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Lawrence J. Kramer  

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  • The Federal Reserve Continues To Misinterpret The Economy -- Take Advantage Of It [View article]
    "As an economy's debt load grows..."

    Can you make this argument without metaphors whose only value is connotative? As my property becomes more valuable, the wealth I can monetize by pledging it grows, too. As my business becomes more reliably profitable, the value I can monetize by selling bonds and paying myself a dividend grows, too. Are either of those actions an addition to my "debt load"? Or are they just how wealth becomes purchasing power most efficiently (i.e., without a proven manager - me, by hypothesis - having to give up management of the monetized asset)?

    Bad credit is bad credit. The crisis of 2008 did not arise because we issued too much debt. It arose because we issued too much BAD debt - debt secured by property that morons thought would continue to increase in value, debt that credit-card companies foolishly thought collectable enough. Bad UNDERWRITING, driven by poorly organized incentives caused the mess. Not "the debt load." Mortgages taken out in 2005 can be refinanced today at half the rate. People with good credit have won - they are "increasing their debt load" all the time. More power to them.

    Credit is just wealth as perceived by an underwriter. Garbage in, garbage out. If the underwriter is stupid or corrupt, too much wealth is imagined, and bad things happen. But "debt" does not explain the "debt crisis" anymore than a glass of wine at dinner explains drunk driving fatalities. We tried outlawing alcohol because too many men were getting too drunk, but it did not work. Because alcohol was never the problem - drunkenness was the problem.

    Your diagnoses needn't be any sharper than your tools. To a man with a hacksaw, everything looks like gangrene. Or Weimar.
    Apr 4, 2013. 09:57 AM | 1 Like Like |Link to Comment
  • The Federal Reserve Continues To Misinterpret The Economy -- Take Advantage Of It [View article]
    "Thanks for helping make my point Larry."

    Happy to help. Not having a point, you will need all the help you can get,.
    Apr 4, 2013. 07:52 AM | 1 Like Like |Link to Comment
  • Concerns Raised Over Fed Distortions: Or How Do They Bail Out A Bailout? [View article]
    The issue is bank capital. If our banks were adequately capitalized, then users of credit who HAVE good credit would be able to borrow money from banks with capital at risk. In the absence of bank capital, the users of credit with good credit have to look elsewhere. Unfortunately, "elsewhere" means intermediaries with little or no skin in the game and a taste for volume not prudence. These are the same incentives that brought us liars' loans. (Yes, some banks made those loans, too, but they made them as brokers, not as bankers, so they might as well have been fund managers. Either the lender is smoking OPM or he's not.)

    I owned some of the dotcom funds that went splooey in 2000. "HOW DUMB COULD THOSE MANAGERS BE?" I asked myself. That's when I learned that incentives trump brains all day long, because incentives affect confirmation bias. There is no INHERENT reason why junk-bond intermediaries cannot be as prudent as banks, but there is plenty of reason to worry that they WILL NOT be as prudent, because it's not their money at risk. Certainly, some of the bonds in the bond funds represent loans that better capitalized banks would and could have made. But the capital isn't there, so the loans get mixed in with the garbage, raising the interest rate and raising the risk.

    How, then, do we recapitalize the banks so that lenders will have skin in the game and capital will be allocated carefully to our mutual benefit? We cannot just give the banks money. I think it would make more sense to turn the funds into virtual banks. I assume some regulatory and maybe tax-law changes would be required as regards investment companies, but classes of stock in bond funds seem to me a good idea, with the high-risk class getting to control the board and the compensation of the managers. Underwriting discipline would emerge naturally from the risks involved.

    Right now, our financing industry faces a tragedy of the commons in the risk space. Not enough people want to own bank shares to make banks big enough to provide enough credit prudently. Instead, the people band together in funds that have no underwriting discipline, where no one takes the junior risk, but, as a result, there is no one at enough risk to mind the store, so quality of credit suffers. I don't want to defame any honest fund manager who is doing his damnedest to make good loans. I'm just saying that if we didn't think risk were essential to prudence, we would long ago have abandoned capitalism as a system.

