Seeking Alpha

Lawrence J. Kramer

View as an RSS Feed
View Lawrence J. Kramer's Comments BY TICKER:
Latest  |  Highest rated
  • What Is Austrian Business Cycle Theory? [View article]
    DLC -

    I disagree with just about every thought in your post, but I am going to leave it to others to assess your arguments.

    "I would like to see you give data on how slow deflation hurts the economy-especially the middle class."

    When has it happened long enough to be tested, and what would the counterfactual control be? You are free to draw whatever inferences you wish from my inability to do the logically impossible.
    Apr 24 06:53 PM | Likes Like |Link to Comment
  • What Is Austrian Business Cycle Theory? [View article]
    Sorry, wid, but specific price declines are not "examples" of deflation. All of those price decreases occurred during periods of INFLATION. It is good when the number of hours of work needed to buy things declines. That's not deflation either, because it can happen via rising wages. Deflation - money increasing in value, as opposed to labor increasing in value relative to the goods laborers buy - retards growth. Always and everywhere.
    Apr 24 05:47 PM | 1 Like Like |Link to Comment
  • The Fed Is Backed Into A Corner With No Way Out [View article]
    "How does the CFMA involve the 2008 crash at all?"

    I have in mind the expansion of the derivatives market and preemption of the insurance laws, gambling laws, and bucket-shop laws. Credit default swaps - insurance contracts without insurable interest (always a recipe for disaster) - were front and center.

    "...when you said 'there is no escaping the effects of globalization without redistribution,' what sort of redistribution did you have in mind?"

    Why would I have to have any kind of redistribution in mind. There is no escaping cancer without a tumor-killing mechanism. Do I need to have a mechanism in mind to make that claim?

    Everyone here thinks everyone else has an agenda, a political program that they are trying to defend. I don't. I'm looking for a political program to support, and this is as far as I've come: globalization leads to capital intensity in developed nations, which leads to income and wealth concentration, which leads to a decline in aggregate demand, which leads to a loss of profits, which leads to less wealth, concentrated as it may be. I believe the best way to break this chain is for the wealth to be de-concentrated, so that others will get it and spend it, making it greater, perhaps especially, for those who own the means of production. And that's without even getting into the issue of social unrest.

    As for the precise mechanisms, I have suggested that greater and earlier Social Security, free universal health care, major tax incentives for stay-at-home parents, and a guaranteed annual income in lieu of welfare and the minimum wage. But I'm open to arguments that these devices would not work, and I certainly know how daunting they are to establish, given the education and intellectual level of our Congress.

    All of these ideas are in response to the obvious question about what sort of redistribution might work; they are not things that I had in mind in observing that SOME sort of redistribution is necessary. That realization came first, the programs flow from the need, not vice versa.
    Apr 24 02:59 PM | 2 Likes Like |Link to Comment
  • What Is Austrian Business Cycle Theory? [View article]
    "So, traffic clusters in the intersection yet it flows nicely, regardless."

    It is interesting to note that "Intersection" is not a prisoners dilemma game. In a PD game, Player A's outcome is always better if he defects than if he does not. If Player B does not defect, Player A wins. If Player B defects, too, then Player A gets a smaller punishment than if he had not defected. So player A should defect unless he has reason to believe - knowledge of coordination - that Player B will not defect.

    At an intersection, Player A can defect by jumping his turn, but if Player B goes forward, too, the outcome is worse for Player A than if he had not defected. This state of affairs makes coordination unnecessary: both drivers simply need a protocol to which they can safely adhere - the guy on the right goes first, say. Enforcement is unnecessary, because there is little to gain and much to lose by violating the rule.

    Markets are more PD-like than intersection-like. Indeed, most intersection-like business protocols are anti-trust violations. Coordination by (representative!) government is thus usually preferable to cartelization.
    Apr 24 11:33 AM | 1 Like Like |Link to Comment
  • What Is Austrian Business Cycle Theory? [View article]
    "That's a great point."

    Yes, but our author isn't making that point. He's contrasting decisions made in response to market signals with decisions made in response to Fed signals. Being an anti-government zealot, LC assumes that the Fed pulls its rates out of its butt, when in fact, it is merely streamlining the process whereby, as you say, the banking system accommodates the market pressures in the real world.

