and 60's, and later the EU in 86. Our industries were protected, and were miles behind other nations because they didn't have to face international competition. When we finally started opening up, there was a flood of foreign capital and knowledge, and finally our industries were forced to compete internationally and adopt more efficient practices. In the second half of the 20th century we were the second fastest economy in the world, behind Japan, if I'm not mistaken.
OK let's leave it at that. I'd still like to hear from Jibba on why there would be a clear advantage in adopting protectionism though.
Portugal handled it poorly, Japan did not. They still operate within competitive markets outside of their borders, with the gained advantage of subsidies, health care, weak unions and lack of domestic competition. The American auto industry, while doing well in China and Europe, has gotten wrecked domestically and many of the root causes are things that would have been alleviated to a large extent if they were Japanese and not American.
In the long term, it is a problem if there is backlash from the rest of the countries who have remained open (which won't happen), but at the same time the chances of falling behind are decreased because their industry will always have an advantage over the other country's similar industry. Also, you have to keep in mind that politicians aren't elected every 15-20 years. It's in their best interest to pursue immediate growth (which is why you need to consider this on different levels of public policy, not simply in terms of macroeconomics) and it can be rationalized in a way that will protect them. Interest groups (unions) are looking out for their own rational interest, and they're what are behind a lot of bills and help put people into power. It's not intentionally dirty, it's just a function of a pluralist democracy. The interest group and congress person has a constituency who will be greatly pleased if the tariff goes up to protect their industry, and even if congress makes the prudent decision not to, they may just be replaced by someone who will. It's a problem, but you can hope to have counter forces or other ways to please the interest group.
It is a prisoner game though, only with more variables then can be calculated.
Technically, Obama isn't going to raise the big taxes that will go up. The Bush tax cuts had a sunset clause in them (Bush actually had a lot of non-discretionary policy, which is in some sense a good thing) that means they need to be re-affirmed every few years, unless Congress truly makes it a law. In this case, they're not going to pass the new version so the tax rates will revert to where they were. It's very convenient for Obama in this way.
I have no problems with any of the proposals in that yahoo article.
Anyone got any thoughts on the paradox of thrift we're facing?
Overleveraged American consumers need to deleverage, but increased saving means less consumption and a deeper recession. We need SOMEONE to consume but it would be irresponsible for overleveraged consumers to spend at this point. Making it worse, increased saving is not really gonna translate into new investment coz of the problems with the banking system and that companies don't seem to be very interested in investing at a time of sharply declining demand. All the while, it was a very low savings rate that helped us get into this mess. aaaAArgh!
On March 04 2009 11:33 warding wrote: Anyone got any thoughts on the paradox of thrift we're facing?
Overleveraged American consumers need to deleverage, but increased saving means less consumption and a deeper recession. We need SOMEONE to consume but it would be irresponsible for overleveraged consumers to spend at this point. Making it worse, increased saving is not really gonna translate into new investment coz of the problems with the banking system and that companies don't seem to be very interested in investing at a time of sharply declining demand. All the while, it was a very low savings rate that helped us get into this mess. aaaAArgh!
On March 04 2009 11:33 warding wrote: Anyone got any thoughts on the paradox of thrift we're facing?
Overleveraged American consumers need to deleverage, but increased saving means less consumption and a deeper recession. We need SOMEONE to consume but it would be irresponsible for overleveraged consumers to spend at this point. Making it worse, increased saving is not really gonna translate into new investment coz of the problems with the banking system and that companies don't seem to be very interested in investing at a time of sharply declining demand. All the while, it was a very low savings rate that helped us get into this mess. aaaAArgh!
My thoughts are I hope they don't pass more tax refunds because I don't know what they think they can accomplish. Like you said, everyone is saving, which is normally what people are supposed to do, except for now when everyone needs to go buy a big screen TV.
I think we are at 5% savings rate now, any other time I would've rejoiced to see this kind of savings rate for America, not now, not while we have a savings glut with what looks like a liquidity trap. I suppose Friedman's solution for the latter simply won't work now
Obama wants to raise taxes on the wealthy and is met with opposition from both parties. Why is it such a bad proposition?
From the article, it seems that Republicans oppose the taxes because, quite simply, they are tax increases. Some Democrats oppose the taxes because part of the bill is to slash tax benefits of charitable contributions from the wealthy. If this were to happen, the affluent would donate a LOT less money to charity and many nonprofits would go the way of the dodo.
I oppose the taxes because the taxing scheme would absolutely punish the upper middle class (those between $250,000 - $750,000). What Obama doesn't seem to realize is that you are only taxed on the cash flows you have during the tax year. Most super high networth taxpayers have their wealth in capital assets (stocks, bonds, real estate, etc), and if you don't cash them in (ie.sell them), you're not getting cash flow from them...so you don't get taxed on them. These taxpayers certainly have enough cash on hand already that they will probably just hold off selling their assets until the next administration comes in with more favorable taxes. So that puts the burden on the people who are right below the super affluent--the upper middle class. A lot of the upper middle class are in that financial position because they are small-mid business owners and becuase they are operating an active business, they continually have cash flows in and out. Every dime they make from their business cannot avoid taxes and it will very harshly punish the businesses of this size. Whats even worst is that they /should/ encourage these businesses to expand and grow because these are the businesses that are large enough to not bankrupt, but small enough to create competition. Obama is going to discover once his tax hikes kick in in 2011, the actual tax revenue will be a lot less than projected.
gchan I wouldn't call 500000+ a year upper-middle class.
Obama certainly realizes how taxes work, and I think his treasury secretary does understand it quite a bit better than you. I'm not exactly 100% sure how American taxes work, but I'm certain that there is a tax on equity, so the ultrarich will not get out unscathed. Furthermore, if you read the article, the plan cuts taxes for an estimated 97% of businesses, and If I might dare say so, I think this is especially true for smaller buisnesses owned by the (upper-)middle class.
On March 04 2009 17:38 Piretes wrote: gchan I wouldn't call 500000+ a year upper-middle class.
Obama certainly realizes how taxes work, and I think his treasury secretary does understand it quite a bit better than you. I'm not exactly 100% sure how American taxes work, but I'm certain that there is a tax on equity, so the ultrarich will not get out unscathed. Furthermore, if you read the article, the plan cuts taxes for an estimated 97% of businesses, and If I might dare say so, I think this is especially true for smaller buisnesses owned by the (upper-)middle class.
Next time read the article, thanks.
If you want to talk taxes, lets talk taxes.
First off, have you ever run a small business or looked at the books of a small business? $250,000-$750,000 is not a lot of profit, especially given the fact that most of the owners of these businesses are putting in 100 hour weeks. Sure, they may get $500,000 in profit in one year, but any smart business owner knows that is not discretionary money. Small businsses face a pretty volatile climate (especially nowadays) and almost all of that money is going to be reinvested back into the business. But for tax purposes, it will look like they have made $500,000 in that fiscal year so they will be taxed as if they made $500,000 in a year. They get taxed for making more money, but they don't get tax benefits for putting money into their business. Sucks, huh?
Secondly, his treasury secretary understands exactly how it works...as does his press secretary. Saying that he will close the deficit and he is giving 95% individuals and 97% businesses is good for PR and confidence. But have you looked at this actual proposed budget? You criticize me for not reading the article, but why don't you try reading the actual budget. His "tax breaks" for individuals include tax credits incentives like green cars. The way he calculated 95% of the population getting tax breaks is he took the amount of americans who are getting actual income tax breaks (like 2/3-3/4), then added an additional 20-30% for those in the mid-upper middle class by giving them tax credits. He made the assumption that all those in that top 1/3 of the population will be doing things that have tax credits with them (like buying green cars, when they probably wouldn't be)..and called those tax breaks. Their net tax is actually going to increase because the income tax increase for them is not going to be offset by a tiny credit they are getting back. That's Obama's definition of "tax break."
For small businesses, he got the figure for 97% mostly by simply increasing the amount and duration businesses can carry their net operating losses. If a business runs in the negative for the year, they can usually carry their losses to be used in the next tax year--to a limit, and for only a certain duration of time. Obama's "tax break" for 97% of the businesses is simply increasing the amount they can report in the next tax year and increase the duration they can carry them. The small businesses are not actually getting any more cash back from the government because of real legitimate tax breaks.
Thirdly, no, there are no taxes on equity that is not cashed in. The new budget has nothing on it. Again, another PR stunt to say he is going to close the budget deficit. He is simply raising the capital gains tax rate; he creates his estimates by taking the amount of taxes from capital gains in the last fiscal year and tacking on an extra 5-10% for his new tax hikes. In reality, if there are higher tax rates, people are not going to cash in as many stocks.
Lastly, though you didn't mention anything about it, when I took a closer look at his budget, I just realized that his tax revenue is based on 3.5% growth in 2010 and 5.2% in 2011. Somehow, I don't exactly see that happening and I don't see our budget being closed by half of what it is now. But hey, if boosts our consumer confidence, I'm all for it. Even if it comes with the side benefit of selling more votes.
Edit: profit != revenue
Edit 2: Now that I reread what I posted, sorry I'm coming off as an ass.
Lastly, though you didn't mention anything about it, when I took a closer look at his budget, I just realized that his tax revenue is based on 3.5% growth in 2009 and 5.5% in 2010. Somehow, I don't exactly see that happening and I don't see our budget being closed by half of what it is now. But hey, if boosts our consumer confidence, I'm all for it. Even if it comes with the side benefit of selling more votes.
You're right warding, I mistakenly read the budget figures as year beginning rather than year end. That would make his forecast for 2011 to be 5.2%, when his taxes kick in. Either way, to expect 5.2% in 2011 and tax based on that is quite an assumption.
gchan I do indeed not feel the need to read throught this budget, and I'm sorry if this makes my post invalid, but your post didn't contain any references either so I guess we're even.
I assummed that the tax cuts were indeed tax cuts and not subisidies for green cars and the like (not a crazy assumption imo), if this is just PR forgive me.
I agree that tax policy should promote enterprise in these days of recession, but disagree that this should be done with income tax cuts for the upper middle class. Of course, if these tax increases indeed play out to harm buisness, they are a bad idea. However, I think that instead of not raising these taxes, American tax code should be rewritten to allow profits to be invested in the own company without being registered as income tax (I'm pretty sure that this is the case in most of Europe). I'm sure you agree with me on this.
On March 02 2009 08:36 warding wrote: Moltke, I only posted information from other sources, they are not my 'prophecies', nor did I claim that an economic recovery is under way.
The implicit message is that, as far as we know, the expectations for this recession are nowhere near as bad as the great depression. This was in response to some posters claiming that this seemed like it was going to be comparable to the great depression. I'm only comparing their expectations to the expectations of economists who understand the subject better.
Of course you can disregard these forecasts on the basis that economists have been wrong before. We'll, economists have always admitted a great deal of uncertainty in their forecasts. They are aware of the unpredictability of recessions. However difficult it may be to predict future economic events, it may still be useful. A great deal of economists are employed for this purpose across numerous industries and institutions you know.
Which economists know better, wardo? The economists at the Federal Reserve Board, or the White House Administration? The people who forecast early recoveries now are the same people who have been forecasting recoveries since the first symptoms of economic crisis. The people who forecast potential depressions are the people who have been warning us since the same time that the situation would continue to worsen. Not that I'm too worried about what your beliefs are. I'm simply a little disappointed by the origins of your opinions.
And here's where we are stepping out of positive economics towards normative stuff. This discussion isn't more about 'what is', being instead of 'what ought to be'. I believe I have much less of a problem with income inequality than you do, not because one of us has a better understanding of economics, but because we hold vales/beliefs/morals whatever. We should keep this discussion out of this thread though.
Here is another example of your moral cowardice, wardo. Your attitudes toward inequality should be similar to mine if you had any imagination.
I'm not putting money on economists' predictions of how this recession will pan out, Moltke. Some people were stating that it looked like this recession would end up being as bad as the great depression. I compared those forecasts to the forecasts of panels of economists which are arguably the best available forecasts we have. If the best forecasts we have say it's not going to be as bad, then I don't see why we should expect much worse.
On March 06 2009 05:35 warding wrote: I'm not putting money on economists' predictions of how this recession will pan out, Moltke. Some people were stating that it looked like this recession would end up being as bad as the great depression. I compared those forecasts to the forecasts of panels of economists which are arguably the best available forecasts we have. If the best forecasts we have say it's not going to be as bad, then I don't see why we should expect much worse.
What are your attitudes toward inequality?
Here's your argument, wardo: My friend LeMan says that tomorrow it will rain, this other guy, Lom, says that tomorrow it will snow. I say that LeMan is smarter than Lom, but I don't say whether it will rain or snow tomorrow. If it does indeed snow tomorrow, I shall still be right, because my pronouncement on the relative intellects of LeMan and Lom shall be unrelated to their relative tendencies toward error.
You cannot play the game without betting your hands, wardo. No one will give honour to a scoundrel who has none to wager.
On March 06 2009 05:35 warding wrote: I compared those forecasts to the forecasts of panels of economists which are arguably the best available forecasts we have. If the best forecasts we have say it's not going to be as bad, then I don't see why we should expect much worse.
How many of them predicted this in 2006? Why should you believe they are they right now when they were wrong then? In fact, the people predicting another great depression in 2006 were more accurate than those economists.
On March 06 2009 05:35 warding wrote: I compared those forecasts to the forecasts of panels of economists which are arguably the best available forecasts we have. If the best forecasts we have say it's not going to be as bad, then I don't see why we should expect much worse.
How many of them predicted this in 2006? Why should you believe they are they right now when they were wrong then? In fact, the people predicting another great depression in 2006 were more accurate than those economists.
Yeah, a couple of the guys who predicted the housing crisis extremely accurately (Peter Schiff, Jim Rogers), are both very bearish on the American economy
"Macroeconomics is like reading the entrails of a goat" - one of my professors
I think microeconomists tend to agree with this.
House Minority Leader John Boehner agreed. "The era of big government is back," he said.
Boehner can go fuck himself. Fucking partisan bullshit, everyone knows him and every other Republican (Paul is ideologically independent) loves big government, they just want it directed towards their issues.
On March 06 2009 05:35 warding wrote: I compared those forecasts to the forecasts of panels of economists which are arguably the best available forecasts we have. If the best forecasts we have say it's not going to be as bad, then I don't see why we should expect much worse.
How many of them predicted this in 2006? Why should you believe they are they right now when they were wrong then? In fact, the people predicting another great depression in 2006 were more accurate than those economists.
Yeah, a couple of the guys who predicted the housing crisis extremely accurately (Peter Schiff, Jim Rogers), are both very bearish on the American economy
Economic prediction in contemporary times is such bullshit. I mean, really, if you have millions of economists typing, of course one of them is going to turn out the works of shakespeare. And it's even worse when you try to get politicians to do the predicting. And that's the beauty of the free market; it's not driven by individual predictions, it's driven by something more innate to people--greed. Sure, people get hurt in the process and people become poor, but the free market has the ability to adapt a lot better than any economist or politician could.
On March 06 2009 05:35 warding wrote: I compared those forecasts to the forecasts of panels of economists which are arguably the best available forecasts we have. If the best forecasts we have say it's not going to be as bad, then I don't see why we should expect much worse.
How many of them predicted this in 2006? Why should you believe they are they right now when they were wrong then? In fact, the people predicting another great depression in 2006 were more accurate than those economists.
Yeah, a couple of the guys who predicted the housing crisis extremely accurately (Peter Schiff, Jim Rogers), are both very bearish on the American economy
Economic prediction in contemporary times is such bullshit. I mean, really, if you have millions of economists typing, of course one of them is going to turn out the works of shakespeare. And it's even worse when you try to get politicians to do the predicting. And that's the beauty of the free market; it's not driven by individual predictions, it's driven by something more innate to people--greed. Sure, people get hurt in the process and people become poor, but the free market has the ability to adapt a lot better than any economist or politician could.
I agree, but Schiff really does know his stuff, and he's about as free-market as they come (Ron Paul's economic advisor).
Even though the US has an absolute advantage in every respect to most nations with which we trade, other nations could have a comparative advantage. For reasons that have already been described, while some of that wealth is taken back to the home country, much of it remains in the "exploited" country in the form of wages and added productivity.
Actually "could have a comparative advantage" should be "WILL have a comparative advantage" as long as the 2 countries are not identical in their production abilities or tradeoffs. If 2 countries are different at all, then they will both always have a comparative advantage in something..even if they are a very undeveloped or unproductive country.
On March 04 2009 06:46 Boblion wrote: The problem is that in real world apples and bananas, like sweat shops and high tech firms don't lead to the same profit margins.
So Bob who is a noob ananas farmer but a smart guy might want to borrow some money and make his own automatic pruning shears thus gaining a lot of productivity and making more ananas and profit than the poor and corny Jim. But Bob is even smarter. He knows that he can make even more if he sells this gear to his pathetic neighbours. So he chops down all his ananas trees and build a pruning shears factory instead. Then he teachs the notion of competitive advantage to his dear Jim. And when Jim finally understand that he can make more money making pruning shears, Bob is already producing his own farm tractor robots each with twelve automatic pruning shears.
That's how real world works.
Again, Boblion, that's why IMF and Development banks exist. The examples here are meant to describe a simple principle in the Ricardian model, one that has yet to be proven wrong even though the Ricardian model is now viewed as somewhat too simplistic to describe the proper nuances of International Trade. The point driven at here is that no matter who profits more, at least the two are both better than the non-trade state, that one person can ramp a higher I than another and resulting in overall higher A is another matter completely. At that, I fail to see how that deals with the principles behind the support of free trade at all.
Uh... the Ricardo model is seen as nothing but a theory in the development community, since it's usually not applicable in real economics. Capital liquidity is extremely high and from a rational choice perspective, it simply doesn't play out that they will or can develop a comparative advantage. When it is developed, it is only temporary and is often not sustained long enough to stimulate full industrial growth. Again, I beg of you, stop looking at it in terms of economics theory (which as Moltke pointed out is not as much of a hard science as it would like to believe) but in terms of public policy from the US and other countries involved. Theoretically, if every country engages in free trade it should be beneficial for all, but the first country that puts a protectionist policy in place is immediately going to become richer than its counterparts. Thus we have a giant fucking game theory model in which free trade cannot exist, and every single country uses modified levels of "strategic trade policy" to outdo eachother.
Sorry, I am trying to catch up in this thread.
I disagree with the first part of your statement here. I don't think you quite grasp the idea of what a comparative advantage is. But as for free trade and the game theory model, that has some real truth to it. However some argue that in many cases, countries like the US are best off without trade restrictions even though other countries have put on restrictions. In other words, our best response to their protectionism is still free trade. It may be because we import so much more than we export and that protectionist policies hurt consumers (higher prices) but help domestic producers. However, I think that would be extremely hard to prove but that is the idea. If we chose to help a relatively small number of domestic producers by raising tariffs, we end up hurting a much larger number of domestic consumers who now have to buy more expensive goods and less variety.
On March 04 2009 08:00 Jibba wrote: I just don't see why we're having an economics discussion instead of a policy discussion.
Its because Econ >>> Public Policy
Macro is garbage. Even if it were reliable (which it's not), it has little relevance on what's actually going to happen.
Here's one for ya. The F22 raptor costs 350 million dollars per plane, and Obama wants to remove it from the budget, but Congress is not going to let it happen. Now, you can talk about government spending, intervention, driving the economy, etc. but the only thing that's important is that manufacturing has been set up through over 1,000 companies in 40 states to ensure that interest group pressure keeps it in production.
Why do you think something as stupid as the Buy American clause got introduced in the first place? It's public policy that you need to examine.
EDIT: And I understand the comparative advantage well enough. The problem is that it becomes a comparative disadvantage unless a country can use it to expand growth in other sectors. There's a limited time to get this done, and it's easy for investors to move money from country to country. Ricardo built the model on the belief that infrastructure was difficult to build and replace, and that the continents were separated by oceans. The continents are separated by fiber optic cables.