    I keep coming back to Red Smith's line about baseball: 90 feet between the bases is as close a man has come to perfection. The point is that a game does not HAVE to work; the ends do not have to meet. There does not have to be enough risk capital to back enough prudent lending to meet the demand of all of the borrowers to whom it would be prudent to lend. On the other hand, markets do have a way of discovering optimal equilibria if they are given the chance. The question then becomes whether the law is enabling or impeding that discovery process. The answer is not always clear, because resolving tragedies of the commons is one of the things that the law does best, but only if it gets it right.

    So I'll stop and let others figure out how we get ninety feet between the guy with the money and the guy with the credit. It's not easy, but I believe it IS the problem that needs to be solved..
    Apr 3, 2013. 04:04 PM | Likes Like |Link to Comment
  • The Greatest Collapse In History? [View article]
    So it turns out I don't even know what I read in the papers. So be it.

    My higher altitude view is that a country should bail out its banks' creditors to the extent that its ability to attract imports depends on money deposited there being safe. One of the reasons the US can run so large a trade deficit is that the resulting dollars are deemed safe, and they should be safe, I would argue, because we benefit from the world's vendors wanting to reach our customers and being willing to accept our money. Had we not "protected the brand" in 2008, the country risk of selling to us would have driven up the price of everything we import.

    To the extent that the money in ANY country's banks is not money acquired by selling things to that country, the country has no national interest in protecting the deposits. The kleptos are just a model of the depositor not worth the trouble to bail out. Who else falls into that category, and where else the kleptos put their money are distinct questions.
    Apr 3, 2013. 03:25 PM | 2 Likes Like |Link to Comment
  • Maxwell's Misreported Revenue: More to Come [View article]
    Mark -

    Isn't the question whether the humans at MXWL are up to the task of exploiting the technology? Maybe they go broke and someone buy the IP. It takes more than product to make sales and profits.
    Apr 3, 2013. 01:01 PM | 1 Like Like |Link to Comment
  • The Federal Reserve Continues To Misinterpret The Economy -- Take Advantage Of It [View article]
    Nappie -

    I am not claiming superiority. I am claiming bargaining power. If you don't know the difference, things will "seem like" and "smack of" all kinds of nonsense, but that won't make them nonsense.

    As for debt, Americans may be overextended at the household level, although that seems to be abating. The GOVERNMENT does not borrow money. The government prints money, destroys money, and, to control inflation, manages the opportunity cost of spending money. Future generations have no stake whatever in the process except insofar as it keeps the polity running.
    Apr 3, 2013. 12:56 PM | 1 Like Like |Link to Comment
  • The Federal Reserve Continues To Misinterpret The Economy -- Take Advantage Of It [View article]
    "How did that work in the Weimar Republic, Germany ."

    Next time we lose a war and have to pay reparations in gold, I'll be sure to look it up.
    Apr 3, 2013. 12:44 PM | 1 Like Like |Link to Comment
  • The Greatest Collapse In History? [View article]
    "There was no reason for uninsured depositors to take a hit,"

    I meant "insured" depositors. Sorry.
    Apr 3, 2013. 09:51 AM | Likes Like |Link to Comment
  • The Greatest Collapse In History? [View article]
    How did Cyprus get in this muddle? Banking is a service. You do it INSTEAD of fishing. Just ask the Swiss.

    My first SA post argued that the US got into its mess because our banks could not figure out how to invest the money that piled up in the accounts of our trading partners. We "solved" the problem by pretending that our real estate market was more valuable than it was (because our homebuyers were more creditworthy than they were). That ended poorly.

    The Cypriot banks apparently hold Russian kleptocrats' money. One can see the banks making bad loans to try to make that money earn something. Apparently, Greek sovereign debt was their version of the liars' loan. When the Greek banks' creditors were hit in the Greek rescue, the Cypriot banks were among them.