    The Fed is like a weather vane: it assesses the market then points the way to higher or lower interest rates. Yes, the Fed FORCES its conclusions on the banks, but that's not very important, because the market also reacts to the Fed's moves, and the Fed corrects its errors in response to the market's reaction, so that, whereas the Fed may be wrong, it is rarely wrong for very long.

    The Fed's actions are part of a dynamic process whereby market conditions are transmitted to the banking industry. At the same time, the Fed acts as coordinating agent for all of the players in the market game. These players will do best if the monetary system features moderate, predictable inflation. Under that condition, spending and investment are optimal for growth. But coordination is not a market phenomenon. On the contrary, coordination is centrally determined by definition.

    Coordination is not "central planning," at least notas that term is pejoratively used by the right. Baseball has rules. (Even MMA has rules.) No one expects the teams to negotiate on game day where they will put the bases. That's what the Fed does: it says "Ninety feet. Play Ball!" One can call that "central planning" if they wish, but that's only because it's a free country, and being wrong is not a crime. (And if the 90 feet didn't work out, if the game weren't viable, if fans didn't show up, the "Fed" would change the rule. So just how "arbitrary" is the 90-foot distance in any real sense?)
    Apr 24 09:26 AM | 2 Likes Like |Link to Comment
  • What Is Austrian Business Cycle Theory? [View article]
    "In fact a slow deflation with a trusted currency (or media of exchange), coupled with trust in other market participants, creates a constant reasonable growth."

    Nonsense. Not only do you have no data to support this, but you have no narrative. I have explained, over and over, how decreasing prices affects the value of collateral, the risks of lending, and the incentives for hoarding money. All common sense says that there is less investment, less spending, less risk tolerance, and less growth when people can make money by putting their cash in a drawer. Indeed, Say's Law goes kaput when the holder of money has no incentive to use it.

    What's your story? How do falling prices cause more activity? What entrepreneur tries to find a cheaper way to make something that is getting cheaper every day already? What seller of goods rushes out to spend his revenue on something else lest his money lose value? There is no plausible EXPLANATION for the phenomenon you claim applies. None. Just the occasional anecdote where the forces for growth overcame the headwind of deflation. And that's hardly a plus for deflation.
    Apr 24 07:57 AM | 3 Likes Like |Link to Comment
  • Inflation Is Less Than You Think (Unless You're An Economist) [View article]
    "The argument could be made that inflation helps debtors at the expense of savers."

    I'm a saver, and I invest in things that things that will perform well in real terms if the expected level of inflation occurs. I am not, however, a hoarder. I do not put my money in a drawer. Inflation separates such fools from their money, which is a service to us all.

    I'm also a debtor, but my damn lenders seem to have priced credit to take into account the inflation that they anticipate. The only thing inflation does for me is force me to amortize my loan more quickly in real terms by paying a portion of it off with each interest payment: if I pay interest only, the value of my outstanding debt falls, just as if I were amortizing it, and my interest payments exceed the real cost of credit, just as if I were repaying principal. So the inflation benefits me by getting me out from under more rapidly, but it also benefits my lender by accelerating the reduction in his risk.

    But all of that is negotiated, so predictable inflation should not benefit either party to any transaction as against the other. Rather, inflation or deflation that deviates from at least one party's expectations creates winners and losers. When the Fed announces, however, that it intends to achieve a certain level of inflation, parties are free to negotiate with respect to that level, and I don't believe that anyone is thereby being "taxed," except to the extent that a new target disappoints prior expectations with respect to deals already made.
    Apr 23 08:20 AM | 1 Like Like |Link to Comment
  • What Is Austrian Business Cycle Theory? [View article]
    "Unfortunately most historians and economists are conditioned to believe that steadily fall prices must [emphasis original] result in depression: hence amazement at the obvious prosperity and economic growth during this era."

    Deflation always retards growth. Anyone not suffering terminal confirmation bias can only wonder how stupendous our growth might have been - See China, 2000-2010 - if the US were not burdened by deflation in the late 19th century. The heart of a post-war boom and incredible innovation in transportation and communication, and 6.8% per annum is all we could muster? From 2000 to 2010, China never grew by less than 8%.