On March 04 2009 08:00 Jibba wrote: I just don't see why we're having an economics discussion instead of a policy discussion.
Its because Econ >>> Public Policy
Macro is garbage. Even if it were reliable (which it's not), it has little relevance on what's actually going to happen.
Here's one for ya. The F22 raptor costs 350 million dollars per plane, and Obama wants to remove it from the budget, but Congress is not going to let it happen. Now, you can talk about government spending, intervention, driving the economy, etc. but the only thing that's important is that manufacturing has been set up through over 1,000 companies in 40 states to ensure that interest group pressure keeps it in production.
Here is another reason why macro economics is garbage. Most macro economists just assume constant growth (exponential growth), an assumption which is guaranteed to be wrong at some point or another. Their theories may work beautifully when things are growing constantly, but they fail to realize this is not a quiescent state.
This video made a lot of good points which I can't refute. It is about exponential growth and it's dramatic consequences (its some physics guy giving a lecture). He seems to focus on population growth, but I think the real application we need to look at here is economic growth (which may or may not involve population growth). Population growth is limited by economic growth, and economic growth is currently assumed to be constant by our banking system. When viewed in the context of economics, this video seems to explain our current economic troubles and why they may be fundamental as opposed to some simple policy decision.
In the news today. U.S. jobless rate jumps to 8.1% highest level since 1983. This is worse than predicted and is likely to cause an additional round of selloffs in the stock market.
On March 06 2009 18:05 fight_or_flight wrote: Here is another reason why macro economics is garbage. Most macro economists just assume constant growth (exponential growth), an assumption which is guaranteed to be wrong at some point or another. Their theories may work beautifully when things are growing constantly, but they fail to realize this is not a quiescent state.
This video made a lot of good points which I can't refute. It is about exponential growth and it's dramatic consequences (its some physics guy giving a lecture). He seems to focus on population growth, but I think the real application we need to look at here is economic growth (which may or may not involve population growth). Population growth is limited by economic growth, and economic growth is currently assumed to be constant by our banking system. When viewed in the context of economics, this video seems to explain our current economic troubles and why they may be fundamental as opposed to some simple policy decision.
On March 06 2009 05:35 warding wrote: I compared those forecasts to the forecasts of panels of economists which are arguably the best available forecasts we have. If the best forecasts we have say it's not going to be as bad, then I don't see why we should expect much worse.
How many of them predicted this in 2006? Why should you believe they are they right now when they were wrong then? In fact, the people predicting another great depression in 2006 were more accurate than those economists.
I don't know. I don't believe they are absolutely right, only that I place more confidence in their forecasts relative to random-TLers' forecasts.
I could generalize like you and say that people who in 2006 predicted a depression for 2008 were the same people who in 2004 predicted a depression for 2006.
Also, Peter Schiff fanboyism is ridiculous. He's an economist making wild forecasts left and right, he's bound to be wrong on most of them. He probably has been before. Worst even, he's a stock broker. It's great if his popularity leads people to learn more about economics and Austrian economics, it's silly if people start taking his word for granted and disregard all mainstream economists to follow the word of the 'prophet'.
On March 04 2009 08:00 Jibba wrote: I just don't see why we're having an economics discussion instead of a policy discussion.
Its because Econ >>> Public Policy
this is a mistaken view. macro theory is still built on a lot of rational choice theory, which starts with axiomatized individual behaviors and builds up to a model of mass behavior. this methodology, or approach to understanding the situation, is more focused on internal consistency, how well models work given assumptions, and not on explaining actions by real people under contingencies. to do the latter would require a more careful study of how people actually behave, and when we are relying on this information to act, we have to treat the peculiarities of a situation seriously, not merely applying a clean model of rational economic actors. to put it another way, econ has an interest in keeping things simple in order to say something about economic behavior, but that something is going to be limited in relevance to real situations, requiring heavy qualifying. thus when you read an economist's prediction, the conclusion is just as important as the reasoning and assumptions. as history has shown, the model of the rational economic actor is becoming more complex as people work these complexities into the dominant math model. we have strategic interaction etc for example. even economists recognize that the world is more complex than the model.
of course, a discipline like econ as it is currently doing business will have an easier time with micro situations, in which disparate situations could be more easily theorized, than macro situations. it's like building a house of legos. the bigger and more elaborate house will have more points of failure.
On March 06 2009 23:53 warding wrote: Also, Peter Schiff fanboyism is ridiculous. He's an economist making wild forecasts left and right, he's bound to be wrong on most of them. He probably has been before. Worst even, he's a stock broker. It's great if his popularity leads people to learn more about economics and Austrian economics, it's silly if people start taking his word for granted and disregard all mainstream economists to follow the word of the 'prophet'.
Granted, but the reason why I lend more credence to Schiff than other Economists is Economics itself. He has a large stake in the game. He's literally betting on Economic macro trends -- he faces huge incentives to know it intimately.
While the academics like the guys at GMU, while I love them, don't face these in their ivory towers, and none of them saw this crash coming, while Schiff was screaming about it.
As a matter of fact theoretical economics predicts an end to economic growth. Politicians on the other hand do not.
Plenty of economists saw this crisis coming. I would say most decent ones did (there are many economists who believe without question in a dramatically oversimplified and ultimately fictional model of the economy but most people cannot tell the difference between them and the good economists ). There were economists in the early 90's who pointed out the simple fact that private sector debt levels just kept on rising while wages were stagnant overall and falling in many cases. It was clear that if this was to continue for too long then crisis was inevitable, naturally their calls fell upon deaf ears.
The argument is that these people have been saying there will be a crisis every year for 20 years so they were bound to be right about it one day but no, this is the crisis they saw coming more than a decade ago the only thing you could not predict is exactly when.
On March 06 2009 23:53 warding wrote: Also, Peter Schiff fanboyism is ridiculous. He's an economist making wild forecasts left and right, he's bound to be wrong on most of them. He probably has been before. Worst even, he's a stock broker. It's great if his popularity leads people to learn more about economics and Austrian economics, it's silly if people start taking his word for granted and disregard all mainstream economists to follow the word of the 'prophet'.
Granted, but the reason why I lend more credence to Schiff than other Economists is Economics itself. He has a large stake in the game. He's literally betting on Economic macro trends -- he faces huge incentives to know it intimately.
While the academics like the guys at GMU, while I love them, don't face these in their ivory towers, and none of them saw this crash coming, while Schiff was screaming about it.
Isn't all of wall street betting on economic macro trends too? I appreciate that he's putting his money where his mouth is (hopefully), but I don't think it makes him any more likely to be right.
On March 08 2009 20:55 Choros wrote: As a matter of fact theoretical economics predicts an end to economic growth. Politicians on the other hand do not.
It is not even a question of model. In a finite world you can't have an infinite growth. That's common sense ... And i don't even talk about pollution problems directed linked to "unmastered" growth or about the real "nature" of growth ( hi people greed ).
Human labour and physical resources may be finite, but what about technology affecting the productivity of the finite resources? Are advances in technology going to stagnate at one point?
On March 09 2009 01:20 warding wrote: Human labour and physical resources may be finite, but what about technology affecting the productivity of the finite resources? Are advances in technology going to stagnate at one point?
On March 09 2009 01:20 warding wrote: Human labour and physical resources may be finite, but what about technology affecting the productivity of the finite resources? Are advances in technology going to stagnate at one point?
I think sustainable development is something we really have to consider (though I'm far from an environmentalist).
Two problems with technology, and hopefully someone better informed on environmental econ can pick up on this:
1.) Technology does not always take into account environmental externalities. In fact, some technology actually facilitates faster exploitation. So you would be reducing your intake of petroleum while destroying another 100 sq km of rainforest, diminishing carbon reservoirs.
2.) Technology is not always exported to developing countries. The US could transition entirely to sustainable growth, but China can still be leaving a giant ecological footprint.
On March 06 2009 18:05 fight_or_flight wrote: Here is another reason why macro economics is garbage. Most macro economists just assume constant growth (exponential growth), an assumption which is guaranteed to be wrong at some point or another. Their theories may work beautifully when things are growing constantly, but they fail to realize this is not a quiescent state.
This video made a lot of good points which I can't refute. It is about exponential growth and it's dramatic consequences (its some physics guy giving a lecture). He seems to focus on population growth, but I think the real application we need to look at here is economic growth (which may or may not involve population growth). Population growth is limited by economic growth, and economic growth is currently assumed to be constant by our banking system. When viewed in the context of economics, this video seems to explain our current economic troubles and why they may be fundamental as opposed to some simple policy decision.
Who, or which models make this assumption, why is it wrong, and why do they fail to realize it's wrong?
Essentially the problem is more fundamental than even the explicit assumptions with macro economics. The problem is with the credit system itself which has been used for hundreds of years. Loans must be paid back with interest, and that usually means that the original investment is designed to grow. In fact, it is ingrained in our mindset that than an investment equals growth.
I don't know which economic theories need this assumption to be valid or not. One would have to examine every single logical argument in that theory to determine if it did since this assumption is so fundamental that it is implicit.
On March 06 2009 05:35 warding wrote: I compared those forecasts to the forecasts of panels of economists which are arguably the best available forecasts we have. If the best forecasts we have say it's not going to be as bad, then I don't see why we should expect much worse.
How many of them predicted this in 2006? Why should you believe they are they right now when they were wrong then? In fact, the people predicting another great depression in 2006 were more accurate than those economists.
I don't know. I don't believe they are absolutely right, only that I place more confidence in their forecasts relative to random-TLers' forecasts.
I could generalize like you and say that people who in 2006 predicted a depression for 2008 were the same people who in 2004 predicted a depression for 2006.
Also, Peter Schiff fanboyism is ridiculous. He's an economist making wild forecasts left and right, he's bound to be wrong on most of them. He probably has been before. Worst even, he's a stock broker. It's great if his popularity leads people to learn more about economics and Austrian economics, it's silly if people start taking his word for granted and disregard all mainstream economists to follow the word of the 'prophet'.
I'm not saying any particular viewpoint is correct. I'm simply saying that your viewpoint is incorrect. Panels of economists generally will say whatever is politically correct. They did not predict this crisis, and during the crisis they repeatedly said it would be over soon, and each trillion dollars into the banking system would return it to "health". Why start believing them now?
On March 09 2009 01:20 warding wrote: Human labour and physical resources may be finite, but what about technology affecting the productivity of the finite resources? Are advances in technology going to stagnate at one point?
I think sustainable development is something we really have to consider (though I'm far from an environmentalist).
Two problems with technology, and hopefully someone better informed on environmental econ can pick up on this:
1.) Technology does not always take into account environmental externalities. In fact, some technology actually facilitates faster exploitation. So you would be reducing your intake of petroleum while destroying another 100 sq km of rainforest, diminishing carbon reservoirs.
2.) Technology is not always exported to developing countries. The US could transition entirely to sustainable growth, but China can still be leaving a giant ecological footprint.
These are good points, but I think you guys are missing the bigger picture. If you watch the video (which i know is really long), he makes the point that in about 750 years, at the current population growth, there will be a human for every 1 square meter of land on the earth's surface. And in something like a few thousand years, the mass of humans will equal the mass of the earth..
I argued vigorously for technology as well. He didn't cover the exponential growth of technology, only the exponential growth in liabilities. Even if we could colonize both mars and the moon, the doubling time of our population is measured in decades, not millennia. So even if we had free energy technology, we would literally need to create matter and live in space to continue our growth. Even then, eventually the volume of space we would need would need to increase to a point where we would need to be moving away from each other at the speed of light to sustain constant growth.
On the flip side however, I don't think population growth is such a big problem because as Japan, Russia, Europe, and (non-immigrants) of the US show, eventually populations decline. So we are really concerned with economic growth here in my mind.
edit: I personally don't believe there is a limit to technology, and in fact I think technology can't be predicted. So even my comments above are probably not valid (what if there are infinite parallel universes, etc). My sole point is that we should probably not base public policy off of expected technological gains which are currently unknown.
at some point the population growth has to stop, and will probably decline. is there any documation of a declining population that had a growing economy? i dont know any instances of it, but there might be.
if that point comes in 5 years or 100 years, it eventually has to come.
"Economically declining populations are thought to lead to deflation, which has a number of effects. However, Russia, whose economy has been rapidly growing (8.1% in 2007) even as its population is shrinking, currently has high inflation (12% as of late 2007)[9]"
is 8% growth under 12% inflation really growth? or just borrowing?
On March 09 2009 09:20 cUrsOr wrote: at some point the population growth has to stop, and will probably decline. ]
Yeah, Japan and Western Europe are both getting shitkicked as the average fertility goes down. At the point where a small entrepreneurial class has to support masses of the retiring elderly, there are going to be serious economic consequences.
But I digress. Let's talk about the Buy-American clause. The truth is, just like in 1929, when Hoover instantiated the Smoot-Hawley tariffs, this will bring eventual disaster to our economy. A trade war will begin, and our exports will suffer. Populism fails because it does not regard the long-term consequence. Obama is appeasing the blue-collared workers in the short term, but the future is at stake here.
On March 09 2009 01:20 warding wrote: Human labour and physical resources may be finite, but what about technology affecting the productivity of the finite resources? Are advances in technology going to stagnate at one point?
I think sustainable development is something we really have to consider (though I'm far from an environmentalist).
Two problems with technology, and hopefully someone better informed on environmental econ can pick up on this:
1.) Technology does not always take into account environmental externalities. In fact, some technology actually facilitates faster exploitation. So you would be reducing your intake of petroleum while destroying another 100 sq km of rainforest, diminishing carbon reservoirs.
2.) Technology is not always exported to developing countries. The US could transition entirely to sustainable growth, but China can still be leaving a giant ecological footprint.
These are good points, but I think you guys are missing the bigger picture. If you watch the video (which i know is really long), he makes the point that in about 750 years, at the current population growth, there will be a human for every 1 square meter of land on the earth's surface. And in something like a few thousand years, the mass of humans will equal the mass of the earth..
I argued vigorously for technology as well. He didn't cover the exponential growth of technology, only the exponential growth in liabilities. Even if we could colonize both mars and the moon, the doubling time of our population is measured in decades, not millennia. So even if we had free energy technology, we would literally need to create matter and live in space to continue our growth. Even then, eventually the volume of space we would need would need to increase to a point where we would need to be moving away from each other at the speed of light to sustain constant growth.
On the flip side however, I don't think population growth is such a big problem because as Japan, Russia, Europe, and (non-immigrants) of the US show, eventually populations decline. So we are really concerned with economic growth here in my mind.
edit: I personally don't believe there is a limit to technology, and in fact I think technology can't be predicted. So even my comments above are probably not valid (what if there are infinite parallel universes, etc). My sole point is that we should probably not base public policy off of expected technological gains which are currently unknown.
I think I was agreeing with you? I'm still agreeing with you, in fact.
I really don't have time to watch the video, sorry.
Population growth cannot be perpetual. If that is the premise of his argument, then there's nothing more to be said. It simply is not, cannot be.
But population growth does not just level off. In fact, it behaves like a sin wave. The rate of population growth picks up until the actual population reaches the carrying capacity of its environment, at which point the second derivative becomes negative, and population growth begins to slow. Eventually, enough resources are depleted and the population is so great that people begin dying off. This is why environmental economists are concerned, because as commodities grow more scarce and ecological "backlash" becomes more harmful, the rate of economic growth must become negative. Since such a scenario will be characterized by high inflation, no amount of economic stimulus will help. Simply put, we'll have exhausted the earth's resources.
My argument is that technology will not always check back this kind of "ecological doomsday". Besides being unpredictable, technology does not take into account environmental externalities. Instead, it only facilitates the exploitation of a more common resource. If we were to ween ourselves off of fossil fuels, for example, the most cost effective substitutes will eventually be depleted. The only solution is to have government create incentives for sustainable alternatives -- energy sources that extracts the earth's resources no sooner than it can regenerate them. The sooner the world realizes this, the more likely we'll avoid the catastrophe we're headed towards.
There are problems with relying solely on the free market to make the jump to alternative energy. But I don't think you were advocating that (are you?) so I'll ignore it.
The main model for economic growth is the Solow-Swan growth model, where economic product is explained as a function of Technology, Labour and Capital:
Y = f(A,K,L)
Where K is capital (eg. infrastructure, production facilities), L is labour and A is technology. Since K and L have diminishing returns, only advancements in A can yield continuous economic growth. Other models have been developed but they mostly been more complex versions of these one, by making endogenous the factors of production.
As far as I know, there is no model or theory that predicts economic growth to reach a plateau. Which is why I'm really curious to know who are these economists predicting the end of growth.
Now on sustainable development.
Limited availability of resources and environmental issues such as global warming are two separate problems.
Environmental issues are usually externality problems, thus being market failures. Burning oil brings costs to society that the individual performing the pollution isn't bearing. This usually requires government intervention to correct the externality. In the case of global warming, either higher taxes or gas or a cap-and-trade system like Obama is going to implement.
Destruction of amazonic rainforest may also fit as an externality issue.
These problems are not that closely related to economic growth tho. It may cause economic inefficiencies and eventually economic costs that may slow growth, but it generally isn't thought as an issue belonging to the subject of economic growth.
Now scarcity of resources is related to economic growth.
What I don't get about your post ahrahra_, and forgive me if I'm wrong, is that you seem to be presenting this issue as a market failure. And markets not only fail to handle scarce physical resources, they seem to have some sort of bias against sustainable resources.
I really don't follow your argument. Why is the price mechanism not effective in stimulating the market to find better alternatives? Where's the evidence that it isn't?
Another thing I think is missing in this discussion is the fact that economic growth doesn't necessarily require the use of additional resources. Services represent more than half of developed countries' economies.
As you yourself said, warding, these environmental issues are not closely related to economic growth. Ordinary free-market, laissez-faire capitalism cannot go far enough to fix environmental issues. For that, the government must step in.
On March 09 2009 12:34 warding wrote: On economic growth:
The main model for economic growth is the Solow-Swan growth model, where economic product is explained as a function of Technology, Labour and Capital:
Y = f(A,K,L)
Where K is capital (eg. infrastructure, production facilities), L is labour and A is technology. Since K and L have diminishing returns, only advancements in A can yield continuous economic growth. Other models have been developed but they mostly been more complex versions of these one, by making endogenous the factors of production.
As far as I know, there is no model or theory that predicts economic growth to reach a plateau. Which is why I'm really curious to know who are these economists predicting the end of growth.
Now on sustainable development.
Limited availability of resources and environmental issues such as global warming are two separate problems.
Environmental issues are usually externality problems, thus being market failures. Burning oil brings costs to society that the individual performing the pollution isn't bearing. This usually requires government intervention to correct the externality. In the case of global warming, either higher taxes or gas or a cap-and-trade system like Obama is going to implement.
Destruction of amazonic rainforest may also fit as an externality issue.
These problems are not that closely related to economic growth tho. It may cause economic inefficiencies and eventually economic costs that may slow growth, but it generally isn't thought as an issue belonging to the subject of economic growth.
This isn't really related with what I'm saying, but it's fairly obvious to me that global warming has serious implications for growth. Flooding, crop failure, etc. Carbon Dioxide emission is depleting a natural resource in the sense that we are using up the planet's capacity to absorb CO2 without causing significant changes in climate.
Now scarcity of resources is related to economic growth.
What I don't get about your post ahrahra_, and forgive me if I'm wrong, is that you seem to be presenting this issue as a market failure. And markets not only fail to handle scarce physical resources, they seem to have some sort of bias against sustainable resources.
I really don't follow your argument. Why is the price mechanism not effective in stimulating the market to find better alternatives? Where's the evidence that it isn't?
1. Sustainable development is typically more expensive. Moreover, the technology requires time to develop. The impacts of global warming could arrive sooner than we may develop that technology. The substitutes favored by the market, even when externalities have been accounted for, could retain unknown externalities. Creating incentives for "sustainability" is a way to ensure that we'll be prepared when the worst strikes. Basically, we need to ensure that the market finds the right substitute.