    The US had the firepower (literally, I think) to just print its way out of its mess, at least so far. But Cyprus isn't even a monetary sovereign, and the Russkies are not in the EU, so there is no way in hell the Eurozone is going to bail out the oligarchs. (Banks don't get bailed out; their creditors do.)

    There was no reason for uninsured depositors to take a hit, and the EU fixed that in the final settlement. But I believe the identity of the true parties-in-interest - the Russians - is key to nature of the "rescue."
    Apr 3, 2013. 09:16 AM | Likes Like |Link to Comment
  • The Federal Reserve Continues To Misinterpret The Economy -- Take Advantage Of It [View article]
    "Perhaps Mr Bernanke and the govt. should now take a Hayek stance, i.e. hands off "

    What does "hands off" look like? It's an illusion. The Fed is the government's banker. REFUSING to lend to the government would not be "hands off." It would be hands around the throat. There simply is no posture by the Fed that can properly be called "doing nothing." There is only "doing what you were doing before you did what you are doing now." And that's not nothing. It's just something else, something that people who make such decisions for a living have concluded isn't as good as what's being done now.
    Apr 3, 2013. 08:56 AM | Likes Like |Link to Comment
  • The Federal Reserve Continues To Misinterpret The Economy -- Take Advantage Of It [View article]
    Coinsk -

    That the NYT has the open-hearted stupidity to treat David Stockman as if he had a clue is not my problem. The man is the poster-child for ignorant ideologue.

    There is no Ponzi scheme, or, if there is, it has nothing to do with our ability to pay our debts, since we can print money. The only "Ponzi" issue is whether the holders of dollars will decide to "redeem" them by purchasing goods and services from the US. Considering the mercantilist posture of our trading partners and our excess capacity, all I can say is that we should be so lucky.
    Apr 3, 2013. 08:29 AM | 1 Like Like |Link to Comment
  • Maxwell's Misreported Revenue: More to Come [View article]
    Maxwell FUNDED the UCLA work.

    Now what?
    Apr 3, 2013. 12:15 AM | 3 Likes Like |Link to Comment
  • Quantitative Easing Will Never End [View article]
    Casca -

    I have read Ford's book and I do think his solutions are utopian. But that does not make him wrong about the problem. I am very much in the post-work economy mode. I just didn't find Ford's answers satisfactory. I have seen Cowen's book, but not read it. I will take a look, only because the subtitle contains some optimism.

    My own efforts in this area are in an instablog I did a couple of years back. There are parts of it I'd change now, but the bulk is still where my head is.
    Apr 2, 2013. 08:21 PM | 1 Like Like |Link to Comment
  • The Federal Reserve Continues To Misinterpret The Economy -- Take Advantage Of It [View article]
    "Even long-term treasuries are liquid."

    Yes, but because they fluctuate in value, they are a poor repository of money that one might wish soon to spend. If we are looking at the extent to which "liquidity" is an indicator of near-term spending, I would assign a higher weight to T-bills than to long bonds. But it is a matter of degree.
    Apr 2, 2013. 06:35 PM | 1 Like Like |Link to Comment
  • Quantitative Easing Will Never End [View article]
    This long comment is addressed to those who take the trouble to read the article to which Casca123 links. I disagree with much of the conclusions, but I am in sympathy with the author's approach, and think the article raises some important questions in an important way. What follows assumes that the reader has read the paper.

    1. The demographic dividend is not "reversing." Many managers preach "work smarter, not harder." The American two-earner-family business model was a classic example of working harder, not smarter. Ceteris paribus, the worker who has a home-making partner is more productive than the one who does not. Yes, statistical "output per capita" did rise when more capites started working – especially once work became something that could be done as much by brain as by brawn – but someone STILL had to do the laundry and make the meals and wash the dishes.