    And targets matter, because targets set expectations. No one was TRYING to create deflation in 1869. If you cannot count on deflation, you don't invest for it. But if the central bank makes deflation a policy choice, the effect on behavior will be dramatic. Likewise, targeted inflation brings forth investment, as simply hoarding money costs money.

    The old saw is right: the past is a foreign country; they do things differently there. Inferences from pre-Ford, pre-Fed America are simply misplaced, which is why they are drawn only by those who are really, really desperate to support a conclusion that common sense and modern practice render untenable.
    Apr 22 10:51 PM | 1 Like Like |Link to Comment
  • The Fed Is Backed Into A Corner With No Way Out [View article]
    dlc -

    I don't understand what "use value" and "real value" mean. I do understand "replacement value," but not the others.

    If houses cost less than replacement cost, it's because houses are not new. An existing house comes with the risk that it will fall apart on account of age, the risk of termites, the risk of asbestos or radon, and all the other risks that are implicit in aging inspection. A new house may be shoddy, but that risk is priced into its selling price, and if that's higher than the selling price of an existing home of similar size and features, then the market has simply weighed the risks that way. I don't think an abundance of money has any effect on it.

    As for silver selling for less than extraction cost, who is actually extracting under those conditions? If anyone, the loss is a form of capital investment in the enterprise, keeping the workers trained and available, the equipment greased, etc. Shutting down is expensive, perhaps moreso than operating at a loss, at least for a time.

    If the price of precious metal falls, it's because it's no longer needed in such quantities as before. Fiat money can do that to a metal. But I don't see how that makes silver any different from buggy whips.

    But maybe you have some other phenomenon in mind.
    Apr 22 04:20 PM | Likes Like |Link to Comment
  • The Fed Is Backed Into A Corner With No Way Out [View article]
    Tack -

    I agree, which is why Treasuries are the drug of choice for rehypothecation. But Mr. Clinton dried up the supply of Treasuries with his much-loved surplus, making RMBS the next best thing. If Congress had had the good sense to put the peace dividend to work by rebuilding the infrastructure with borrowed money, or if Messrs. Rubin and Summers had paid the least bit of attention to Brooksley Born and not permitted the awful CFMA 2000 to slouch all the way to Washington, the crisis might very well have been averted.

    Of course, mortgage rates would have remained higher, housing employment would have declined, and the economy would still have sucked - there is no escaping the effects of globalization without redistribution - but the landing might have been softer and the realization of the solution come sooner, not to mention that the bridges wouldn't be falling down. Anyway, your point about the awkwardness of real-estate collateral provides a wonderful window into the seamless web of finance.
    Apr 22 11:54 AM | 1 Like Like |Link to Comment
  • The Fed Is Backed Into A Corner With No Way Out [View article]
    "when a mortgage is created it the house equity that is the basis of the loan and the promise to pay is trust."

    I think it's more complicated then that. If your claim were true, then the only reason for lenders to underwrite carefully would be to avoid the cost of foreclosure. But if a lot of people with bad credit get loans, then the glut of foreclosures reduces the value of everyone's equity, impairing all loans. Thus, each loan's underwriting raises the value of all loans by protecting all lenders against a tragedy of the commons as occurred in 2007.

    "Then the mortgage is used as an asset to back another loan. And again and again. So there is a lot of speculation using every penny of that basis."

    I don't believe that follows. When my bank sells my mortgage to FNMA, FNMA steps into my bank's shoes, and my bank goes off the loan entirely. It's the same loan with a different lender. The same is true when FNMA packages the loan into a pass-through security: same loan, different lender. The loan-to-value ratio is not affected, and the equity remains intact.

    The practice of rehypothecation is something different. Rehypothecation is fractional reserve banking applied to collateral. If a bank makes 1000 well-underwritten secured loans (the collateral is fungible paper, including RMBS, but not real estate itself), the odds of default become actuarially predictable, and the bank need only hold enough collateral to protect it against the aggregate default rates. So, for example, if a bank's expected default rate is 1%, and it holds $1B in collateral against $1.3B in loans, the bank is overcollateralized, even though no single loan is overcollateralized. The bank can then LEND the collateral to someone else who needs to borrow but does not have the collateral required by its lending source (but does meet the rehypothecating bank's credit standards).