2. Ok, after reading what i wrote I realized I didn't answer your question. My argument is basically that some resources cannot be substituted easily, and that a sudden crash in supply will cause a severe economic downturn before technology can be adapted. Oil is one example. We are a long way off from cars fueled on any kind of sustainable fuel. Energy prices in particular tend to be really volatile and prone to speculation. This volatility alone can slow economic development -- taxing gasoline to create incentives for more fuel efficient and sustainable cars, for example, would correct for this "resource externality".
Another thing I think is missing in this discussion is the fact that economic growth doesn't necessarily require the use of additional resources. Services represent more than half of developed countries' economies.
Manufacturing as a whole on the planet remains the same. It just gets shifted around to countries with a comparative advantage for it, while more technologically and better educated countries shift to service. The service growth in America is made possible by the "outsourcing" of manufacturing to countries with cheaper labor.
On March 09 2009 12:34 warding wrote: On economic growth:
The main model for economic growth is the Solow-Swan growth model, where economic product is explained as a function of Technology, Labour and Capital:
Y = f(A,K,L)
Where K is capital (eg. infrastructure, production facilities), L is labour and A is technology. Since K and L have diminishing returns, only advancements in A can yield continuous economic growth. Other models have been developed but they mostly been more complex versions of these one, by making endogenous the factors of production.
As far as I know, there is no model or theory that predicts economic growth to reach a plateau. Which is why I'm really curious to know who are these economists predicting the end of growth.
Now on sustainable development.
Limited availability of resources and environmental issues such as global warming are two separate problems.
Environmental issues are usually externality problems, thus being market failures. Burning oil brings costs to society that the individual performing the pollution isn't bearing. This usually requires government intervention to correct the externality. In the case of global warming, either higher taxes or gas or a cap-and-trade system like Obama is going to implement.
Destruction of amazonic rainforest may also fit as an externality issue.
These problems are not that closely related to economic growth tho. It may cause economic inefficiencies and eventually economic costs that may slow growth, but it generally isn't thought as an issue belonging to the subject of economic growth.
This isn't really related with what I'm saying, but it's fairly obvious to me that global warming has serious implications for growth. Flooding, crop failure, etc. Carbon Dioxide emission is depleting a natural resource in the sense that we are using up the planet's capacity to absorb CO2 without causing significant changes in climate.
Now scarcity of resources is related to economic growth.
What I don't get about your post ahrahra_, and forgive me if I'm wrong, is that you seem to be presenting this issue as a market failure. And markets not only fail to handle scarce physical resources, they seem to have some sort of bias against sustainable resources.
I really don't follow your argument. Why is the price mechanism not effective in stimulating the market to find better alternatives? Where's the evidence that it isn't?
1. Sustainable development is typically more expensive. Moreover, the technology requires time to develop. The impacts of global warming could arrive sooner than we may develop that technology. The substitutes favored by the market, even when externalities have been accounted for, could retain unknown externalities. Creating incentives for "sustainability" is a way to ensure that we'll be prepared when the worst strikes. Basically, we need to ensure that the market finds the right substitute.
2. Ok, after reading what i wrote I realized I didn't answer your question. My argument is basically that some resources cannot be substituted easily, and that a sudden crash in supply will cause a severe economic downturn before technology can be adapted. Oil is one example. We are a long way off from cars fueled on any kind of sustainable fuel. Energy prices in particular tend to be really volatile and prone to speculation. This volatility alone can slow economic development -- taxing gasoline to create incentives for more fuel efficient and sustainable cars, for example, would correct for this "resource externality".
Another thing I think is missing in this discussion is the fact that economic growth doesn't necessarily require the use of additional resources. Services represent more than half of developed countries' economies.
Manufacturing as a whole on the planet remains the same. It just gets shifted around to countries with a comparative advantage for it, while more technologically and better educated countries shift to service. The service growth in America is made possible by the "outsourcing" of manufacturing to countries with cheaper labor.
Actaully Ahrara, the effect of global warming on economic growth can't even be predicted well enough to know the sign of the net effect. Attempts to predict it only measure the bad things they can imagine (like flooding and other things you mentioned), but fail to imagine the possible benefits such as unfarmable land that has become much more suitable to growing crops and literally limitless other possibilities (more rain, more CO2 for plants to grow, and who knows what else).
Also regarding global warming, I don't think anyone can say that high CO2 is bad for the planet as a whole. CO2 levels have been WAY higher than they are now and the earth was a much greener place (perhaps as a consequence?) I'm not a biologist but my simple understanding suggests that more CO2 means plants have more carbon available to fuel growth and proliferation.
I guess the main point is that in general, when people talk about global warming, they almost always only talk about what MIGHT go wrong. This is pretty natural since people are afraid of change and the unknown.
Also:
Manufacturing as a whole on the planet remains the same. It just gets shifted around to countries with a comparative advantage for it, while more technologically and better educated countries shift to service. The service growth in America is made possible by the "outsourcing" of manufacturing to countries with cheaper labor.
I hope a misread that or missed something earlier that changes the meaning. There is no way that total global manufacturing amounts is stable over time. As the world get richer (which is has enormously), what that really means is that the world over all produces more. Even if you kick out services from the calculations, there is no way that the world now manufactures that same as it did in the 1700's (even if you discount the effect of a growing population).
The poor of the world consume WAY more physical resources than the poor of a few hundred years ago.
In real economic growth (as happens with free trade), even though both countries specialize in their respective comp advantage, BOTH countries are richer (richer always means increased production and consumption).
Finally, the market actually fixes things faster than we genernally give it credit for. Take your example of oil. The government taxes oil and gasoline but the benefits that we have seen from this (meaning like fuel efficiency, etc) has been pretty small to the changes we observed during the oil embargo of the '70s. During that period prices literally quadrupled overnight (way faster than we have seen since then). But it was during this time that everybody started using double paned glass for their windows, the gas guzzlers of the 50s and 60s were pretty quickly replaced by smaller, less powerful cars and large increases in the efficiency of furnaces, etc.
And this wasn't because the government MADE window manufacturers change their methods. It was just a natural response.
We have not seen renewable energy cars that are trully viable yet mainly because there is not reason for them. Shoot, we are still getting most of our electricity from fossil fuels even though with relatively small effort we could get ALL of our electricity from nuclear power and it would be cleaner and safer (like France and Japan already do for the most part). But we haven't done it because there has been no reason to. But we could sure do it pretty fast just like they did in the '70s if we needed to (I haven't looked it up but I know that most of our nuclear plants are about 30 years old...there has been no new ones since then. Its not surprising that we have a bunch of nuclear power plants that date back to to 70s since that is when we were trying to adjust to oil shocks).
So I think that your idea of having government force the market to adapt before it needs to: 1. Hasn't seemed to be very effective...it would have to be a HUGE tax to have an effect and that is political suicide 2. Isn't necessary.
Also regarding global warming, I don't think anyone can say that high CO2 is bad for the planet as a whole. CO2 levels have been WAY higher than they are now and the earth was a much greener place (perhaps as a consequence?) I'm not a biologist but my simple understanding suggests that more CO2 means plants have more carbon available to fuel growth and proliferation.
Actually, I think it has moreso do do with the pace of CO2 rising. CO2 changes the nature of the environment on many levels and if it is at a pace that exceeds the pace natural selection can select for it, hordes of species are going to die out. Traditionally, even the more episodic periods of evolution took millions of years for natural selection to pan out and for the best fit to survive. If people force the same change in a mere thousand years, there just won't be enough generations and/or genetic diversity to survive.
Personally, my qualm with the whole global warming paranoia and the movement towards self sustainability is that scarcity itself creates competition. Competition creates creativity and solutions. Hell, economics is founded on the principle of scarcity of resources. But the thought of having our most basic needs self sustainable (food, power, shelter) will make people overly complacent. Being ignorant and oblivious of our most basic needs, from an economics standpoint, is a scary thought. Then again, the green movement may be a natural free market reaction to excess pollution and who am I to question the free market.
So I think that your idea of having government force the market to adapt before it needs to: 1. Hasn't seemed to be very effective...it would have to be a HUGE tax to have an effect and that is political suicide 2. Isn't necessary.
In principle, I'd agree with you that the government handles almost everything more inefficiently than the free market. But I think this is also because the government lacks the computing power and data inputs necessary to accurately forecast future needs. The one thing that government spending benefits from is having a lot deeper pockets to use for investment, and if combined with better data input/computing power than firms, this could make for a very lethal and effective corporate type government. But theory and practice are of course never the same and democracy will probably never be ruled by a competent board of directors.
On March 04 2009 08:00 Jibba wrote: I just don't see why we're having an economics discussion instead of a policy discussion.
Its because Econ >>> Public Policy
Macro is garbage. Even if it were reliable (which it's not), it has little relevance on what's actually going to happen.
Here's one for ya. The F22 raptor costs 350 million dollars per plane, and Obama wants to remove it from the budget, but Congress is not going to let it happen. Now, you can talk about government spending, intervention, driving the economy, etc. but the only thing that's important is that manufacturing has been set up through over 1,000 companies in 40 states to ensure that interest group pressure keeps it in production.
Here is another reason why macro economics is garbage. Most macro economists just assume constant growth (exponential growth), an assumption which is guaranteed to be wrong at some point or another. Their theories may work beautifully when things are growing constantly, but they fail to realize this is not a quiescent state.
This video made a lot of good points which I can't refute. It is about exponential growth and it's dramatic consequences (its some physics guy giving a lecture). He seems to focus on population growth, but I think the real application we need to look at here is economic growth (which may or may not involve population growth). Population growth is limited by economic growth, and economic growth is currently assumed to be constant by our banking system. When viewed in the context of economics, this video seems to explain our current economic troubles and why they may be fundamental as opposed to some simple policy decision.
Didn't watch your video but I did want to point out that in fact economic growth and population growth seem to inversely related.
Think of the US, Canada, Europe, or ANY other developed country. What is the average family size? How many kids. Here in the US, it is over 2 (the replacement number and 0 growth number), but in some places in EU...I think Italy is one...it is less than 2. Then look at the underdeveloped countries and see what their family size is.
It seems that if you really want a country to stop having so many babies, get it rich...let it grow until that happens on its own.
The first temptation is to attribute this to lack of birth control but we bomb these countries with so many condoms and other forms of birth control that they have had to find alternate uses for them.
Here is the current theory to explain this phenomenon: Generally speaking, with Economic growth you see an increase in education and with that an increase in political freedom. In more developed counties (even the recent ones), women have much more access to jobs that earn real money rather than no jobs or poor jobs. The effect is that the opportunity cost (what she gives up in order to have more kids) of a woman having children in a rich country is a LOT of potential money while in a poor country she gives up much less.
To put it bluntly, women in poor counties have very little else to do with their time other than raise children while those in rich countries give up a lot to have a large family. That plays a very important role when a couple is deciding whether or not to have another kid.
Also, as side note, macro economists do NOT assume constant growth. They study recessions and depressions which are periods of negative economic growth and they do just fine with them.
Now it is true that free countries have experiences virtually constant positive growth for the last couple centuries and there is no evidence that this will ever change, but everyone has recessions and depressions.
As a side note, for the last couple centuries world food supply has grown faster than world population and has had to be restrained. ALL of the predictions that we would multiply till the Earth could not sustain us have failed. For a long time we have had to restrain our awesome food production abilities because if we let if loose, food prices would fall so low that farmers couldn't make money. The only problems we have are distribution problems.
EDIT: But let it be known that I have no special connection to macro as I do to microeconomics. I love the micro and endure the macro. But I did have to clear this up.
On March 11 2009 16:20 gchan wrote: Actually, I think it has moreso do do with the pace of CO2 rising. CO2 changes the nature of the environment on many levels and if it is at a pace that exceeds the pace natural selection can select for it, hordes of species are going to die out. Traditionally, even the more episodic periods of evolution took millions of years for natural selection to pan out and for the best fit to survive. If people force the same change in a mere thousand years, there just won't be enough generations and/or genetic diversity to survive.
The Earth's diversity has handled WAY worse than humans. Shoot, the earth can even handle cows (who even today produce more greenhouse gases than human machinery/fossil fuel burning all combined--google it).
Meet the world's top destroyer of the environment. It is not the car, or the plane,or even George Bush: it is the cow.
A United Nations report has identified the world's rapidly growing herds of cattle as the greatest threat to the climate, forests and wildlife. And they are blamed for a host of other environmental crimes, from acid rain to the introduction of alien species, from producing deserts to creating dead zones in the oceans, from poisoning rivers and drinking water to destroying coral reefs.
The 400-page report by the Food and Agricultural Organisation, entitled Livestock's Long Shadow, also surveys the damage done by sheep, chickens, pigs and goats. But in almost every case, the world's 1.5 billion cattle are most to blame. Livestock are responsible for 18 per cent of the greenhouse gases that cause global warming, more than cars, planes and all other forms of transport put together.
Livestock also produces more than 100 other polluting gases, including more than two-thirds of the world's emissions of ammonia, one of the main causes of acid rain.
But maybe there should be a thread for global warming where we can really talk about the science of it (and the economics driving the science of it....HELLoooooOOOOo grant money).
For now, I will try to redirect myself back to the economy.
Savio, yeah, the climate has changed rapidly in the past...but rapidly in the geological sense. Meaning even the major extinction events lasted tens of thousands of years, if not longer. Recorded civilization has only been around a couple thousand years and the industrial revolution time period only a couple centuries. Relatively, I think we put out a lot more crap a lot faster than other species did in the past.
On March 09 2009 01:20 warding wrote: Human labour and physical resources may be finite, but what about technology affecting the productivity of the finite resources? Are advances in technology going to stagnate at one point?
I think sustainable development is something we really have to consider (though I'm far from an environmentalist).
Two problems with technology, and hopefully someone better informed on environmental econ can pick up on this:
1.) Technology does not always take into account environmental externalities. In fact, some technology actually facilitates faster exploitation. So you would be reducing your intake of petroleum while destroying another 100 sq km of rainforest, diminishing carbon reservoirs.
2.) Technology is not always exported to developing countries. The US could transition entirely to sustainable growth, but China can still be leaving a giant ecological footprint.
These are good points, but I think you guys are missing the bigger picture. If you watch the video (which i know is really long), he makes the point that in about 750 years, at the current population growth, there will be a human for every 1 square meter of land on the earth's surface. And in something like a few thousand years, the mass of humans will equal the mass of the earth..
I argued vigorously for technology as well. He didn't cover the exponential growth of technology, only the exponential growth in liabilities. Even if we could colonize both mars and the moon, the doubling time of our population is measured in decades, not millennia. So even if we had free energy technology, we would literally need to create matter and live in space to continue our growth. Even then, eventually the volume of space we would need would need to increase to a point where we would need to be moving away from each other at the speed of light to sustain constant growth.
On the flip side however, I don't think population growth is such a big problem because as Japan, Russia, Europe, and (non-immigrants) of the US show, eventually populations decline. So we are really concerned with economic growth here in my mind.
edit: I personally don't believe there is a limit to technology, and in fact I think technology can't be predicted. So even my comments above are probably not valid (what if there are infinite parallel universes, etc). My sole point is that we should probably not base public policy off of expected technological gains which are currently unknown.
Since the movie is so long, maybe you can answer my question. Did his predictions take into account that as time goes by and developing countries develop, their birth rates will change? If he ignores the changes in birthrate that come with changes in development then I don't think his predictions are worth anybody's time to listen to.
On March 09 2009 09:20 cUrsOr wrote: at some point the population growth has to stop, and will probably decline. ]
Yeah, Japan and Western Europe are both getting shitkicked as the average fertility goes down. At the point where a small entrepreneurial class has to support masses of the retiring elderly, there are going to be serious economic consequences.
But I digress. Let's talk about the Buy-American clause. The truth is, just like in 1929, when Hoover instantiated the Smoot-Hawley tariffs, this will bring eventual disaster to our economy. A trade war will begin, and our exports will suffer. Populism fails because it does not regard the long-term consequence. Obama is appeasing the blue-collared workers in the short term, but the future is at stake here.
Sorry for so many posts, I am just getting caught up.
I would add to this that populism not only ignores the long term, it seeks to appease the well organized producers while ALWAYS hurting the consumer (aka every single American since we are all consumers. I can't think of any example of how populism would benefit consumers. But consumers are not organized while steel, car, and produce industries are extremely well organized and can push government to do what will help them. Interest groups getting some help to their members while hurting the rest of country....populism for the fail.
On March 11 2009 16:48 gchan wrote: Savio, yeah, the climate has changed rapidly in the past...but rapidly in the geological sense. Meaning even the major extinction events lasted tens of thousands of years, if not longer. Recorded civilization has only been around a couple thousand years and the industrial revolution time period only a couple centuries. Relatively, I think we put out a lot more crap a lot faster than other species did in the past.
In an effort to not steer this too far from the economy let me just say that humans do not have as big an impact as we tend to think.
And let me throw in an image:
See the green, thats humans.
Its all summed up by this: "Just how much of the "Greenhouse Effect" is caused by human activity? It is about 0.28%, if water vapor is taken into account-- about 5.53%, if not."
Other sources if you wanted to do some reading. For some reason I don't understand people get all religious about global warming and don't even like to read things that might shake their "faith" but I will list them anyway.
And I really like this one, but you have to ignore the first 2 minutes. They are designed to be the "emotional catch" that keeps TV viewers watching. It starts getting interesting after 2 and a half minutes. If for nothing else, it is very useful in talking about the kinds of political/economic pressure that is placed on scientists to support global warming. But beware, it is definitely just 1 side of the argument. Its kind of like a Michael Moore documentary but done from the other side of the spectrum. Still, its worth a watch: http://video.google.com/videoplay?docid=288952680655100870
On March 09 2009 01:20 warding wrote: Human labour and physical resources may be finite, but what about technology affecting the productivity of the finite resources? Are advances in technology going to stagnate at one point?
I think sustainable development is something we really have to consider (though I'm far from an environmentalist).
Two problems with technology, and hopefully someone better informed on environmental econ can pick up on this:
1.) Technology does not always take into account environmental externalities. In fact, some technology actually facilitates faster exploitation. So you would be reducing your intake of petroleum while destroying another 100 sq km of rainforest, diminishing carbon reservoirs.
2.) Technology is not always exported to developing countries. The US could transition entirely to sustainable growth, but China can still be leaving a giant ecological footprint.
These are good points, but I think you guys are missing the bigger picture. If you watch the video (which i know is really long), he makes the point that in about 750 years, at the current population growth, there will be a human for every 1 square meter of land on the earth's surface. And in something like a few thousand years, the mass of humans will equal the mass of the earth..
I argued vigorously for technology as well. He didn't cover the exponential growth of technology, only the exponential growth in liabilities. Even if we could colonize both mars and the moon, the doubling time of our population is measured in decades, not millennia. So even if we had free energy technology, we would literally need to create matter and live in space to continue our growth. Even then, eventually the volume of space we would need would need to increase to a point where we would need to be moving away from each other at the speed of light to sustain constant growth.
On the flip side however, I don't think population growth is such a big problem because as Japan, Russia, Europe, and (non-immigrants) of the US show, eventually populations decline. So we are really concerned with economic growth here in my mind.
edit: I personally don't believe there is a limit to technology, and in fact I think technology can't be predicted. So even my comments above are probably not valid (what if there are infinite parallel universes, etc). My sole point is that we should probably not base public policy off of expected technological gains which are currently unknown.
Since the movie is so long, maybe you can answer my question. Did his predictions take into account that as time goes by and developing countries develop, their birth rates will change? If he ignores the changes in birthrate that come with changes in development then I don't think his predictions are worth anybody's time to listen to.
No he ignores that for the most part. However, its still worth watching imo because he doesn't really make predictions, rather, he simply shows what the outcome is if historical trends continue. For example, when they say coal will last for another 500 years at its current rate of consumption, he shows that if we actually take into account the historical growth it will only be like 50 years (if I remember correctly).