    Much of that output per capita consisted of paid work as other people's "wives." The nanny, the housekeeper, and the vendor of prepared foods is part of output per capita. But they are subtractions, not additions, from the net improvement in the economic quality of life. I am leaving sexual politics aside. We can concede arguendo (but only so) that the lot of American women has improved in the past fifty years and still speculate that their entry into the workforce has pretty much come at the cost of downward pressure on wages and the failure of ethnic minorities to advance. (The REAL demographic dividend may lay ahead as the zero-earner couples start to realize that it is the two-earners who are their economic nemeses.)

    2. I don't dispute the bad news about how badly we are doing at educating our people. But read the first fifteen pages of the paper, and see if our failures there are not an effect rather than a cause. I believe in the importance of cultural literacy, creative thinking, a love of learning, and all the rest. But it is not at all clear how those things make the third industrial revolution more revolutionary or how it brings on a fourth. Or, maybe the claim about the third industrial revolution is simply wrong. Why DOESN'T the internet make higher education cheap enough for anyone who wants it to get it? And, if it does, are we not underestimating the power of "running info" as a game-changer like running water?

    3. I agree completely that rising inequality is a serious problem. But there are two levels of inequality. The first arises from the aforementioned "liberation" of women, which suppressed wages and removed industrial incentives from bringing ethnic minorities into fuller participation while labor was still a valuable input. "The Bell Curve" pretty much covers the social and economic implications of lawyers marrying lawyers not secretaries. Mobility falls, and inequality is amplified.

    But gender despecialization was only a temporary driver of economic inequality. The more important force is that danged third industrial revolution, which made labor itself unnecessary, starting with the most expensive labor, i.e., educated Westerners. The second industrial revolution put people to work; the third put electrons to work. Each just tapped the resource with the lowest opportunity cost. In the short run, the eagerness of our women to whitewash Tom Sawyer's fence kept people employed, but eventually, even our women would not work more cheaply than Chinese laborers, and, soon enough, no human will work as cheaply as robots. The money is accumulating in the hands of capitalists because that's just how a labor-free productive process crumbles the cookie.

    Inequality is indeed a "headwind." It's hard to sell to a market of the impoverished, and social unrest is a pain in the capitalist butt. The answer, however, is obvious: redistribution. I don't mean that HOW to redistribute is obvious. Quite the contrary, income inequality is a daunting problem precisely because we lack the POLITICAL technology to redistribute the eggs without killing the goose. But that's where our next set of innovations needs to be: in the political and social realm, getting past the biblical curse of earning our bread by the sweat of our brow. It can be done. But will it?

    4. I think Professor Gordon is wrong about globalization as a "headwind" to American growth. Rather, globalization reaches the higher-hanging fruit of comparative advantage, which means that we will be, in the aggregate, richer for it. In other words, the globalization headwind is just the income inequality headwind viewed from a different window. Redistribution of its benefits is, therefore, the solution to the problems it creates.

    5. Energy and the environment will at least CHANGE the technologies by which we grow, but it is not clear that they will change how we grow. Why isn't a pollution-control device an "output"? Why isn't the guy who builds it a customer for the robot that makes things for people who have jobs? Do we need a "carbon tax"? Maybe, but there is no reason why it could not be rebated. Indeed, THAT is one of the "redistribution" devices available for dealing with income concentration. There is no reason why a carbon tax would have to reduce disposable income in the aggregate.

    6. As regards debt, the good professor is right about household debt slowing demand, but we all know about the liquidity trap and the paradox of thrift. They are not permanent conditions. As for government debt, a good dose of Modern Monetary Theory is all that is required. There is no there there except in the minds of those who want the sky to be falling so badly that they won't look up and see that it has not moved.

    Prof. Gordon's one concrete solution - immigration - is exactly backwards. Globalization IS immigration only without the immigrants. What would their physical presence add? But that's for another day.
    Apr 2, 2013. 06:17 PM | 1 Like Like |Link to Comment