    If our sample bank lends $100,000,000 of collateral to customer so that the customer can obtain a loan elsewhere, the bank's loans increase to $1.31B, and its collateral drops to $900M. Assuming it applied the same quality of underwriting to the collateral loan as it does to all others, it is still more than adequately collateralized, and all of its loans are equally sound on a statistical basis. Eventually, the bank can get down to the point where its collateral on hand matches its risk of default, with whatever cushion is necessary to assure confidence in its solvency.

    It's useful to look at the interplay between good underwriting and overcollateralization. The insistence on sound underwriting is driven not by worries about the borrowers' credit - the collateral takes care of that - but by the need to protect the collateral itself. The quality of underwriting necessary to protect the collateral makes the collateral itself largely redundant. As a result, the loans are not overcollateralized, but the book of loans IS overcollateralized. It would, therefore, be wasteful for banks NOT to rehypothecate, just as it would be wasteful for banks not to engage in fractional reserve banking.

    (My favorite example is the hobo who makes cigarettes out of found butts. He can make one cigarette out of four butts, but he can make five cigarettes out of sixteen, because after he has smoked the four he made from them, he has four left to make a fifth. One can ask all day where this fifth cigarette "came from," but the question makes no sense. It didn't "come from" anywhere, but there it is...)

    So, I end up where I started, seeing no inherent difficulty in too much credit being created against too little "basis." Rather, I see only the short-term problem of whether more credit is being created, with or without collateral, than there are goods here and now to buy with the money.
    Apr 22 11:04 AM | 1 Like Like |Link to Comment
  • Sharing Productivity Gains With Joe Sixpack [View article]
    "Such relatively simply changes in the tax system would greatly reduce advanced economy unemployment, improve government revenue, and domestic demand."

    Maybe, maybe not, but I can't fault the logic. The issues is that all sales taxes suppress sales. Income taxes, being contingent on the bottom line, attach at the most efficient point by not adding to the risk of doing business. Whether the decreased cost of producing here would offset the increased cost of selling here is a matter of fact, and I have no reason to disagree with your assessment. But the robots are still coming.

    Your other suggestions seem to me to run into the fallacy of composition. Making everyone more employable does not necessarily increase employment. On the contrary, it may merely depress wages. Sexism was great for wages. We can blame foreign competition for the decline of wages, but we must also take into account the increase in the labor participation rate just as the need for labor was peaking. (In economic terms, women's liberation was a 1970's response to a 1960's problem.) No, I'm not advocating that anyone be made to do anything, just noting that the market doesn't care why there are so many mouths at the trough. But again, these are engineering issues. You may be right that they will help.
    Apr 21 06:05 PM | Likes Like |Link to Comment
  • The Fed Is Backed Into A Corner With No Way Out [View article]
    dlc -

    I am still struggling, so let me say some general things that may or may not help.

    First, the mortgage confuses things. Let's make the loan a credit card debt "backed" by nothing but your promise to pay. A good banker will want evidence that you will earn the money to pay the bill by making something for sale.

    I think you are hovering around a principle I often put forth: money paid for real goods implies that there are goods to be bought. If there is a certain amount of money in circulation, and that money came into existence in exchange for goods and services, then the economy's capacity to produce goods and services is at least as great as the money supply (greater, actually, considering the velocity of money). Presumably, that capacity has not collapsed, which means that there probably exists enough capacity to enable me to spend any such money that I receive. That is a crucial aspect of a credible currency.

    The question you seem to be raising is whether money created and distributed solely in exchange for the promise of money to be paid later instills the same confidence in the currency, as the production necessary to support that money has not yet occurred. Two separate issues arise. The first is the underwriting competence of the lender. If the borrower cannot repay the lender, that will imply that there is more money in the economy than capacity, because some of it was created in exchange for nothing - not in exchange for a promise, but in exchange for a BROKEN promise. If, however, the vast majority of debts are repaid, one can infer that the economy created enough goods and services to enable the debtors to service the debt, so the currency still kicking around is probably spendable.