He also discusses oil consumption, which shows the exponential increase in consumption and how that has leveled off and beginning to form a bell curve. As far as population growth I think he mentions a peak population somewhere.
Its interesting to watch because its not so much about predictions as understanding exponential growth. I mean we all know what it is, but we don't know what it is if you understand what I'm saying.
On March 11 2009 15:57 Savio wrote: Actaully Ahrara, the effect of global warming on economic growth can't even be predicted well enough to know the sign of the net effect. Attempts to predict it only measure the bad things they can imagine (like flooding and other things you mentioned), but fail to imagine the possible benefits such as unfarmable land that has become much more suitable to growing crops and literally limitless other possibilities (more rain, more CO2 for plants to grow, and who knows what else).
Also regarding global warming, I don't think anyone can say that high CO2 is bad for the planet as a whole. CO2 levels have been WAY higher than they are now and the earth was a much greener place (perhaps as a consequence?) I'm not a biologist but my simple understanding suggests that more CO2 means plants have more carbon available to fuel growth and proliferation.
I guess the main point is that in general, when people talk about global warming, they almost always only talk about what MIGHT go wrong. This is pretty natural since people are afraid of change and the unknown.
People who are not qualified to discuss ecology shouldn't make such claims. I don't know enough about it to discuss the impacts of global warming confidently, but I can tell you that the overwhelming scientific consensus is that the greenhouse effect will have a tremendously negative impact. Just like there are economists who think free trade isn't valuable, there are ecologists who don't believe in man made warming, but that doesn't mean we should listen to them.
Couple of things based on what I know (could be veryyy wrong though :\).
1.) Warmer climes adversely impacts crop yields because it engenders greater competition among species, which makes crops more vulnerable to disease. This is one reason why tropical regions of the world have so much trouble producing enough food.
2.) Just a few degrees increase in the average global temperature can melt enough of the polar ice caps to increase sea levels enough that entire coastal regions will be rendered uninhabitable.
3.) Higher CO2 density may help plants grow faster in the long run, but we are cutting down forests sooner than they can be replenished. Plants act as reservoirs of CO2, so with each tree cut down, more CO2 is released into the atmosphere.
Anyway, I think we're just gonna make fools of ourselves debating this. I personally work under the assumption that global warming has negative impacts and is man-made, because that's the scientific consensus. I think bias is probably an issue, but I think since peer review seems to work well enough with other fields of study, it's fair to assume it works under human ecology as well.
Manufacturing as a whole on the planet remains the same. It just gets shifted around to countries with a comparative advantage for it, while more technologically and better educated countries shift to service. The service growth in America is made possible by the "outsourcing" of manufacturing to countries with cheaper labor.
I hope a misread that or missed something earlier that changes the meaning. There is no way that total global manufacturing amounts is stable over time. As the world get richer (which is has enormously), what that really means is that the world over all produces more. Even if you kick out services from the calculations, there is no way that the world now manufactures that same as it did in the 1700's (even if you discount the effect of a growing population).
The poor of the world consume WAY more physical resources than the poor of a few hundred years ago.
In real economic growth (as happens with free trade), even though both countries specialize in their respective comp advantage, BOTH countries are richer (richer always means increased production and consumption).
Ya, I misspoke. I was just pointing out to warding that global growth must always be accompanied by manufacturing growth. Individual countries can crowd out manufacturing by shifting to service growth, but that only means the demand for tangible goods will be met by developing countries.
Finally, the market actually fixes things faster than we genernally give it credit for. Take your example of oil. The government taxes oil and gasoline but the benefits that we have seen from this (meaning like fuel efficiency, etc) has been pretty small to the changes we observed during the oil embargo of the '70s. During that period prices literally quadrupled overnight (way faster than we have seen since then). But it was during this time that everybody started using double paned glass for their windows, the gas guzzlers of the 50s and 60s were pretty quickly replaced by smaller, less powerful cars and large increases in the efficiency of furnaces, etc.
And this wasn't because the government MADE window manufacturers change their methods. It was just a natural response.
We have not seen renewable energy cars that are trully viable yet mainly because there is not reason for them. Shoot, we are still getting most of our electricity from fossil fuels even though with relatively small effort we could get ALL of our electricity from nuclear power and it would be cleaner and safer (like France and Japan already do for the most part). But we haven't done it because there has been no reason to. But we could sure do it pretty fast just like they did in the '70s if we needed to (I haven't looked it up but I know that most of our nuclear plants are about 30 years old...there has been no new ones since then. Its not surprising that we have a bunch of nuclear power plants that date back to to 70s since that is when we were trying to adjust to oil shocks).
So I think that your idea of having government force the market to adapt before it needs to: 1. Hasn't seemed to be very effective...it would have to be a HUGE tax to have an effect and that is political suicide 2. Isn't necessary.
The idea that free market corrections are sufficiently fast acting is empirically denied. Carbon emissions even in countries with regulations have continued growing, although at a slower rate. The rate of growth of the rate of growth for developed countries, on the other hand, is rising. Moreover, free markets do not account for damage done to publicly owned resources such as the atmosphere. The tragedy of the commons ensures that free-market solutions will never be sufficient.
An important thing to understand about the environmental cost of development is that any correction, free-market or otherwise, will likely be sudden and calamitous. This is how a population behaves when they overshoot the capacity of their environment to sustain them.
Populations do not settle gently to a sustainable level because the impacts of resource depletion (or in our case, global warming) are delayed. So even if free-markets can self correct for environmental externalities, the price signals will arrive too late to prevent the population overshoot. Both animals and past human civilizations have followed exactly this trend -- why not us?
The Peleocene-Eocene Thermal Maximum or PETM... is when the planet was as warm as its ever been, it was a "drastic" global temperature increase of: "6 °C over 20,000 years".
There were no ice caps, and there were temperate zones in the polar regions, no ice. I just thought this would be interesting. I don't think I'll weigh in on the debate this time- its just a fascinating event.
In the resolution to the PETM, the northern ice-cap became covered in a huge mass of Fern like plant life that covered what was, at the time, the northern ocean. This huge carbon sink for the atmosphere lead to a long period of global cooling in which the ice caps formed. We are currently living in whats called an "icehouse" planet. Ironically enough, the Oil Companies cant wait for the northern cap to melt... so they can get at the huge deposits of fossil fuels speculated to be left by the Azolla Event. So... we can release all that carbon again.
Interesting facts, before the Azolla Event, the average polar temp was 13°c and after, its -9°c..."It is not until 15 million years ago that evidence for widespread polar freezing is common." Of course, humans (homo-sapeins) have lived in the last 1million years of that period. So... suppose we do see a complete melting of the Northern Icecap, that will be significant... in terms of altering the environment that humans have evolved in.
i think we are like at least +1°C ( i don't have the exact numbers ) over the last century so it is 0.01/year ( it is a way faster increase ). The main problem is that there are no adaptations possible for animal species and even for human it will be difficult. Some places in the world will be flooded by the end of the century. ( Think Bangladesh for exemple ).
This is one reason why tropical regions of the world have so much trouble producing enough food.
The number 1 reason why tropical regions have so much trouble producing enough food is that the soil obtained by clear cutting trees is a very iron rich thin band which dries up and loses water carrying capacity within years, and rapidly depletes itself of nutrients. Read more here: http://rainforests.mongabay.com/0502.htm
Anyway, I think we're just gonna make fools of ourselves debating this.
You most definitely will if you don't get a primer. Lets start that now: The vast majority of surface CO2 is held in the oceans, which then deposit carbonaceous material onto the ocean floor where its subducted into the mantle (the largest carbon reservoir on the planet) and kept; volcanic activity releases it over time. This is the basic carbon cycle. The more rapidly adapting portion is the carbon held in soil, rock and living organisms. Now how can this be dangerous? The earth's corrective measures for increasing albedo and global ice ages (which is decreased solubilization of CO2 from volcanic emissions leading to global heating) and its corrective measures for increased CO2 emissions (global melting of ice, permafrost, etc) both lead to nearly catastrophic consequences for humans; In the first scenario, we're literally buried under kilometers of ice, and in the second the vast majority of continents are submerged. The worst part is that these geologic corrective measures take millions of years to do their work, which simply isn't good for us. Basically, substantial changes of temperature on the planet in both directions are fatal to us.
This is a very entry level version that's hyper simplified, but there are substantial 'oh shit' moments as we hit certain benchmarks, the scariest of which is probably the destabilization of gas methane hydrates if global temperatures continue to rise. The common analogy would be that someone took our can of ocean pepsi, shook it, then opened the lid. The worst part is that this has already started to happen in arctic regions, but at an 'acceptably' low rate. This is a feed-forward mechanism wherein warming is going to cause future warming. If this continues and the gas hydrates start increasing their level of destabilization, we're going to, essentially, need to run a carbon NEGATIVE footprint in order to stop runaway global warming. The longer we wait, the much more expensive this protection will be, because as the rate of out-gassing increases, the level of investment into storing carbon will similarly increase.
The Peleocene-Eocene Thermal Maximum or PETM... is when the planet was as warm as its ever been, it was a "drastic" global temperature increase of: "6 °C over 20,000 years".
You should probably mention that the 'drastic' part was that the most likely cause or most significant factor was the release of those hydrated gases and resulted in a mass extinction of marine life. That very same release of gas hydrates is also speculated to have caused the worst mass extinction the planet has ever seen, during which 96% of marine species, and 70% of land dwellin' species went afk from the fossil record. So no, it won't be 'significant', it'll be catastrophic, with the vast majority of our species dying because of both a series of pandemic breakouts, food shortages, and far more violent weather patterns.
Not sure if it was covered (too lazy to read through all these pages), but, for anymore that cares, you are missing two huge components of what happened. HnR)hT covered one of them, in that Congress pressured banks to lend to minorities (most of them couldn't pay their mortgages).
The second is a little more complex:
Amid the dot com bust and 9/11, Greenspan cut the target federal funds rate to 1% to keep the economy going. As a result the rates on the treasury bills fall drastically. Institutional investors, more so pension funds, want low risk investments that yield ok returns. Treasury bills are the "safest" investment, but the yields had fallen so low, it just wasn't what they wanted.
These pension funds are calling the banks asking how to find an investment that gives a better return. This 1% rate is exactly what banks wanted. It let the banks borrow money cheaply, and let them leverage to ridiculous amounts. They used their leverage to buy a lot mortgages from mortgage lenders. They packaged up all the mortgages into CDOs, cut them up by risk rating, and sold them off to the institutional investors. Pension funds obviously wanted the safest mortgages, and they got them. Investors who want more risk, more return, like hedge funds, took the risky mortgages. These safe mortgages were like the new treasury bills to pension funds, and they wanted more and more and more.
The banks want more and more and more money so they told the mortgage lenders to sell them more and more and more, and the mortgage lenders told their mortgage brokers to get more and more and more. The problem is that all the people who qualified for the loans already had them. But, the greedy institutional investors, banks, and mortgage lenders wanted more money, so this made the mortgage lenders lower the standards for giving out loans... Uh oh. The banks didn't care because what happens if the person defaults? Well, the bank gets the house, and house prices have been rising and rising; so they would just sell the house and make a profit.
As a result, more and more people started defaulting. This caused more supply of houses, which caused the housing prices to decrease. The "safe" mortgages the pension funds wanted were not so safe. Institutional investors stopped buying CDOs from the banks, and banks stopped buying from the mortgage lenders. Suddenly, they were all holding a bunch of useless securities, and the problem was that because the banks had bundled everything together, no one knew which piece they had; thus, writedowns were the big thing last year.
Another issue I want to address, and again, sorry if it has already been addressed, is AIG:
So, credit default swaps. Basically, you're a bank or someone and you loan out money. Because you want to make sure that principal loan is 100% guaranteed to get back to you, you engage in a credit default swap with a third party. The terms of this swap are, you pay some type of fee to the third party, and they will payback your principal if the loan were to default. When times were good, obviously these CDS insurance companies were not required to carry the amount of capital equaling how much they are insuring. However, once the loans started defaulting, lenders are running to the insurance companies holding their hands out. The problem is that these companies don't have all the capital to pay all the lenders their principal. You see companies like Ambac and MBIA suffering greatly.
AIG is another one of these. I don't know how educated any of you are on why the government bailed out AIG. Well, AIG is, or was, the largest insurance company out there. Obviously people want to do business with such a credible company. Most of these credit default swaps were between AIG and some lender. If AIG were to go under, none of those lenders would receive the principals that were defaulted on. This would mean that there would be more gigantic writedowns all over the world. There was major, and I mean, major systemic risk involved if AIG were to fail.
On March 12 2009 18:05 cUrsOr wrote: somebody listens to rush limbaugh, although i think pressure was applied, i dont think it was congress pressuring the banks.
I actually do not listen to him. I've read up on a lot of this stuff since I am a finance major, and it interests me.
You are correct. I guess I worded it wrong. It was not the encouraging (I think that is a better word than pressuring) of Congress that directly caused these loans to be made; the main driver was through the institutional investors. However, the through the encouraging of Congress, I think these lenders were more at ease to do so.
On March 12 2009 17:54 cAtAcLySmIc wrote: Not sure if it was covered (too lazy to read through all these pages), but, for anymore that cares, you are missing two huge components of what happened. HnR)hT covered one of them, in that Congress pressured banks to lend to minorities (most of them couldn't pay their mortgages).
The second is a little more complex:
Amid the dot com bust and 9/11, Greenspan cut the target federal funds rate to 1% to keep the economy going. As a result the rates on the treasury bills fall drastically. Institutional investors, more so pension funds, want low risk investments that yield ok returns. Treasury bills are the "safest" investment, but the yields had fallen so low, it just wasn't what they wanted.
These pension funds are calling the banks asking how to find an investment that gives a better return. This 1% rate is exactly what banks wanted. It let the banks borrow money cheaply, and let them leverage to ridiculous amounts. They used their leverage to buy a lot mortgages from mortgage lenders. They packaged up all the mortgages into CDOs, cut them up by risk rating, and sold them off to the institutional investors. Pension funds obviously wanted the safest mortgages, and they got them. Investors who want more risk, more return, like hedge funds, took the risky mortgages. These safe mortgages were like the new treasury bills to pension funds, and they wanted more and more and more.
The banks want more and more and more money so they told the mortgage lenders to sell them more and more and more, and the mortgage lenders told their mortgage brokers to get more and more and more. The problem is that all the people who qualified for the loans already had them. But, the greedy institutional investors, banks, and mortgage lenders wanted more money, so this made the mortgage lenders lower the standards for giving out loans... Uh oh. The banks didn't care because what happens if the person defaults? Well, the bank gets the house, and house prices have been rising and rising; so they would just sell the house and make a profit.
As a result, more and more people started defaulting. This caused more supply of houses, which caused the housing prices to decrease. The "safe" mortgages the pension funds wanted were not so safe. Institutional investors stopped buying CDOs from the banks, and banks stopped buying from the mortgage lenders. Suddenly, they were all holding a bunch of useless securities, and the problem was that because the banks had bundled everything together, no one knew which piece they had; thus, writedowns were the big thing last year.
Another issue I want to address, and again, sorry if it has already been addressed, is AIG:
So, credit default swaps. Basically, you're a bank or someone and you loan out money. Because you want to make sure that principal loan is 100% guaranteed to get back to you, you engage in a credit default swap with a third party. The terms of this swap are, you pay some type of fee to the third party, and they will payback your principal if the loan were to default. When times were good, obviously these CDS insurance companies were not required to carry the amount of capital equaling how much they are insuring. However, once the loans started defaulting, lenders are running to the insurance companies holding their hands out. The problem is that these companies don't have all the capital to pay all the lenders their principal. You see companies like Ambac and MBIA suffering greatly.
AIG is another one of these. I don't know how educated any of you are on why the government bailed out AIG. Well, AIG is, or was, the largest insurance company out there. Obviously people want to do business with such a credible company. Most of these credit default swaps were between AIG and some lender. If AIG were to go under, none of those lenders would receive the principals that were defaulted on. This would mean that there would be more gigantic writedowns all over the world. There was major, and I mean, major systemic risk involved if AIG were to fail.
You're right on both accounts and the fact that i didn't address the former issue as well as the problem of global imbalances is just a testament to how comparatively little i knew 6 months back.
edit: i'm going to copy/paste what you have as a spoiler into the OP
when they risk and proffit, its their proffit. when they risk and fail, government (taxes) bail them out. whats what we call a win/win. we should be in the fucking streets imo.
All the inane idiots blaming everything from damn evil rich people to conniving profiteering bankers to corrupt dastardly congressmen should go read that note.
Though I doubt any of the ignorant proletariat will be able to understand the arguments set forth therein. Damned plebs.
On March 12 2009 06:34 ahrara_ wrote: The idea that free market corrections are sufficiently fast acting is empirically denied. Carbon emissions even in countries with regulations have continued growing, although at a slower rate. The rate of growth of the rate of growth for developed countries, on the other hand, is rising. Moreover, free markets do not account for damage done to publicly owned resources such as the atmosphere. The tragedy of the commons ensures that free-market solutions will never be sufficient.
An important thing to understand about the environmental cost of development is that any correction, free-market or otherwise, will likely be sudden and calamitous. This is how a population behaves when they overshoot the capacity of their environment to sustain them.
Populations do not settle gently to a sustainable level because the impacts of resource depletion (or in our case, global warming) are delayed. So even if free-markets can self correct for environmental externalities, the price signals will arrive too late to prevent the population overshoot. Both animals and past human civilizations have followed exactly this trend -- why not us?
We may be talking about 2 different things. I think you were talking about the market correcting the problem of CO2 emissions. In that case you are right. The market does not take care of externalities like that.
I was saying that if we started running out of gasoline, the market would correct for that pretty fast because it is just a development problem and not an externality problem.
i thought it was funny how china and the US had that little military argument a couple days ago, it`s an interesting relationship that the US still thinks of itself as the superpower, while chinese investments are literally the only thing holding the US from collapsing
edit: to be fair, i`m not an economist, and i suppose china relies on the US quite a lot too
What's your point? It's a lot of money regardless of whether you look at it physically or not. But either way, eocnomics should not be governed by visual emotions.
i thought it was funny how china and the US had that little military argument a couple days ago, it`s an interesting relationship that the US still thinks of itself as the superpower, while chinese investments are literally the only thing holding the US from collapsing
edit: to be fair, i`m not an economist, and i suppose china relies on the US quite a lot too
The truth is that the potential for a global dollar panic is becoming greatly heightened, in spite of (and in part, actually because of) the dollar's recent significant gains as a refuge for investors, the bulk of whom continue to be distinctly risk-averse. Ironically, this massive piling onto the dollar opens yawning new vulnerabilities and risks that either did not exist before, or were at most very minimal.
For example, a number of experts warn that US Treasuries are increasingly taking on the characteristics of a bubble, and they remind us that bubbles inevitably deflate, and they rarely, if ever, do so in an orderly fashion. When this one deflates there could be uncontrolled, perhaps even chaotic, repercussions for the dollar.
Much discussion and debate is currently underway as to whether the US will find sufficient global demand for the more than $2 trillion in new Treasuries coming online this fiscal year alone. But the fundamental risks for the dollar aren't only arising out of that fear over whether demand for Treasuries will be sustained.
Serious risks for the dollar also arise if global demand for Treasuries is sustained. Why? Because that would only thrust the present Treasuries bubble to even more gigantic proportions, further warping the structure of the already severely deformed present global financial order, magnifying the dangerous distortions that already exist and increasing the likelihood of a massive second wave of damage and destruction in this present crisis, and an eventual burst in the Treasuries bubble.
...
By facilitating and encouraging the massive global flight into Treasuries, and by issuing a huge new supply of US sovereign debt, emerging markets, their governments and banks, and US businesses are deeply suffering. As the US government sucks all the air out of the global credit markets via the unstemmed growth of its latest in a series of dangerous asset bubbles, namely the Treasuries bubble, these other entities find it extremely difficult to issue debt (obtain credit) at feasible costs, if at all. Investors are demanding very high yields to exit the relative "safety" of Treasuries to invest in corporate and government bonds in the emerging markets and in large swaths of the US and Western Europe as well.
...
Investors will begin to stampede out of financial assets such as Treasuries and into hard assets like precious metals and certain commodities whose price has been severely beaten down. These will offer comparatively much safer stores of wealth, ones with a real profit potential. China, via its resource buys, is already blazing the trail, going energetically into hard assets, rather than sustaining its 2008 rate of purchases of Treasuries and other financial assets.
While the US is coming close to record levels of debt compared to GDP, historically and compared to other countries with similar rates of growth, it's really not that high. Blaming treasuries for the credit crunch is just silly. Investors will put their money into whatever asset they feel is safest. If the value of treasuries in circulation weren't able to absorb the large volumes of currency investors are throwing at it, then they'd put it in the next best place -- government bonds in the euro zone, for example, or commodities. The downside is that investing disproportionately in the US is like putting all your eggs in one basket. If, in the extreme unlikelihood of a major devaluation or default, the global economy would be fucked. But since politicians are probably aware that the consequences of default or devaluation are worse than cutting spending, the latter will probably happen first.
Of course, government spending rarely matches private sector borrowing in terms of growth potential, so that is one concern. But sometimes it can -- like (arguably) with the stimulus package and financial bailouts.
Inflation is reigniting. The U.S. Bureau of Labor Statistics announced last week that consumer prices, which had declined from November and December, rose 0.4% between December and January, an inflation rate of 4.9% on an annualized basis. The bureau announced earlier that producer prices rose 0.8% in the same period, a 10% annual rate of inflation.
If demand is still down, credit markets are dysfunctional, housing prices crashing, why is inflation going up? Or aren't they?
The question I want answered is: are asset prices still undergoing a correction or has the market overshot?
On March 15 2009 14:41 ahrara_ wrote: While the US is coming close to record levels of debt compared to GDP, historically and compared to other countries with similar rates of growth, it's really not that high. Blaming treasuries for the credit crunch is just silly. Investors will put their money into whatever asset they feel is safest. If the value of treasuries in circulation weren't able to absorb the large volumes of currency investors are throwing at it, then they'd put it in the next best place -- government bonds in the euro zone, for example, or commodities. The downside is that investing disproportionately in the US is like putting all your eggs in one basket. If, in the extreme unlikelihood of a major devaluation or default, the global economy would be fucked. But since politicians are probably aware that the consequences of default or devaluation are worse than cutting spending, the latter will probably happen first.
Of course, government spending rarely matches private sector borrowing in terms of growth potential, so that is one concern. But sometimes it can -- like (arguably) with the stimulus package and financial bailouts.
I don't think the article was blaming treasuries for the credit crisis. His point was that it is dangerous for everyone to simultaneously go into treasuries. Obviously from the housing bubble, you can't expect the market to prevent them from happening.
Inflation is reigniting. The U.S. Bureau of Labor Statistics announced last week that consumer prices, which had declined from November and December, rose 0.4% between December and January, an inflation rate of 4.9% on an annualized basis. The bureau announced earlier that producer prices rose 0.8% in the same period, a 10% annual rate of inflation.
If demand is still down, credit markets are dysfunctional, housing prices crashing, why is inflation going up? Or aren't they?
The question I want answered is: are asset prices still undergoing a correction or has the market overshot?
That's amazing. I don't know the answer, but I hope that the rise in price level is a little correction for overshoot deflation. If inflation continues during a recession/depression, then we are messed up on both ends.
Inflation is reigniting. The U.S. Bureau of Labor Statistics announced last week that consumer prices, which had declined from November and December, rose 0.4% between December and January, an inflation rate of 4.9% on an annualized basis. The bureau announced earlier that producer prices rose 0.8% in the same period, a 10% annual rate of inflation.
If demand is still down, credit markets are dysfunctional, housing prices crashing, why is inflation going up? Or aren't they?
The question I want answered is: are asset prices still undergoing a correction or has the market overshot?
Starting note: Balance sheet is a financial statement that measures assets, equity (ie. stock), and liabilities. A balanced balance sheet should have assets = equity + liability.
To answer your question about asset prices, it's really hard to say because of mark to market (MTM) accounting. There's been a lot of talk about mark to market accounting lately and long story short, MTM is basically valueing your financial assets at fair market value. The theory behind it is that because financial institutions deal with so many instruments that constantly change in value, pricing these instruments at fair market value gives a more accurate assesment of the balance sheet (and/or relative strength) of these companies. But the reality is that these instruments are very hard to value.
Last year, one or the primary reasons why the crisis quickly expanded out of the subprime sphere was because of MTM. When the companies were strong, auditors really had no measuring stick for these types of CDOs because they were never really used before. The only method of valueing these assets was probably based on cash flow...which was probably fine if everybody made their mortgage interest payments. But once too many subprimes were sold and people defaulted on their payments, thus too the payments stopped. Because the auditors had idiotically created their valuation based on cash flow, no payments = no value. This quickly evaporated the assets of all the investments banks who had heavily leveraged on CDOs...and now they had way too much liability relative to assets. The pivotal point though, in a credit based system that banks run, was that this in turn triggered margin calls by lenders (margin calls are based on liability+equity:assets ratio) and all the lenders demanded to be paid. Investment banks suddenly had no cash, no assets, and a ton of liability so they demanded their loan payments from other institutions. And the chain goes on, so nobody had any cash to go around, and nobody would loan to each other (hence the credit crunch).
But back to the original question of whether or not assets are still undergoing a correction. If you are talking about homes, then I'd say it doesn't matter. If you are talking about financial assets, then I'd say yes. Even months now from the October volatility, auditors and SEC alike still have no idea how to value these CDOs. And because of this, that is why the government keeps pumping cash into the investment banks and buying up these "toxic assets." Cash keeps their balance sheet up on the equity/liability side, buying assets keeps the asset side down. But really, they are just stalling while trying to figure out how to deal with all these financial instruments. And if they're stalling, the cheaper and probably better fix would be to simply suspend mark to market accounting. Let the assets equal what they were originally sold at, margin calls wouldn't trigger, and everybody could start lending again. It's a hell lot cheaper than giving billions in cash and spending billions more to buy up a bunch of mortgages.
On March 20 2009 13:39 fight_or_flight wrote: The government just printed up $440 billion. I guess thats what happens when you can't lower the interest rate anymore.
Wow, that's 1400 bucks per person, everyone is getting rich
I'm curious what kind of effects that will have around the world if it results in significant inflation. Tons of countries, China specifically, float below the american dollar to make their good attractive. Does this mean American is seen as a bad investment if they can't just continue borrowing? I'm not an economist but this seems like putting a bandaid on a festering wound
On March 24 2009 15:09 fight_or_flight wrote: China stepping up its rhetoric about getting rid of the dollar. My guess would be they don't like recent actions of the fed (see my post above).
I think it's a good idea, and I can understand China wories a bit about what's gonna happen with the dollar, having so many of them. The timing of this proposal is interesting I would say....
The concern of the Chinese is absolutely justified. Unfortunately Ben Bernanke seems absolutely determined to destroy the value of the American dollar. The value of the dollar is fundamentally determined by supply and demand, there is inherently a finite limit to how much money you can simply create out of thin air before that currency looses all of its value. Infact because of the huge pressure from many firms and nations around the world who are holding up the value of the American currency (including China who is holding around $2 trillion right now) if it finally does come come to the dollar reaching its breaking point then it will loose basically all value almost instantly dropping the United States into an inflationary depression, probably hyper inflation no less.
I am not trying to suggest that this is actually what will happen, the point is that if Bernanke continues to expand money supply at the current rate then this outcome is inevitable. The fact that the Federal Reserve has actually stopped releasing statistics regarding the true extent of money supply certainly has not gone unnoticed by many people around the world in the places that actually count.
On March 20 2009 23:31 floor exercise wrote: I'm curious what kind of effects that will have around the world if it results in significant inflation. Tons of countries, China specifically, float below the american dollar to make their good attractive. Does this mean American is seen as a bad investment if they can't just continue borrowing? I'm not an economist but this seems like putting a bandaid on a festering wound
The main concern of the Chinese is that the value of their holdings in American currency (some two trillion) looses value at the rate of inflation. If inflation is running at 5% per year than the Chinese currency holdings will loose 5% of their value in real terms per year. If inflation rises then the amount of currency value deterioration rises along side it. If the American currency collapses then that money will be worthless.
On March 20 2009 23:31 floor exercise wrote: I'm curious what kind of effects that will have around the world if it results in significant inflation. Tons of countries, China specifically, float below the american dollar to make their good attractive. Does this mean American is seen as a bad investment if they can't just continue borrowing? I'm not an economist but this seems like putting a bandaid on a festering wound
The main concern of the Chinese is that the value of their holdings in American currency (some two trillion) looses value at the rate of inflation. If inflation is running at 5% per year than the Chinese currency holdings will loose 5% of their value in real terms per year. If inflation rises then the amount of currency value deterioration rises along side it. If the American currency collapses then that money will be worthless.
The scary thing here is if the Chinese decide to cut their losses and sell, the dollar will collapse even harder.
On March 20 2009 23:31 floor exercise wrote: I'm curious what kind of effects that will have around the world if it results in significant inflation. Tons of countries, China specifically, float below the american dollar to make their good attractive. Does this mean American is seen as a bad investment if they can't just continue borrowing? I'm not an economist but this seems like putting a bandaid on a festering wound
The main concern of the Chinese is that the value of their holdings in American currency (some two trillion) looses value at the rate of inflation. If inflation is running at 5% per year than the Chinese currency holdings will loose 5% of their value in real terms per year. If inflation rises then the amount of currency value deterioration rises along side it. If the American currency collapses then that money will be worthless.
The scary thing here is if the Chinese decide to cut their losses and sell, the dollar will collapse even harder.
And why would they do that? They probably understand their position well enough, after all, we did screw over the Japanese in similar fashion in the 80s. The fallout of them actually bailing out on the Dollar is going to be catastrophic to the whole world, even with China being a much stronger economy now than it used to be, bringing down the US doesn't do anything for them. They are already on a path to prominence, there is no point hurting themselves now to accomplish the same goal. The suggestion imo is much more of a posture they've adopted as a way of gaining greater leverage and importance in the international community.
I have a question. How are they going to pay for all these government initiatives? Obama has proposed trillions of dollars in spending. In the old days, they would use taxes to pay for government operations. However, when taxes weren't enough the government would sell debt which was backed by its ability to collect taxes (future taxes).
But what happens when the demand for government debt isn't enough to account for all spending? In that case, the government buys its own debt, which is what the $440 billion was about. It is paying for government operations by devouring the value of money itself. Are they doing this because they are out of options? Will future demand for treasuries be enough to keep our government going?
China is a bloody hypocrite. They didn't buy American bonds because they looked like good investments, they bought American bonds because they wanted to keep the yuan undervalued relative to the dollar. Now they're crying about the value of their investments. Well, if they are so concerned, they can go ahead and sell them befroe the situation gets worse. But they won't do that because that would cause the dollar to crash and the yuan the shoot up in value and that would hurt their exports.
That's what you get when you rely on an export driven economy and manipulate your currency.
On March 24 2009 22:45 achap54 wrote: We had the seventh largest percentage gain in the Dow Jones Industrial average yesterday. What do you suppose that means?
I don't think it means much. The market was a little bit excited by current political events (stimulus bills and banking bills), and it is starved for good new and perhaps was correcting for an unrealistically low outlook on the current situation.
But I still think this recession will be long and slow coming out. I don't think that stimulus bills will have much effect so we will pass them, change nothing and then have to pay off a trillion dollars compounded by interest at some future point.
im just sick of 'experts' calling the bottom every 5 minutes you can't call bottom until after the event , at the least there needs to be a raft of good news ; something we have not seen for a long time now
On March 25 2009 12:16 The Storyteller wrote: China is a bloody hypocrite. They didn't buy American bonds because they looked like good investments, they bought American bonds because they wanted to keep the yuan undervalued relative to the dollar. Now they're crying about the value of their investments. Well, if they are so concerned, they can go ahead and sell them befroe the situation gets worse. But they won't do that because that would cause the dollar to crash and the yuan the shoot up in value and that would hurt their exports.
That's what you get when you rely on an export driven economy and manipulate your currency.
They have every right to complain, but they simply have no choice. There's still no one else they can buy from.
The whole AIG thing is absolutely ridiculous. Krugman needs to shut up when he isn't asked about international trade and everyone in congress should be castigated for their actions, and Obama deserves criticism too. Congress knew what AIG was going to do, AIG had plenty of reasons to do what they did, everything they did was legitimately handled and retroactively taxing their extensions is FUCKING UNCONSTITUTIONAL. Obama has to know that. The entire thing is so clearly a political move to distract from the entire crisis, except that there isn't even a fucking election for 1 1/2 years.
It boggles my mind that they could move so quickly on an amount of money so insignificant in terms of the entire rescue plan, and the media (as they always do) deserve blame for taking the bait. The entirety of congress, both dems and reps, are being irresponsible with this thing. It's almost as bad as if they took half a year to discuss baseball. >.>
I have to agree. It's blatant scapegoating to redirect public outrage. They didn't want to meddle before, but now they're tripping all over themselves to take AIG bonuses and pass additional legislation to not only takeover fucked up banks, but any failing financial institution (who owns the burden of discretion here? The government? "May I have another piece of cake? Yes, I may have another piece of cake"). In reality, the AIG bonuses finaggle could've been handled months ago when stipulations were being considered. They decided against it. Now they realize it was a mistake. Which public serviceman is going to step forward and accept responsiblity for being retarded? Nobody, because they're ALL retarded.
They're passing laws faster than they can read them or think about them whatsoever. It's insane.
On March 25 2009 11:58 fight_or_flight wrote: I have a question. How are they going to pay for all these government initiatives? Obama has proposed trillions of dollars in spending. In the old days, they would use taxes to pay for government operations. However, when taxes weren't enough the government would sell debt which was backed by its ability to collect taxes (future taxes).
But what happens when the demand for government debt isn't enough to account for all spending? In that case, the government buys its own debt, which is what the $440 billion was about. It is paying for government operations by devouring the value of money itself. Are they doing this because they are out of options? Will future demand for treasuries be enough to keep our government going?
Well yeah they can simply buy their own debt (debt monetization). Its just a tricky way to say your basically printing money. The federal reserve can continue to loan money to the federal government indefinitely but ofcourse there is some finite limit to how much borrowing the government can endure and only so much money you can print before you trigger serious inflation.
The United States today is sitting at around 70% debt to GDP ratio, which is not that much in a relative sense. Japan today has around 250% debt to GDP and they can still borrow, Britain used to have 200% debt to GDP as well so theoretically America can borrow trillions more if need be.
They are doing this because they are out of options.
However if the demand for Government bonds disappears, i.e no one has confidence in the ability of the United States to repay their debt (so far the demand for govt bonds has actually risen) which will happen eventually if the current situation continues then people will loose confidence in the value of the dollar that the dollar will then loose all value rendering the United States government bankrupt.
What will actually happen if this does eventuate is hard to say. There has never been a developed economy which has actually 'gone bankrupt' that I am aware of. But if I were to hazard a guess what we would see is the United States actually creating a new currency and basing its value of something like American gold reserves (there are many trillions worth I believe) and then backing that up with tax revenue and everything should work its self out kinda like in Germany in the 30's who did this, (they created a new currency the Reichsmark and based its value of German land). But really this is untested waters.
I really do not like the Obama rescue plan for the banks because basically what they are doing is guaranteeing private purchases of worthless assets so if the people buying those assets loose money the Govt will pay them back up to 85% of their losses. The problem is that these 'assets' have no value. They are literally buying mortgages of people who have already been foreclosed on, there cannot be any return on this investment in the long run. This could end up costing the tax payer trillions of dollars they cannot afford. At the end of the day America's fate will be determined by what happens in the real economy and thus far has been insufficient attention to this area for me to have much confidence.
People in finance have been calling the bottom every 5 minutes for the last couple years now, why? Because they have no idea what is actually going on here. http://www.youtube.com/watch?v=2I0QN-FYkpw That video is pretty funny and shows what I'm talking about.
The Chinese could possibly pull out the of American currency and trigger currency collapse as Baal mentioned. American demand for exports has already collapsed so a yuan revaluation making their exports less competitive really wont make much difference to anything. That said its not like the Chinese are actually going to do it unless they have no a choice, i.e if it is apparent the currency is going down regardless they will try to get whatever they can for their currency reserves there holding on.
And this whole AIG thing is basically irrelevant scapegoating but last I heard they are not going to do the tax thing anyway.
On March 25 2009 11:58 fight_or_flight wrote: I have a question. How are they going to pay for all these government initiatives? Obama has proposed trillions of dollars in spending. In the old days, they would use taxes to pay for government operations. However, when taxes weren't enough the government would sell debt which was backed by its ability to collect taxes (future taxes).
But what happens when the demand for government debt isn't enough to account for all spending? In that case, the government buys its own debt, which is what the $440 billion was about. It is paying for government operations by devouring the value of money itself. Are they doing this because they are out of options? Will future demand for treasuries be enough to keep our government going?
Like the government has in the past, they are paying for these initiatives by expanding money supply (printing money, causing inflation) and by selling treasuries. However, because they are doing it to a very large extent, inflation is relatively high and the bonds are relatively cheap. The accumulated effect of this is that it becomes harder to sell USDs and treasuries, which in turn puts pressure on the USD.
To answer your second question, the Fed bought treasures for three primary reasons: (1) to lower public debt at tradeoff of more inflation, (2) to push down the long term yield of treasuries, and (3) to increase the value of privately held treasuries. 1 happens because you are printing money to buy up debt--less overall public debt, more usd floating around. 2 & 3 happens because by buying treasuries, there will be less supply of treasuries being sold. Less supply of treasuries will mean currently held private treasuries will be worth more (3). Consequently, when the value of bonds goes up, yield goes down. This also has the double effect of making future issued treasuries less desirable so banks and investors will purchase non-treasury assets. Bernanke did this specifically to target long term yields so that long term assets (like homes, cars, etc) will be a lot cheaper to buy. In theory, this would spur demand for these items in the short term (which are at the core of the problem of the recession), but it would mean much higher levels of inflation in the future.
Just to be clear the United States government will go bankrupt if government revenue through taxation etc is no longer sufficient to meet debt repayments (or close enough too it). So if Government revenue falls enough then it will happen, this is the determining factor more so than the amount of debt actually taken up. America could borrow 5-6 trillion more without going bankrupt if their revenue base manages to hold up (believe it or not), but if their revenue base falls enough they could go bankrupt with the levels of debt they are holding already.
It is for this reason that I say Americas fate rests with the real economy, whatever happens in the financial sector is virtually irrelevant yet it steals the headlines. I am not convinced by the argument that fixing the banking sector and 'getting credit flowing again' will fix the real economy. More debt does not fix having too much debt. Its like suggesting that more alcohol will sober up a really drunk person.
On March 25 2009 16:36 Choros wrote: I am not convinced by the argument that fixing the banking sector and 'getting credit flowing again' will fix the real economy. More debt does not fix having too much debt. Its like suggesting that more alcohol will sober up a really drunk person.
But credit is essential to a modern economy. It just depends on whether people borrow for investment (education, industry etc.) or for goods with no long term value.
On March 25 2009 16:36 Choros wrote: I am not convinced by the argument that fixing the banking sector and 'getting credit flowing again' will fix the real economy. More debt does not fix having too much debt. Its like suggesting that more alcohol will sober up a really drunk person.
But credit is essential to a modern economy. It just depends on whether people borrow for investment (education, industry etc.) or for goods with no long term value.
If it is the case that a modern economy can only be sustained through increasing debt then clearly the collapse of that economy is inevitable.
The point is not whether there should be credit, there should be and it is very important for productive investment as you mention.