    The second issue seems to me closer to your concern about the ledger money overwhelming the earned money. No matter how much capacity borrowers may have to produce goods and services over the life of their loans, the money they borrow is spent immediately. Good underwriting implies that when the loan payments (including periodic ones) are due, there WILL BE enough capacity to produce enough revenue to cover them. But there is no implication from the making of a good loan that there exists at the time of the loan enough capacity to absorb the money created by the loan. This is where cheap credit creates inflation: whether or not the loans are repayable, the money lent chases too few goods at the time of the loan. The result is inflation and, in some cases, that inflation causes business plans to fail, and so a boom becomes a bust.

    The Fed's job, as I see it, is to know when credit is so cheap that people will borrow more than the economy can sell right now. When that happens, the Fed must tighten lest the evils you see occur. But when the economy is weak, and borrowers are not outstripping supply, and inflation is not occurring, that result - the lack of inflation - implies that the ledger money is not in fact overwhelming the earned money. Thus, I see nothing inherently bad in any amount of well-underwritten loans, but I do see how, at any given place and time, a plethora of such loans could cause an inflationary boom-bust cycle. I'm just saying that here and now is not such a place and time.
    Apr 21 05:52 PM | 1 Like Like |Link to Comment
  • Sharing Productivity Gains With Joe Sixpack [View article]
    "You place your bets on reluctance borrowers, while I place mine on reluctant lenders."

    Not at all. I place my bet on the lack of qualified borrowers. That's a combination of reluctance to borrow and inability to borrow, which shows up as reluctance to lend. All I'm saying is that higher rates won't fix it.

    You haven't seen me say anything nice about the wealth effect. I think people see right through asset inflation. But I do believe the Treasury should not pay more for money than the rate of inflation unless the government wants to discourage spending. That view supports ZIRP and QE without even a nod to the wealth effect.

    I don't see any disagreement about the merits of saving. Where have I disparaged saving? I'm all for subsidizing it with tax breaks, not with higher interest rates. I do disagree with the specific claim that asset price inflation creates a leveraged debt trap which forces central banks to maintain asset inflation at all cost. Or, if it does, it's because banks are not sufficiently regulated to protect them from themselves. In that case, they need to be more tightly regulated. Raising rates is not the answer.

    I also disagree that higher rates would result in higher investment returns. When money is expensive, capitalization of capital-intensive production becomes more expensive, buying consumer durables becomes more expensive, demand falls, profits falls, investments become more risky, and nothing good comes of it. If rates rise naturally, because good credits are competing for money, then capital becomes expensive, and returns improve. But raising rates to simulate that effect is like retouching the x-ray to remove the tumor.

    We can and do boycott sweatshops, but we do not boycott all imports made by people earning less than a living US wage. That approach is sometimes suggested, but the only good argument for it is that we should sacrifice the benefits on moral grounds. The economic argument - it creates jobs here - might have made sense as little as forty years ago, but now it doesn't, because the real challenge facing today's American worker is automation.

    Foreign workers merely channel the inventors' and programmers into certain areas. There exists an array of tasks for which cheap foreign labor has made automation not worth pursuing. If we boycott foreign labor, we will get machines sooner. That may be a better state of affairs than exploiting foreign peons, and some of us may sleep better on account of it, but I do not believe that it will provide any long-term solution to the obsolescence of unskilled and semi-skilled labor.

    I think you err in trying to find grand philosophical differences between us. From my perspective, it appears that we disagree on mechanical issues such as the extent to which the Fed actually controls anything - I see the Fed Chair as King Canute - or whether higher rates are the best way to help savers, if we believe they need help. These are not philosophical conundrums; they are much closer to engineering problems.
    Apr 21 04:23 PM | Likes Like |Link to Comment
  • The Fed Is Backed Into A Corner With No Way Out [View article]
    dlc -

    I was not being adversarial. I was saying that I do not understand your claims. I still do not understand them. Your explanations don't clear up the matter for me. I don't understand the distinctions you make or their relevance. Consequently, I cannot understand your questions, which I thought were rhetorical when I read them the first time.

    You can try again or not. That's up to you. All I can say is that I don't have an opinion on whether you are right or wrong, just on whether you have said something understandable.
    Apr 21 03:58 PM | Likes Like |Link to Comment