The underlying problem of the American economy is that American consumers no longer earn sufficient incomes to maintain the level of spending required to prevent recession. American consumers have been borrowing increasingly large sums of money in order to maintain consumption level above their income. The real problem at the heart of the American economy is the fact that incomes have been falling, and falling for quite a long time now, and the federal reserve has been throwing more debt money at the system in order to sustain it and prevent recession.
To get 'credit flowing again' is basically an attempt to get people to start borrowing money again for general consumption, this will not fix anything, but it will make the problems even worse in the long run.
The Banks already have around $8-9 Trillion sitting in their pocket they could lend out of they wanted too but they cannot / will not as they know that no one has the capacity to sustain a higher level of debt, and the people know they cannot afford to borrow any more thus credit has stopped flowing.
The only real solution to the American economic crisis is to fix the crisis of incomes and thus far this issue has not been adequately addressed rather they have placed most of their focus on attempting to sustain the debt bubble which is covering up the income crisis which is the real problem and attempts to create short term demand which again does basically nothing to fix the real problem.
On March 25 2009 18:01 Choros wrote: To get 'credit flowing again' is basically an attempt to get people to start borrowing money again for general consumption, this will not fix anything, but it will make the problems even worse in the long run.
The Banks already have around $8-9 Trillion sitting in their pocket they could lend out of they wanted too but they cannot / will not as they know that no one has the capacity to sustain a higher level of debt, and the people know they cannot afford to borrow any more thus credit has stopped flowing.
The only real solution to the American economic crisis is to fix the crisis of incomes and thus far this issue has not been adequately addressed rather they have placed most of their focus on attempting to sustain the debt bubble which is covering up the income crisis which is the real problem and attempts to create short term demand which again does basically nothing to fix the real problem.
I totally agree that income levels are insufficient to service debt, and also that there's a big, big, difference between increasing debt and getting credit flowing.
But I thought the main point of "getting credit flowing again" was more to get credit to businesses which would in turn create jobs and value for the economy, thus getting it moving again, not so much to get it into the hands of consumers and increase their debt even more.
Chronos, maybe the real problem lies in the level of spending needed to avoid this kind of recessions and not in the crisis of incomes as you say. Not only because of the recession that eventually causes, but because that level of spending is just not sustainable in many ways (mainly ecologically but also socially). But of course this solution would require some changes too deep in the current system to be truly viable.
Sure the quest for ecological sustainability is an important one which involves basically a complete economic restructure which is challenging but possible and without necessarily reducing material standard of living either in my opinion.
However the level of spending required to maintain the economy at the point it is (was) at can be sustainable if you disregard the ecology issue. We were perfectly capable of sustaining the state of the economy 20 years ago or 30 years ago which is basically the same level that we are at today. The fact that the current economic system is unsustainable is the consequence of destructive economic policies which have created this outcome. For example oppressive labor market policies specifically designed to push down wages, the United States used to have the highest wages in the world and this was a foundation of their success and the destruction of wages will be their undoing. The demolition of the public sector is another important cause of the current crisis.
They would have you believe that lower wages will create more jobs but in practice less wages = less demand = less jobs. Their logic is critically flawed yet they seem oblivious to this truth. The changes to the system required to make it sustainable even including environmental issues are only relatively subtle, but the changes to the economic paradigm which has dominated politics are profound (basically the whole thing has to be thrown out) and no one in places of power in the west seem willing or able to actually change this.
The truth is that the notion that a welfare state is inherently unsustainable is a destructive myth, a welfare state model can create wealth cycles which become self perpetuating providing good quality of life indefinitely. It is the removal of those positive aspects of the welfare state which has lead to this economic deterioration. You create unemployment benefits and the basic level of demand in the economy rises bringing up standards of living and employment levels along with it, you take those benefits away and the basic level of the economy will fall back to where it was to begin with. America is in the process of loosing all that was gained in the post 'new deal' era.
Economic managers of the United States have worked tirelessly to undo all that which made the economy strong in the first place. China on the other hand understands economics, what are they doing? Strengthening labor unions, increasing unemployment benefits, raising public sector wages among other things. They are doing the exact opposite of what American economic managers have been and I fully expect their economy to recover quite nicely simply because the policies that they are carrying out will achieve this outcome.
Economic outcomes are a product of economic policies. The obsessive focus on the financial sector only serves to remove outcomes from policy in the minds of the people. The suggestion is that this is all the fault of financial market deregulation combined with the greed of banks, Reaganomics (the real cause) is irrelevant in the minds of the media and politicians. As a consequence of the total lack of understanding in high places I have no confidence in the ability of the United States to recover.
Every week or so I have been hearing about china and others wanting an international currency to replace the dollar, where can i get more info about this ?
On March 25 2009 20:25 D10 wrote: Every week or so I have been hearing about china and others wanting an international currency to replace the dollar, where can i get more info about this ?
Havent had much luck so far
I read in the paper today that China suggested it and our Prime Minister basically said that it wasn't going to happen. But that said I think it is realistic we will see this happen in several years time.
Edit: So I just watched an interview on Lateline and they asked about this and they said that there really is no prospect of this happening.
On March 25 2009 20:25 D10 wrote: Every week or so I have been hearing about china and others wanting an international currency to replace the dollar, where can i get more info about this ?
Havent had much luck so far
I read in the paper today that China suggested it and our Prime Minister basically said that it wasn't going to happen. But that said I think it is realistic we will see this happen in several years time.
Edit: So I just watched an interview on Lateline and they asked about this and they said that there really is no prospect of this happening.
It is a difficult notion to advance, especially when accounting for the fact that it increases the complexity for each country in terms of controlling monetary policy and the amount of conflict of interests behind such a notion. Honestly, with the current environment, I am not quite sure why China is bringing up the issue at all. Perhaps they are certain of the recovery of the Chinese economy within the year even should they raise hell. I probably should take a bit of time to read the essay in question just to see what they brought up in specific to back up the proposition. But honestly, with the kind of [lack of] traction that it has been getting, it probably isn't going to work out to be anything substantial.
About the labor issue, well, it is a sticky one if we are going to leave productivity out of the picture. Personally I see the issue with America atm more of a normalization of the wage levels to be on par with productivity, which applies similarly to China in their rapid industrialization and increase in the medium level of income. US and the level of growth it has seen in the areas that it has a greater advantage simply isn't up to the level of growth that we have seen in previous periods - too much money has been blown into the financial sector (that, arguably, isn't really anyone's fault), but at any case, the growth in productivity and wage has fallen far out of sync.
The notion that a welfare state is inherently unsustainable is indeed false, at that, a lot of theories about economic growth involve the idea that there could be a distribution of income for individual welfare to increase across the board. The question, though, is how practical the policy is, I personally attach really little hope for it.
On March 25 2009 20:23 Choros wrote: Sure the quest for ecological sustainability is an important one which involves basically a complete economic restructure which is challenging but possible and without necessarily reducing material standard of living either in my opinion.
However the level of spending required to maintain the economy at the point it is (was) at can be sustainable if you disregard the ecology issue. We were perfectly capable of sustaining the state of the economy 20 years ago or 30 years ago which is basically the same level that we are at today. The fact that the current economic system is unsustainable is the consequence of destructive economic policies which have created this outcome. For example oppressive labor market policies specifically designed to push down wages, the United States used to have the highest wages in the world and this was a foundation of their success and the destruction of wages will be their undoing. The demolition of the public sector is another important cause of the current crisis.
They would have you believe that lower wages will create more jobs but in practice less wages = less demand = less jobs. Their logic is critically flawed yet they seem oblivious to this truth. The changes to the system required to make it sustainable even including environmental issues are only relatively subtle, but the changes to the economic paradigm which has dominated politics are profound (basically the whole thing has to be thrown out) and no one in places of power in the west seem willing or able to actually change this.
The truth is that the notion that a welfare state is inherently unsustainable is a destructive myth, a welfare state model can create wealth cycles which become self perpetuating providing good quality of life indefinitely. It is the removal of those positive aspects of the welfare state which has lead to this economic deterioration. You create unemployment benefits and the basic level of demand in the economy rises bringing up standards of living and employment levels along with it, you take those benefits away and the basic level of the economy will fall back to where it was to begin with. America is in the process of loosing all that was gained in the post 'new deal' era.
Economic managers of the United States have worked tirelessly to undo all that which made the economy strong in the first place. China on the other hand understands economics, what are they doing? Strengthening labor unions, increasing unemployment benefits, raising public sector wages among other things. They are doing the exact opposite of what American economic managers have been and I fully expect their economy to recover quite nicely simply because the policies that they are carrying out will achieve this outcome.
Economic outcomes are a product of economic policies. The obsessive focus on the financial sector only serves to remove outcomes from policy in the minds of the people. The suggestion is that this is all the fault of financial market deregulation combined with the greed of banks, Reaganomics (the real cause) is irrelevant in the minds of the media and politicians. As a consequence of the total lack of understanding in high places I have no confidence in the ability of the United States to recover.
To clarify it a bit more, this is basic Keynes principle of anti cycling. In time of crises, tax incomes fall down and social benefit costs rise. Less income for the government, but income of people will stabalize, in stead of falling down (ie more welfare costs) This system is quite good. The problem lies within politicians who are chosen for a certain period and (normally) want to spend money in stead of save it.
It is for this reason that I say Americas fate rests with the real economy, whatever happens in the financial sector is virtually irrelevant yet it steals the headlines. I am not convinced by the argument that fixing the banking sector and 'getting credit flowing again' will fix the real economy. More debt does not fix having too much debt. Its like suggesting that more alcohol will sober up a really drunk person
Some companies did not foresee the recessions and did not have appropriate cash reserves to prepare for it. Others are simply too strained from the dramatic fall in demand. A lot of these companies are perfectly viable in the long run, but in the short they need financing. You also need a working banking system to get investment going again. Credit's not just for families.
If you want to get demand going again, you need jobs. To get jobs, you need companies in good shape. And for that you need credit flowing.
Your last post is a bunch of ideological rhetoric, not economic arguments.
America's flexible labour politics have given it an edge in competitiveness and flexibility over the years. The US has had much lower unemployment rates, especially long-term rates, than other developed countries.
How exactly do you suggest the US can raise real wages? What happens to the US's trade imbalance and american companies' competitiveness abroad?
Raising wages, ceteris paribus, can't create growth by expanding aggregate demand because the supply curve goes up, and you end up with inflation.
I would also like to hear about this demolition of the public sector and how it contributed to the crisis. Can you elaborate a little bit more on this one?
American Express has reported that their credit card customers are paying down outstanding balances at record rates and that their customers have signifcantly reduced new charges against their American Express credit cards. Is this good? And what impact will it have on spending once confidence in the economy is restored? Is this a permanent change in spending mentality, or is it just bottling up demand that will return robustly later?
Those workers in the US (the 90+ percent who still have jobs) who are still adding to their 401Ks are buying stocks at bargain basement prices. It's like a two for one sale where everything in the store is two for one, even the good stuff. And the sale runs all year.
On March 26 2009 01:30 achap54 wrote: American Express has reported that their credit card customers are paying down outstanding balances at record rates and that their customers have signifcantly reduced new charges against their American Express credit cards. Is this good? And what impact will it have on spending once confidence in the economy is restored? Is this a permanent change in spending mentality, or is it just bottling up demand that will return robustly later?
I think this is very good and believe a change in mentality (don't buy too much on credit) will be a good thing in the long run. Maybe for now spending will drop a bit, but this will fix itself in the coming years. I still believe the US has a strong economy.
My dad was sixteen when the US depression hit. It affected him for the rest of his life. He saved a lot, didn't trust financial institutions, etc. Will this resession permanently change people's attitudes?
On March 27 2009 12:18 achap54 wrote: My dad was sixteen when the US depression hit. It affected him for the rest of his life. He saved a lot, didn't trust financial institutions, etc. Will this resession permanently change people's attitudes?
People will definitely be more cautious after the recession is over. However, this is not the first time recession has hit America. In fact, this is the second recession in this decade that hit America. People will slowly, but surely recover and regain confidence.
On March 27 2009 12:18 achap54 wrote: My dad was sixteen when the US depression hit. It affected him for the rest of his life. He saved a lot, didn't trust financial institutions, etc. Will this resession permanently change people's attitudes?
People will definitely be more cautious after the recession is over. However, this is not the first time recession has hit America. In fact, this is the second recession in this decade that hit America. People will slowly, but surely recover and regain confidence.
It is for this reason that I say Americas fate rests with the real economy, whatever happens in the financial sector is virtually irrelevant yet it steals the headlines. I am not convinced by the argument that fixing the banking sector and 'getting credit flowing again' will fix the real economy. More debt does not fix having too much debt. Its like suggesting that more alcohol will sober up a really drunk person
How exactly do you suggest the US can raise real wages? What happens to the US's trade imbalance and american companies' competitiveness abroad?
Well the truth is that the fall in real wages is the consequence of economic policies. Suffice to say that basically what happened was the undoing of the 'new deal'. The most important cause of the fall in incomes was the destruction of the union movement. Infact in the 1920's the United States carried out a huge amount of union busting which lead to deteriorating incomes and a massive explosion in income inequality, this then lead to expansionary monetary policy and increasing levels of debt and ultimately the great depression.
In 1980 Reagan called open season on the unions which almost immediately triggered a massive deterioration in income inequality particularly pushing down wages at the bottom end of the scale, whilst simultaneously giving out large tax cuts targeted at the rich. The only comparable example of deteriorating income equality in the developed world is in Britain during the Thatcher years which is its self revealing.
There are other policies which have contributed to this situation including reducing public sector wages and employment levels. The attempt of the Bush administration to privatize the social security system would really have been the final nail in the coffin of the new deal.
The United States during the 1930's quickly over the space of only a few years completely reversed the destruction of income equality through the creation of a social security system, reforming tax policy, investing in health and education etc and this is basically what is necessary to deal with the problems in the United States today. Destruction of new deal lead to economic decay and the restoration of the new deal should be able to turn the economy around quickly.
The point is that you do not raise wages in the private sector through control methods, these create inflation, you raise wages by changing the structure of the labor market and through investment into the public sector including the social safety net. This did not create significant inflation in the past rather it lead to significant and sustained increases in standard of living and also increases in productivity. You will not have inflation problems unless you drive income demand above capacity but with America today producing at around 50% capacity there is no real inflation risk from this. (there is inflation risk due to the ridiculous expansion in money supply but this really is a separate issue)
So what will the impact upon productivity be? Well the notion that America has the most productive workers in the world really is a myth, this is a statistical anomaly caused by a number of factors but for example if Merrill Lynch makes billions on stocks that gets added to the 'productivity' of American workers. History has shown that rising wages if anything has a positive impact upon productivity for one thing a 'happy worker is a productive worker', French workers for example work around 2 weeks less on average per year and enjoy much higher wages, yet their labor force productivity is basically the same as Americas is.
The problem with the French economy is that they have mishandled old age pensions which is a relatively minor but pretty serious issue for them.
On March 25 2009 18:01 Choros wrote: To get 'credit flowing again' is basically an attempt to get people to start borrowing money again for general consumption, this will not fix anything, but it will make the problems even worse in the long run.
The Banks already have around $8-9 Trillion sitting in their pocket they could lend out of they wanted too but they cannot / will not as they know that no one has the capacity to sustain a higher level of debt, and the people know they cannot afford to borrow any more thus credit has stopped flowing.
The only real solution to the American economic crisis is to fix the crisis of incomes and thus far this issue has not been adequately addressed rather they have placed most of their focus on attempting to sustain the debt bubble which is covering up the income crisis which is the real problem and attempts to create short term demand which again does basically nothing to fix the real problem.
I totally agree that income levels are insufficient to service debt, and also that there's a big, big, difference between increasing debt and getting credit flowing.
But I thought the main point of "getting credit flowing again" was more to get credit to businesses which would in turn create jobs and value for the economy, thus getting it moving again, not so much to get it into the hands of consumers and increase their debt even more.
Yes this may sound good but in practice it doesn't really work. The Bush administration carried out some incentives for investment but all that did was reward investment already taking place (which isnt a bad thing) but it did nothing to actually create more investment.
You have this suggestion that in order to create more jobs we need to create more investment but it doesn't really work this way.
Basically it goes like this; Demand > Investment > Supply > Consumption You cannot skip the demand step and expand investment and thus supply. No firm will invest in increasing output when they know that demand is weak. The problem today is not that there is too little 'liquidity' there are trillions of dollars that could be lent and invested but none of that investment will take place without demand there in the first instance.
If you can deal with the demand issue then and only then will firms start to invest in productive output and thus hire more workers.
On March 28 2009 11:43 Choros wrote: Basically it goes like this; Demand > Investment > Supply > Consumption
This is easily remedied by an immediate across the board decline in all price - especially housing prices. Then just shove everyone through bankruptcy court. Liquidate everyone and cram down on the secondary and tertiary loan claims and put a few Wall Street Investment banks out of business.
Ohh and you're missing the precursor to demand. Usually it goes something like this: (Savings/Income) -> Demand.
Americans unfortunately don't have savings and have an awful income - remember all that debt that they accumulated. So the lack of demand is here to stay.
I would also like to hear about this demolition of the public sector and how it contributed to the crisis. Can you elaborate a little bit more on this one?
Sure well the best example of this is the health care system. Why is it the case that the United States pays significantly more on health care than anyone else. If you are in France or Australia or any other western country you do not have to worry about paying for health care. The notion that getting sick might lead to financial ruin is alien to us. The reason that America pays so much more on health care than we do is because the health care system is wildly inefficient. This is in part the consequence of attempting to privatize health. A private company running for a profit with an inelastic demand curve (as health has) will lead to very high prices as they maximize profit. Medical corporations in the United States sucks hundreds of billions of dollars out of the economy, at the same time they pay nurses sub par wages and under staff institutions also depriving individuals of money they would otherwise use on general consumption.
What I just said still does not adequately address the question though so I will give another example, in California they fired every art, music and drama teacher in their school system and many of their science teachers as well. The impact this has upon education is significant but in my mind irrelevant, the consequence that really counts is a reduction in the levels of employment and thus demand, by firing workers out of the public sector there are more workers competing for jobs in the private sector whilst the number of jobs available is if anything smaller. More workers competing for less jobs leads to falling wages. Infact when the crisis first began the sector of the economy with the highest job losses was the public sector where hundreds of thousands of jobs were lost as states around the country fired workers in order to reduce costs and attempt to get a surplus budget which greatly exacerbated the recession.
But the deterioration of the public sector is nothing new and can be traced back to the Reagan administration. The persistent attempt to reduce public spending on institutions lead to job losses and falling real incomes in the public sector whilst pushing more workers into the private sector which again pushed down wages in that area as well. Job losses go further than just teachers etc but also tradesmen who would otherwise have been repairing schools gutters and whatever but instead they have not been. There are more than a trillion dollars worth of 'deferred maintenance' in the United States which again has lead to deteriorating incomes for workers which in turn has weakened the demand base of the economy.
I do not point to the deterioration of the public sector as cause no.1 but it certainly has made matters worse.
This is easily remedied by an immediate across the board decline in all price - especially housing prices. Then just shove everyone through bankruptcy court. Liquidate everyone and cram down on the secondary and tertiary loan claims and put a few Wall Street Investment banks out of business.
This really is the only viable solution to the financial crisis but it does not help much in terms of the real economic crisis.
Ohh and you're missing the precursor to demand. Usually it goes something like this: (Savings/Income) -> Demand. Americans unfortunately don't have savings and have an awful income - remember all that debt that they accumulated. So the lack of demand is here to stay.
Indeed well you can say that low saving > low incomes > lower savings, a deteriorating cycle. However this relationship only really applies to the private sector, the Government can and must (but really isnt) significantly increase wages of public sector workers and hire more workers into the public sector which will then flow on to push up the private sector as well.
It worked in the 1930's and it can work again. People say oh the fiscal stimulus failed to create jobs in the 30's claiming that the unemployment rate was still 10-15% after the fiscal stimulus, they ignore the fact that unemployment went above 20% prior to it. You can break the downward cycle through prudent steps by the public sector.
Repairing labor market policy must be carried out but this will have no impact upon an economy in a recession, this will only come to help you after you have already created a recovery, either through intervention now or letting the recession play out but this may lead to almost complete economic destruction and this is neither necessary or prudent.
I disagree with the popular consensus that the stimulus must have the 3 T's, Temporary, Targeted and Timely.
The notion that the stimulus should be Temporary is to suggest there is actually nothing wrong with the economy and on that I disagree entirely.
Really one of the main reasons for the massive deficit is far far too many tax cuts. For example capital gains tax was reduced from 25% to 15% and so on across the board, this again makes matter more difficult to address.
On March 28 2009 12:04 Choros wrote: Sure well the best example of this is the health care system. Why is it the case that the United States pays significantly more on health care than anyone else. If you are in France or Australia or any other western country you do not have to worry about paying for health care. The notion that getting sick might lead to financial ruin is alien to us. The reason that America pays so much more on health care than we do is because the health care system is wildly inefficient. This is in part the consequence of attempting to privatize health. A private company running for a profit with an inelastic demand curve (as health has) will lead to very high prices as they maximize profit. Medical corporations in the United States sucks hundreds of billions of dollars out of the economy, at the same time they pay nurses sub par wages and under staff institutions also depriving individuals of money they would otherwise use on general consumption.
This is absolutely silly. The rising health care costs has tracked with increasing involvement of the government in health care. We have the byzantine medical administrative paperwork. LBJ graced us with Medicare and Medicaid. We have the introduction of "corporate health insurance" encouraged in the IRS code introduced by Ted Kennedy. That movement evolved into state level mandatory coverage levels and government regulation in the form of uniform group rates.
The result is we have a gigantic moral hazard in the health care insurance industry which the corporate health insurance industry tries to minimize by harassing doctors and patients to justify their health care expenditures. These health insurance industries then make massive profits because it's almost impossible for anybody else to figure out how to minimize the moral hazard and still get people willing to pay for health insurance. Then we get the silly mandatory health insurance law in Massachusetts which is the equivalent of a massive giveaway to the health insurance industry because "health insurance" is so unaffordable.
The bottom line is that people don't need health insurance for activities like annual checkups, family doctor visits, fevers and colds, and other common ailments. They need only insurance for the unforeseeable disasters like contracting cancer, emergency room service, and many post-operation complications.
The idea that health care demand is inelastic is absurd. It's especially absurd for preventive care. Thanks to insurance, few people engage in proper preventive care, because preventive care is expensive compared to what it's designed to prevent - at least for the consumer. The insurance agencies feel the pain on their bottom line, so they have all these programs to entice people to engage in preventive medicine. The idea of health insurance has completely undermined price sensitivity.
At the other end of the spectrum is AMA preventing nurses and other licensed practitioners from dispensing simple health care. Oh noes! You always need a doctor on site! It doesn't matter that most of the service was actually provided by the nurse, the doctor somehow still has to be there. Then, the AMA restricts the number of doctors that can graduate every single year. And people wonder why interns at hospitals are worked to death (80 hours a week!) and provide bad health care because they are always so tired.
BTW the public sector is too big - especially the National "Defense" industry. Health care and education are a distant second and third.
On March 28 2009 12:15 Choros wrote: Indeed well you can say that low saving > low incomes > lower savings, a deteriorating cycle. However this relationship only really applies to the private sector, the Government can and must (but really isnt) significantly increase wages of public sector workers and hire more workers into the public sector which will then flow on to push up the private sector as well.
You forget that there's is the rest of the world out there. The same people who loaned us their money would likewise provide the balance of the demand. America needs to start exporting.
It worked in the 1930's and it can work again. People say oh the fiscal stimulus failed to create jobs in the 30's claiming that the unemployment rate was still 10-15% after the fiscal stimulus, they ignore the fact that unemployment went above 20% prior to it. You can break the downward cycle through prudent steps by the public sector.
It did not work, because recovery is all about sustainability. The fact that the government borrowed money to employ 5% of the population to move unemployment from 20% to 15% doesn't mean a damn thing. That employment was the result of unsustainable government involvement. Take away the unsustainable government involvement and you still had 20% unemployment.
That means that the government involvement had no positive benefit. Factor in the phenomenon that the economy generally recovers slowly on its own, and the conclusion is that the government got in the way of the recovery. In fact you see it in 1937 when the first New Deal ended and the economy promptly spiraled into an echo depression with unemployment touching 20% again.
On March 28 2009 12:15 Choros wrote: Indeed well you can say that low saving > low incomes > lower savings, a deteriorating cycle. However this relationship only really applies to the private sector, the Government can and must (but really isnt) significantly increase wages of public sector workers and hire more workers into the public sector which will then flow on to push up the private sector as well.
You forget that there's is the rest of the world out there. The same people who loaned us their money would likewise provide the balance of the demand. America needs to start exporting.
It worked in the 1930's and it can work again. People say oh the fiscal stimulus failed to create jobs in the 30's claiming that the unemployment rate was still 10-15% after the fiscal stimulus, they ignore the fact that unemployment went above 20% prior to it. You can break the downward cycle through prudent steps by the public sector.
It did not work, because recovery is all about sustainability. The fact that the government borrowed money to employ 5% of the population to move unemployment from 20% to 15% doesn't mean a damn thing. That employment was the result of unsustainable government involvement. Take away the unsustainable government involvement and you still had 20% unemployment.
That means that the government involvement had no positive benefit. Factor in the phenomenon that the economy generally recovers slowly on its own, and the conclusion is that the government got in the way of the recovery. In fact you see it in 1937 when the first New Deal ended and the economy promptly spiraled into an echo depression with unemployment touching 20% again.
Well it was sustainable as the increased income equality and institutional strength remained to the benefit of the American economy right up to 1980 when it started to be undone and the United States started to go backwards.
Your right that the United States needs to start exporting there is considerable distortion in production and consumption patterns in the world. The developing world basically produces everything and the west consumes it. The developing world has been relying upon export driven growth and low labor costs is the foundation of their international competitiveness thus they have been holding down their wage growth in order to maintain that competitiveness but the consequence of this is that they have been preventing real economic development as the income growth and domestic demand has remained weak thus when export demand dropped off it lead to significant recession in the developing world as they do not have a domestic demand engine to keep their economies growing.
The developing world however has largely realised this now and are actively adopting policies designed to increase domestic demand and domestic wages. The Chinese for example are passing several laws designed to protect workers for example if you fire a worker in China today you need to pay them wages for a couple months based off how long you had them employed. The business lobby doesn't like it but the communist party just said too bad. The Chinese too are creating a social safety net along with various other measures designed to strengthen domestic demand. Basically they are doing what I would advocate we in the west do as well.
In my opinion you should not worry about the global economy only the domestic, if all nations deal with their domestic issues this will combine to resolve the global issues in the process, the way things are going today we should see considerable improvement in trade patterns and a boost in American exports but this can only be achieved if the government carries out policies designed to repair the domestic economy.
On March 28 2009 13:47 Choros wrote: Well it was sustainable as the increased income equality and institutional strength remained to the benefit of the American economy right up to 1980 when it started to be undone and the United States started to go backwards.
I don't think you understand what happened in the 70's - that decade of stagflation and the misery index. If your idea of institutional strength and income equality involves double digit unemployment and double digit inflation, by all means, America was both "strong" and "equal."
On March 28 2009 13:47 Choros wrote: Well it was sustainable as the increased income equality and institutional strength remained to the benefit of the American economy right up to 1980 when it started to be undone and the United States started to go backwards.
I don't think you understand what happened in the 70's - that decade of stagflation and the misery index. If your idea of institutional strength and income equality involves double digit unemployment and double digit inflation, by all means, America was both "strong" and "equal."
The inflation of the 1970's was because of significant rises in the price of oil and the government misusing fiscal policy to attempt to achieve macro stability. + Show Spoiler +
If you try to use infrastructure spending to stabilize the business cycle it does not work as it often takes around a year for the spending to hit the economy thus the economy goes down so you increase spending but when it hits the economy the downturn is already over and you make the upturn higher and create more inflation, so you cut spending but that slows the economy when the upturn is over and your in a bust and you make the downturn worse and so on.
What was good about the economy at this time was the consequence of the factors I mentioned, what was bad about the economy was the consequence of other things but unfortunately many economists took the wrong lessons out of this experience in my opinion.
This is absolutely silly. The rising health care costs has tracked with increasing involvement of the government in health care. We have the byzantine medical administrative paperwork. LBJ graced us with Medicare and Medicaid.
The American healthcare system is wildly inefficient and in my opinion you need to throw out Medicare and Medicaid and start from scratch. The problem really is that the Government does not do health care its self it pays the private sector to provide health care by subsidising health insurance and such, I don't understand the details of how the American system works. Every other developed country which has a centralized public health system spends far far less then the United States does on health care as you can decrease costs by removing profits and gaining economies of scale. Health care is a clear cut example of the private sector being less efficient than government (provided that the Government does it job properly which in America it is not). Every time you have inelastic demand (and health is almost perfectly inelastic) then profit maximizers will generally lead to market failure as a consequence.
Basically elasticity of demand or supply means how much output/consumption changes as price changes. If an apple costs $1 I will buy it, if it costs $5 I will not maybe ill buy a pear instead or something, this means that it has relatively elastic demand. As price goes up demand falls quickly and vice versa. On the other hand if life saving treatment costs $1000 I will pay it, if it costs $100,000 I will pay that, if it costs a million I will pay that too and so on until such time as I run out of money. This means that the quantity demanded does not change much as price changes and thus a profit maximizer will increase prices to generate more profits. The private health industry in the United States runs at huge profit margins and the economy suffers because of it.
The idea that health care demand is inelastic is absurd. It's especially absurd for preventive care. Thanks to insurance, few people engage in proper preventive care, because preventive care is expensive compared to what it's designed to prevent - at least for the consumer.
It is the reliance on insurance which creates all these problems, the insurence broker too makes profits thus increasing overall costs, and yes preventitive care is elastic thats a problem cause the high costs have lead to people not getting propper treatment.
The idea of health insurance has completely undermined price sensitivity.
I am inclined to agree on this.
BTW the public sector is too big - especially the National "Defense" industry. Health care and education are a distant second and third.
The public sector is too big, especially the defense industry. You can increase the amount you are spending in terms of its impact whilst reducing spending in nominal terms by around 30% possibly more in my opinion.
On April 02 2009 15:30 Choros wrote: Elasticity description: + Show Spoiler +
Basically elasticity of demand or supply means how much output/consumption changes as price changes. If an apple costs $1 I will buy it, if it costs $5 I will not maybe ill buy a pear instead or something, this means that it has relatively elastic demand. As price goes up demand falls quickly and vice versa. On the other hand if life saving treatment costs $1000 I will pay it, if it costs $100,000 I will pay that, if it costs a million I will pay that too and so on until such time as I run out of money. This means that the quantity demanded does not change much as price changes and thus a profit maximizer will increase prices to generate more profits. The private health industry in the United States runs at huge profit margins and the economy suffers because of it.
I'm pretty sure that some elderly folks would elect to die than spend $1 million dollars for a chance to keep them alive.
That said, if it it costs that much money to provide the care then the private health industry should charge that much. There is no point in deceiving the public on the costs of treatment and going bankrupt.
But the idea that private health industry would make huge profits suggests that providing the care is much less than what the consumer pays. Where does come from?
Did some corporate entity get monopoly rights over providing health care? Where did the competition go? If the consumers aren't price sensitive, how about the producers? They should be price sensitive.
On March 28 2009 13:47 Choros wrote: Well it was sustainable as the increased income equality and institutional strength remained to the benefit of the American economy right up to 1980 when it started to be undone and the United States started to go backwards.
I don't think you understand what happened in the 70's - that decade of stagflation and the misery index. If your idea of institutional strength and income equality involves double digit unemployment and double digit inflation, by all means, America was both "strong" and "equal."
The inflation of the 1970's was because of significant rises in the price of oil and the government misusing fiscal policy to attempt to achieve macro stability. + Show Spoiler +
If you try to use infrastructure spending to stabilize the business cycle it does not work as it often takes around a year for the spending to hit the economy thus the economy goes down so you increase spending but when it hits the economy the downturn is already over and you make the upturn higher and create more inflation, so you cut spending but that slows the economy when the upturn is over and your in a bust and you make the downturn worse and so on.
What was good about the economy at this time was the consequence of the factors I mentioned, what was bad about the economy was the consequence of other things but unfortunately many economists took the wrong lessons out of this experience in my opinion.
Wait a second. There was NO recovery in 1970's. The economy never recovered. It was stagflation any time, all the time. The economy indeed stabilized, but the economy was never healthy. It had an equilibrium with 10%+ unemployment. On top of that, the government kept spending and inflating to the tune of 10%+ inflation rate and did some stupid stuff like price controls and start the drug war.
There is no separation of the good consequences and the bad consequences. The adverse effects of debt/inflation financing is the direct consequence of infrastructure spending. If there is a lot of public spending, there will either be high taxes, high deficits, or high inflation. All three are larger drains on the economy than the "stimulus" that public spending provides. And the idea that politicians would get the correct timing for stimulus and surplus is preposterous. Politicians are the worst decision makers in the economy. In fact, politicians have only learned one lesson, stimulate, stimulate, stimulate.
you think your all making some kinda difference? theres nothing any of you can do to stop/help the economic situation. it is what it is. bitching and making HUGE posts is not helping anyone or anything. just warping the minds and oppinions of people with no free will, which happens way too much and is possibly the main cause of stupidity being so rampant on the internet these days. so just give it a rest will ya? 42 pages of this shit is just over the top completely.
On April 03 2009 00:54 Vex wrote: you think your all making some kinda difference? theres nothing any of you can do to stop/help the economic situation. it is what it is. bitching and making HUGE posts is not helping anyone or anything. just warping the minds and oppinions of people with no free will, which happens way too much and is possibly the main cause of stupidity being so rampant on the internet these days. so just give it a rest will ya? 42 pages of this shit is just over the top completely.
On March 28 2009 13:47 Choros wrote: Well it was sustainable as the increased income equality and institutional strength remained to the benefit of the American economy right up to 1980 when it started to be undone and the United States started to go backwards.
I don't think you understand what happened in the 70's - that decade of stagflation and the misery index. If your idea of institutional strength and income equality involves double digit unemployment and double digit inflation, by all means, America was both "strong" and "equal."
The inflation of the 1970's was because of significant rises in the price of oil and the government misusing fiscal policy to attempt to achieve macro stability. + Show Spoiler +
If you try to use infrastructure spending to stabilize the business cycle it does not work as it often takes around a year for the spending to hit the economy thus the economy goes down so you increase spending but when it hits the economy the downturn is already over and you make the upturn higher and create more inflation, so you cut spending but that slows the economy when the upturn is over and your in a bust and you make the downturn worse and so on.
What was good about the economy at this time was the consequence of the factors I mentioned, what was bad about the economy was the consequence of other things but unfortunately many economists took the wrong lessons out of this experience in my opinion.
The rampant inflation of the 1970s started because of the collapse of the Bretton Woods system. Having all the world's major currencies pegged to the USD coupled with rapid growth in the EEC grossly underscored the pegged rates that was going at the time. Toss in a dash of terrible monetary policy, inflated union labor wages, and a war looming on the horizon, and not surprisingly, the USD collapsed. That is not to say that what you pointed out didn't perpetuate the inflation, but you forgot a very important component.
4.5 years later. Here is the state of the economy. wow. It's difficult to process it all and get through it, I recommend pacing yourself. A lot of these statistics are unbelievable.
-- Posted Friday, 29 March 2013 | | Source: GoldSeek.com
An unstoppable sequence of events has been put into motion finally. The pressure has been building for months. Some themes are plainly evident, except to those who wear rose colored glasses in the US Dome of Perception. The USTreasury Bond will be brought home to the US and British banks, where it will choke its bankers, then be devalued for survival reasons, after a painful isolation. The Chinese and Russians will conspire to finance the Eurasian Trade Zone corridor foundation with USTBonds, held in reserve, put to usage. The British will play a very unusual role, selling out the United States in order to be squires to the Eastern Duo. The process has begun; it cannot be stopped. The events are already being grossly misinterpreted and minimized in the US press, where devoted lapdogs, artistic swindlers, and creative writers prevail. The Paradigm Shift eastward is showing its next face, with a truly massive trade zone for cooperation and reduced cost overhead as the giant foundation. The Untied States for all of its past hegemony and devious manipulations and vicious attacks, will be excluded. The British will assist in the exclusion in order to avoid the Third World themselves. The following blueprint is the result of years of planning, with steady information and hints and confirmations by at least two Hat Trick Letter sources. The sunset of the USDollar has a blueprint. As a personal embroidery, let me state that this article is the most important the Jackass has ever written. Let it be taken seriously for its grave somber message.
EURASIAN TRADE ZONE
The crowning blow is the financial centerpiece to the trade zone, which draws upon the critical mass bulk of the BRICS nations as nucleus. Together Brazil, Russia, India, China, and South Africa have begun to form an alliance built upon trade and economic development, forged by investment in infrastructure and its construction. Include Iran and Indonesia to welcome the new BRIIICS nations for a larger Eastern representation. The arterial system of the trade zone will be energy supply, the life blood of commerce. The Eurasian Trade Zone is being formed, with an energy foundation. Important bilateral pacts were made concrete in the last week. Supply of crude oil, natural gas, including LNG, will come from a vast system of pipelines from Russia to Central Europe and from Russia to China. Completed pipelines will flow. Other pipelines will be completed. Crucial pacts have been made final, with more to come. Additional important pipelines along the periphery will be completed also, like the Iran-Pakistan Pipeline, despite the USGovt obstruction and intimidation. New LNG ports will be constructed. Logistics for rail traffic will be agreed upon, for commodity supply. Many features of the trade zone will be worked out, like reduced tariffs, like border inspection methods, like payment systems including barter, like environmental concerns, like regional cooperation.
BRICS DEVELOPMENT BANK
Consider the BRICS Development Bank. It is so much more than a fund to build railroads in remote African locations, as the delusional US press reports. It will form the giant credit line for countless projects upon which trade will be conducted, often called infrastructure, but so much more. It will gradually reveal itself to provide a second function, a core bank for trade payments outside the USDollar sphere. Steps are being made, extremely important steps, that will shape the next chapter. The United States will not play a role. With a trade zone and financial payment structure, the USDollar is to be rendered an outsider looking in, soon to be deemed obsolete. The many emerging nations are coming of age, flexing their muscles, banding together. Their critical mass in trade volume, in industrial output, and in product development, including patent registration, are impressive. In the last two years, they have demonstrated that the G-20 Meeting of finance ministers has totally eclipsed the G-7 Meeting that had dominated for two decades. They are making the next critical step in creating a bank, a global bank whose role will grow and expand. It will operate under the golden glow.
EXCLUSION OF UNITED STATES
The many years of abusive control of the FOREX currency markets, intervention in the sovereign bond markets, manipulation in the important commodity markets, devious propaganda in the communications networks, with support role played by the aggressive USMilitary and nefarious activity by its security agencies have guaranteed exclusion of the United States. The unspeakable abuse of the US$ credit card will end, as the global reserve currency is dismissed from its throne. The US leader crew, led by fascist bankers, can print money and counterfeit bonds all they wish, but the currency will be required to submit to grand devaluation if they wish to purchase supplies for the massively lopsided and imbalanced USEconomy, the greatest travesty in marketplace history. While the Keystone Pipeline is corrupted by the USGovt with hidden beneficiaries such as Halliburton and Burlington Northern, essentially divvying up the gangrenous paunch of the exhausted bloated American torso, the vast pipelines of the European and Asian continents are merging. They will not include the Americans, whose pathetic gambit fell on its face, the Trans-Pacific Partnership pushed by the Obama Admin. It actually attempted to form a trade zone with Asia, on condition that the lead nations Japan and South Korea excluded China. How incredibly moronic and amateurish! What a pathetic return on the dime for votes for this leader in the new police state.
BRITISH BROKER ROLE & INTRIGUE
The British have an historical knack to remain on top of the bank center heap. Earlier this year, when they announced the launch of a Chinese Yuan Swap Facility in London City, they stepped on the New York neck. Never in a million years would South Manhattan serve as the site of a Yuan Swap functionary post, not during a trade war that has a secret hot military war element being played out in Southern African near the horn (see Djibouti). The embattled British Petroleum will retain a 19.75% stake in Rosneft, which is to acquire the significant BP-TBK energy firm in Russia. Both Bank of America and Citigroup are brokering a $55 billion deal that will enable Rosneft to become the world's largest oil company. Several hidden messages are laden within the blockbuster global changing deal by Rosneft. By dissecting the flow, it is clear the BP executive staff is selling out, since not paying dividends. The collateral for the deal toward the loans will come from USTreasury Bonds. The Anglo-American bank complex will in effect be forced to swallow its own high volume of toxic paper. The tainted BP oil giant still reels from the tarnish of the Gulf of Mexico incident. Worse, BP is finally pushed out following its dubious role in the Yeltsin years of Russia. That difficult transition period in the 1990 decade saw a failed attempt by the Western Oil Giants to control Russia and its vast energy wealth. Putin from the KGB said no, and it did not happen on his watch. He assumed the Kremlin top post. Witness a potentially crucial London role in helping the Eurasian Trade Zone, perhaps buying favor to avoid the Third World. The broad exclusion of the United States guarantees a Third World flavor and stench for the North American core, with a Mad Max overtone and a Dachau closet.
DEVIOUS CYPRUS HIDDEN ANGLE
A piece of the financing for the Rosneft deal came from GazpromBank, which operates out of Cyprus. China has posted $30 billion in USTBonds as collateral within the massive deal, in return for ample future crude oil supply. Since Russia will receive a steady flow of payments from China from diverse energy pipeline supply, in the form of USTBond fund flow, the big debt to the London banks will be paid off by USTBonds. The payoff will be in the same terms of the huge collateral. Conclude that the Eurasian Trade Zone will have an energy pipeline and delivery system with loaded supply whose foundation is built upon USTBonds, sent back to the Anglo-American bankers to digest. The USTBonds are going home to die. As Lenin said, the rope to hang themselves will be bought by the capitalists. As footnote, some important toes were stepped on in Cyprus. Expect more entries to the morgue. The event opened the door to dangerous games of brinksmanship.
The timing of the Cyprus bank account tax and confiscation is curious, exactly when the extremely significant summit meeting took place between Russian President Putin and Chinese President Xi Jinping, where several big pacts were signed. One is left to wonder if the Cyprus fire was lit by the Europeans in order to attempt to disrupt the Moscow Energy Summit with heavy smoke. It bears repeating. The summit received almost zero Western press coverage, even though its details outline a sunset of the USDollar. Maybe because its details outline a sunset of the USDollar. The Jackass is left to wonder if the next important energy pact with the Eurasian Leader Duo (Russia & China) will involve Saudi Arabia, with a whiff of sunset for the Petro-Dollar defacto standard. Cyprus might indeed have been all about trying to save the Petro-Dollar, more than the European banks. Perhaps the Moscow Summit dictated the Cyprus timetable. The Italian elections to depose Monti, Spanish high level corruption and bankruptcies, and the French backtrack on massive spending cuts, these three nations point to urgency in disaster control. The bank account tax was thrust forward, unmasking the fascist bankers.
USDOLLAR HEGEMONY ENDING
The alternative system to conducting trade outside the USDollar system has had formative stages since the Lehman Brothers and Fannie Mae collapse. The Eastern trade leaders have been very busy quietly constructing a new system, with almost zero press coverage. They prefer to work in the background. Recent events indicate they have chosen the formal public stages and forums with wider visibility, starting with the February G-20 Meeting in Moscow. The true agenda for G-20 finance ministers was to hatch finally the USDollar alternative. The sleepy West appears not to be paying much attention. The initiatives to construct alternative platforms were given a major thrust in the last year since the Iran sanctions led by the USGovt banker and their henchmen in London. For the last 20 years at least, trade has followed banking. Nations of the world have been coerced for three decades into holding USGovt debt securities in order to make payment in trade, most notably in crude oil. With the Grand Arab Recycling accord struck by the 1970 decade leaders, the Petro-Dollar was born in return for a fantastic higher oil price. The oil-rich Arab royalty supported the USDollar by recycling trade surplus into USTreasury Bonds. The conventional practice dictated that global banking systems be dominated by USTBonds in reserves, serving as the banking foundation of debt.
New chapter to turn. The ongoing endless QE to Infinity has hastened Eastern trade leaders. The near 0% return from USTBond yields has motivated them to seek alternatives. They are horrified by the debasement of their hard-earned reserves, filled to the gills with USTBonds of shrinking value and low yield. The new trade settlement system based in Gold finance will turn the tables, as once more trade is to dictate banking. The combination of central bank hyper monetary inflation, big US bank fraud, security agency $100 bill counterfeit, and rampant criminality in the US financial system has motivated the Eastern nations to act. They have acted. The clear outcome is that the Western banking system will topple, since the East will be shoving the USTBonds back to Anglo-American shores for cemetery treatment. Trade should always dictate banking. The major trade partners no longer want US$-based trade settlement. Watch for the crowning blow in the Saudi response soon, since they always follow the winners.
THE CENTERPIECE PLAN
The new BRICS development bank will surely be supplied with USTreasury Bonds at first. The primary seeding is obvious. The emerging nations have collected huge reserves from successful trade over the last decade, primarily held in USTBonds. They do not wish to hold them, since undermined and debased by their own steward at the US Federal Reserve. The big Eastern nations have committed $100 billion for the fund, whose liquidity lies in USTBonds. On a gradual ramp, the USTBonds will be converted to Gold bars for the core bank asset in the development fund. Some of the 6000 metric tons of Gold bullion removed from London banks by the Eastern entities from March to July 2012 might find their way into the BRICS Fund core. The initial role of funding critical important projects like pipelines, communication networks, railroads, shipping ports, ships & trucks, perhaps even energy transfer ports, will become clear. The more overarching role of forming a (Eastern) global core central bank clearing house for payment transactions will be its second dual role. The emerging nations have had their fill of the USDollar control mechanisms with the SWIFT bank structure, the Intl Monetary Fund steering committee, and others. Finally, Gold Trade Notes would be used in trade settlement. Witness the new Eastern Fed for trade settlement in Gold bullion. Better to call it the BRICS Development Fund, since a major Trojan Horse for excreting USTBonds through its rectum, the London Boyz busily catching it.
The Gold core will facilitate the purchase of Gold Trade Notes much like the common letters of credit used widely in commerce nowadays. Like the Eurasian Russian-Chinese energy foundation, the development fund will be built on the back of USTBonds in toxic discharge. In the process, expect extreme hardball, shoving the toxic USTBonds back into US and British banks, as collateral for huge loans, as funds for repayment of huge loans, as funds to purchase Gold. In the process, the COMEX with LBMA appendage will be drained of its Gold, a future default assured. The Western gold marts will be unmasked as corrupt dens of empty inventory shelves. What comes is a BRICS Development Fund which will serve as a quasi global gold central bank for the expressed purpose of facilitating trade settlement in Gold. This is hardly just a fund to finance African rail projects.
THE CHECKMATE
A checkmate is in progress. It has four important elements.
1) The established Eurasian Trade Zone joins the massive Asian continent with a significant portion of the European continent, where three quarters of the world population resides. The trade zone has no visible presence or participation by either the United States or United Kingdom.
2) The BRICS Development Fund will control a giant sum of $100 billion. It will eclipse the role of the Intl Monetary Fund. The fund will facilitate numerous infrastructure projects. However, its other feature will be the shocker, as its core is transformed into Gold bullion. The conversion of USTBonds to Gold will nail the coffin in the isolated USDollar, a topic of Jackass scribbles for the last full year.
3) The flow of USTBonds will be from China to London, for financing the foundation of the Eurasian Trade Zone on its energy backbone with brisk energy flow. The collateral for large loans is to be USTBonds, as is repayment for loans to be USTBonds.
4) The transition from Yuan-based trade settlement via the numerous Swap Facilities in barter trade with key nations, toward Gold trade settlement via the BRICS fund that will feature a gold core, will launch the new Gold Trade Standard. It will not be a banker dominated currency type of Gold Standard. It will instead be a trade settlement Gold Standard that bypasses the hegemony of the Anglo-American banking system, the SWIFT rules, the FOREX gaming, and the IMF/World Bank harlots that harbor insects.
ZINGERS AS COFFIN NAILS
Many are the big signals and signposts with deep meaning. They line the path to the Third World. They are many, diverse, and unmistakable in importance. The gradual discard of the USDollar as global reserve currency, the gradual discard of the USTreasury Bond as primary banking system reserve asset, these events are in progress with a speed not seen in past months or past years, not since 2008. The level of intrigue matches the level of deception. Cyprus is not a one-off event, an isolated insignificant beer fart. It is a flash point event. The tipping point events could be bank runs across Southern Europe extending to Britain and the United States, including Canada. Numerous potential tipping point events can be identified, each powerful and ominous for the US Fascists in power. The USDollar is coming home to be buried and devalued. The USTBond is coming home to be buried and downgraded. The ring fence has been clearly laid out. The checkmate with the Eurasian Trade Zone and BRICS Fund is evident for the trained analyst eye. The devaluation will cause severe price inflation and supply shortages for the USEconomy. The end game has never been more clear. Follow the numerous highly important factors at work, each of which could produce a tipping point event. The dominos are aligned and ready. Inside the US Dome of Perception, they are less visible, yet still at work for extreme consequences. Some severe disorder comes this way. Expect some quantum leaps upward in the Gold price and Silver price, each controlled by unprecedented criminal activity in the financial markets.
* The BRICS Development Fund is the main event, to build a railway to a dark place for the United States, ring fenced for its toxic USDollar. Gone will be the corrupted motivated tools like the IMF and World Bank, with even Western central banks of lesser importance. The BRICS Fund could be the Trojan Horse (much like ObamaCare) that permits a vast conduit to be built, a seemingly innocuous let permitted entrance through the door, which permits USTBonds to be dumped like the trash.
* The upcoming Gold purchases by the BRICS Fund might be coordinated with the Shanghai Metals Exchange, to exploit the artificial low London Gold price. A COMEX bust can be foreseen.
* The BRICS should be careful about the new undersea global communication cable system. In 2007, foul play resulted in the Iranian cable being cut, the result of cooperative action by the USGovt and the little ally on the Southern Med that looks northwest to Italy.
* The tipping nation is Germany, which has had its fill supporting the slower wasteful debt-ridden Southern European nations. After cutting the cord, they will embrace the Eurasian Trade Zone. Evidence is the numerous heavy rail facilities that begin in Russia and end in Germany for commodity supply. There are two Germanys, one with old corrupt ties to the West, another with traditional reliable ties to the East. The Western camp is given light by the press, while the Eastern camp works behind closed doors shaping the next chapter.
* The Eastern Alliance (often discussed in past Hat Trick Letters) is slowly coming into view. The Russian and Chinese corridor will serve as the commercial foundation. The BRICS Development Fund will serve as the backbone. When Germany joins in more overt manner, the Alliance will be clear on the geopolitical stage. Then comes the Saudis to join, complete with protectorate role already offered by the Eastern Duo giants, who together will announce the end to the Petro-Dollar defacto standard.
* The political rebellion movement inside Germany is slowly coming into view. They wish to return to the D-Mark currency and to discard the Euro, an experiment in disaster, waste, fraud, and ruin. The movement is gaining traction. Discussion of the Nordic Euro (aka Teutonic Euro) has been heard on an increasing basis among its tribal cousins. Germany will side with Russia & China, and join the next chapter, after shedding its PIIGS pen trash.
* Both Russia and China purchase all their domestic gold mining output. If truth be told, their gold reserves are multiples higher than the official data indicates. Neither nation has any desire to cooperate with such critical disclosure, much like national trade secrets. Both nations are ready for the next chapter, with a few years of preparation in new modern systems, platforms, wiring, and gold held in reserve as core wealth.
* The ABN Amro news of halted gold delivery speaks volumes to the absent inventory linked to the corrupted London gold market. They have no Gold in inventory. They control the Gold price with paper leverage and suppressive techniques. This news halt out of the Netherlands should be viewed in context of the Germans, Dutch, and Austrians demanding their gold in repatriation. London has none. What gold bullion they do obtain comes from urgent shipments from the Roman Catacombs and the Basel hills of Switzerland.
* The nations across the entire West have citizens deeply worried about their savings wealth stored in the banks. They are beginning to realize their accounts are legally considered as bank liabilities subject to heavy loss upon bank failures. They will begin to remove the money from bank accounts in droves, but with capital controls imposed.
* The Cyprus bank account tax is the latest ignored shock wave warning to the West. It is described as a small tax to assure bank solvency, but it is a vicious transfer from sovereign source to depositor private source in funded bailouts. It is confiscation. The 2005 Bankruptcy Law in the US gave away the plan, with savings deposits subordinated under derivatives. The MF-Global episode has not resulted in much learned. It was the first test ride of the subordination rules in the new law. The Jackass warned in early 2012 of an MF-Global event for bank accounts and stock accounts. The event is coming very soon, but the public is very sleepy distracted and dulled.
THE HAT TRICK LETTER PROFITS IN THE CURRENT CRISIS.
Ty for your post. I dont neccesarly have the same vision but it is definatly an interesting vieuw on the current and future economic situation of the world. Personally i am not this negative about the us bonds though i do think rates will go up (and us bonds will go down) in the coming decade. America still has a good productivity and all of its products (besides cars lol) are sought after all over the world. As long as people can buy desirable products for their dollars and bonds they will retain a value. Rusia and china arent the biggest bondholders either, the us fed holds over 90% of all us bonds i believe so the effect of 10% flowing back to the usa might not be to big.China,s growing middle class should have a considerable demand for usa build luxery goods and the trade balance might become more favourable for the usa as a result of it. This would allow the bonds to naturally flow back to the usa, increasing their exports at the expense of a higher inflation and interest rate. Dont think england will give up the usa just yet. The ties between europe, england and the usa are not only economic, they also pretty much share the same ideologys and religion.
so fight_or_flight posted a text in the bottom of the last page (in spoilers). I read it, it seems to make sense but is it sensationalized? Is the outlook for the western world really as drastic as that text makes it out to be?
It's really hard for me to imagine the US$ becoming devalued to that extent, especially seeing as we produce many advanced and desirable goods. But at the same time, because I'm living in the US, I may be victim to some kind of illusion that the US and the western world portrays.
I think that that article fight_or_flight posted is utter nonsense from the mouth of a gold trader who has everything to benefit from weakened confidence in fiat currency. Nothing to see there. I mean, come on, it's from "goldseek.com" lol.
I see there was some curiosity and confusion about the second thing in my last post. Let me try to give a little background on it.
First, people don't really make money by advocating that someone should buy physical gold. To buy physical gold, you generally go to your local coin shop and pay with cash, or you go to a place like apmex. These places are dealers which both buy and sell directly.
Jim Willie is an analyst who sells a subscription to his publication at www.goldenjackass.com/subscribe.html. The goldseek website is just hosting something he's written. He isn't some random guy, he's been doing what he does for many years and gives great insight and predictions, that's why people listen to him.
There are quite a few other people who people pay attention to, such as Karl Denninger, Max Keiser, Tyler Durden, Peter Schiff, Jim Sinclair, Paul Craig Roberts, Gerald Celente, James Turk, and many many others. Generally they're analysts or write publications which people subscribe to, some manage other people's money, etc. These people have been doing what they do for decades and people listen to them because they're intelligent people who have a history of being right (and wrong), but overall they're generally pointed in the right direction and see what's going down ahead of time. All these people have different views, etc, but they're pretty much on the same page. That article I posted and you guys read on the previous page is not viewed as sensational by the people listed above, nor is it viewed as sensational by the many people on the internet who are plugged into the news.
Having said that, everyone knows the overall facts such as the checkmate described in the previous article, but everyone also knows the rules can change anytime. So while everyone views it as an accurate analysis, everyone also knows that the timetable is unknown, potential wars or big events are unknown, developing crypto currencies, and nobody sells their house based on a single piece of news or analysis. But we see the big picture and we slowly and diligently prepare for it in a responsible way, such as any fund manager would do. Having said that, everyone of these people see how things are accelerating at an ever increasing speed over the last decade, so the concept of what a responsible action is may differ greatly between their point of view and ours.
The important thing is to stay aware, pay attention to the trends we see, and be responsible to the environment as needed. One of the top places to stay on top of things that are happening daily is at http://www.zerohedge.com/. People like Jim Willie do more of the big picture stuff where all the details are put together.
For example, here's a guy who wouldn't call the article I posted "nonsensical". He may disagree with it potentially, but like I said, everyone is pretty much on the same page about what's going on when you step back and look at the big picture. + Show Spoiler +
He equates not being a profit of doom with not storing food. That's where the current sentiment is....preparedness discussion is about ammo and food now, not gold.
The problem is that those people are wrong most of the time, not just "some" of the time. Sure, the markets will allow you to ride some of your bad bets until they're better, like buying gold in the 80s and 90s. However, that just means they have nothing real to offer.
They have these elaborate explanations that connect isolated events together after the fact, not with diligence and journalism, but as conspiracy theories that people want so desperately to be true. They tote the same line of market collapse and the danger "nobody else sees," and posit that they KNOW the way the world works when a tiny portion of their message becomes aligned with reality for a brief moment. Like sitting at a red light, yelling out "green" every 2s and claiming you're psychic when you get it right after the 27th try. You're not psychic though, and these people don't actually know what they're talking about. They just found a way they can make money off of pretending.
As for the rest of your post it's pretty vague, and only time will tell. I bumped this thread after almost 5 years, when the "recession" first started. Five years later, it is now standard practice to take depositor's money to bail out banks (cyprus, new zealand, candada, italy, spain, and the US are all putting in place provisions for it or have already had provisions for it). I suppose in another 5 years we can bump the thread again and see what happened.
zero hedge has called 10 of the last 0 recessions. From 2009, every 4 months they will post "the collapse of the dollar is right around the corner" or "the collapse of the stock market is right around the corner" or "hyper inflation is right around the corner."
And it has always been standard practice to take depositor's money to bail out banks when the money is above the threshold of the insured deposit limit.
As for the rest of your post it's pretty vague, and only time will tell. I bumped this thread after almost 5 years, when the "recession" first started. Five years later, it is now standard practice to take depositor's money to bail out banks (cyprus, new zealand, candada, italy, spain, and the US are all putting in place provisions for it or have already had provisions for it). I suppose in another 5 years we can bump the thread again and see what happened.
Zerohedge is and always has been a site pushing a specific agenda and writing its own story. It's not about telling the story, but a story, just like Fox News and MSNBC.
And no, it's not standard practice to take depositor money in this way. It's happening in Cyprus because of some very unique circumstances, and a LOT of people, including economists and normally sane people, are not happy about it. Sub40APM is right in a sense though, if a bank defaults, depositors are expected to lose most, if not all, of their deposits above the insured amount.
I'm vague because these sources are bad in a general way. They're obfuscated in very, very pointed language and name-calling. I understand people like to come up with their own catch phrases and naming conventions, but that article you linked doesn't go 10 words without using some awful name for something, and they're all like that.
As for the thread itself, reading the OP, there is a lot that is wrong. At the very least, it's debatable. Stuff like the Fed and US Government being (mostly) responsible for the housing bubble is wrong, as well as the reasons banks were willing to participate in sub-prime lending.
EPT
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man im a cook, i wont ever be writing an essay on this hahaha.
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