JohnL

Why Economists Messed Up

So the majority of economists are Keynesians or neo-Keynesians, they did not see this coming, and they now think they can diagnose their own errors. Meanwhile, the Austrian economists, the ones who actually called this thing in advance and have a rational explanation for the causes, are ignored by the mainstream (including Mr. Marron). Why the world continues to pay any attention to the mainstream economists is beyond me.

Obama's Housing Plan: Elegant and Costly

"The ideology of "do nothing and let the free market correct " is what led to the great depression."

That statement is complete, uninformed non-sense. Rothbard, Higgs and others have credibly destroyed that argument. The credit boom of the roaring 1920s caused the Great Depression. Any economy can have a recession, but it takes a government to turn it into a depression.

Foreclosure Moratoriums: It's Time to Get Real

"It was hard to foresee the mess that came. Does a mistake or a miscalculation or a decision made of necessity remove their right to a little help now to survive the storm so that we don't have to deal with the fallout later when the market turns around?"

I made a huge mistake on some stocks I bought in 1999. Do I have a "right" to get some help from you? I can provide you with my bank routing number whenever you're ready to make the transfer.

Adults used to take responsibility for their actions and when good people were down, their family, friends, congregation and neighbors voluntarily pitched in. That system worked fine for thousands of years from what I can tell. Today, people think they have a right to their fellow taxpayers' wealth whenever they mess up. It's incredibly immoral, and it should be illegal.

Nationalizing the U.S. Banking Sector: There's No Choice

"The good news is this: most policymakers agree that letting the banks fail is an unacceptable outcome."

You know we've arrived in Wonderland when it's good news that failed capitalists will be made whole, at the expense of their competitors and the taxpayers. It's sad commentary on how dishonest and immoral this "free market" has become.

The New Unwind

Two comments struck me as ill-founded:
--Remember when gasoline prices finally settled down after the Katrina run up and people flocked right back to SUVs? People have very short memories.--

You apparently did not grow up with parents that lived through the Great Depression. I assure you, with the right set of events, your memory gets very long indeed.

--The idea of the "rational man" can go to the dustbins of history as our new models show that even the smartest people can succumb to groupthink and the madness of crowds.--

Our new models show us that? I thought it was shown as early as the bursting of the Great Tulip Bubble of 1637. Such folly was examined in "Extraordinary Popular Delusions and the Madness of Crowds" by Charles Mackay in 1841.

$800 Billion: Too Much? Too Little? Yes.

There is a lot of talk about kick-starting the economy, but is that valid? The implication is that the economy is fundamentally sound and would be humming along if it just got a nudge. It just lacks confidence or positive inertia or something.

I don't think the economy runs on confidence, but on good balance: between levels of investment and consumption, between levels of debt and income, between the prices of various commodities and those of finished goods, between the mix of goods produced and the mix that consumers want to buy, between interest rates and required savings rates, etc.

My belief is that the problems we are seeing and the size of the government "solution" indicate severe imbalance and accumulated malinvestment -- imbalances caused by years of government intervention and loose monetary policy. The economy doesn't need stimulus -- it needs to re-balance. That is what economies do, if left alone. The stimulus package will simply prevent the natural healing process.

Looting Goes Mainstream: The Trouble with Government-Backed Risk

Looting has become endemic, even in good times, for many years. When banks can legally borrow a large portion of their funding from the central bank at a low interest rate and then loan it out to the public at high interest rates, that is looting -- plain and simple. It is a huge transfer of wealth from the public to the bankers and it's been taking place in plain sight for decades. There is not a word from the press, politicians or academia. The public is almost entirely ignorant of the whole scheme. I'm sorry, but looting went mainstream a long time ago.

Pensions: The Biggest Story of the Week - Or the Year

-- Right now it looks like Medicare and Social Security are the stronger legs. --

Wow! That says it all right there!

The Urgent Financial Crisis Facing Obama

"...it does rather worry me that we don't actually have a Treasury secretary right now, and won't for a while yet. There is a large number of very important decisions to be made, and the decision-makers have to be put in place now. Delay can only cause harm, at this point."

Actually not having a Treasury secretary right now might give me a night of good sleep; the last one ripped a few trillion dollars out of the pockets of the taxpayers. And subsidizing the favored banks ain't exactly fair to all of the other banks that were prudent with their capital. Oh that's right - questions of fairness are out the window in this brave new world.

It's Up to Government to Do the Consuming Now

"It’s only the public sector who is in the mood to spend right now, and it’s only the public sector who can afford it."

Are you sure the public can afford it? We have unfunded liabilities of $55 trillion. And you want that to increase?

The public (that's us) is desperately trying to save. Whether we know it or not, we are trying to get consumption and investment back in balance. We are trying to liquidate the bad investments (e.g. a strip mall on every corner). We're trying to let prices re-balance so that investments are again profitable and consumers can afford what they need. Yet, the government should try to thwart all of our attempts? What is government but our agent, doing our bidding?

There is nearly universal understanding that, as a people, we spent beyond our means and that it is not sustainable. It had to come down. Yet you would advocate we have our government force the spending out of us. Such logic is partly why this country is in so much trouble.

When Governments Go Wrong (and Cause Depressions)

Thanks for the link to the FRB report. Here is my favorite quote from the paper:

"Unproductive firms need to die. This is as true for the automobile industry as it is for the banking system. Bailouts and other financial efforts to keep unproductive firms in operation depress productivity. These firms absorb labor and capital that are better used by productive firms. The market makes better decisions than does the government on which firms should survive and which should die."

This concept seems to elude the politicians.

What If Stimulus Isn't Stimulating Enough?

"So, my question is, if most of the deficit-financed spending will occur after the recession, is the deficit financing justified?"

Diane, are you saying that if the spending occurred quickly it would be justified? I would like someone with your knowledge of Keynesian economics to explain why running up roughly $55 trillion of deficit-financed spending over the last few decades, much of it in the last 8-10 years, was not stimulating enough. As a member of the Concord Coalition, you're surely aware that between our federal debt and our unfunded liabilities, there's been lots of stimulus.

To me, the U.S. record exposes the Keynesian arguments to be intellectually bankrupt. Please help me understand what I'm missing. I keep asking this question and nobody comes forward with an answer. Just an eerie silence...

Mark-to-Market: The Bogeyman of the 1930s Is Back

On Mar 14 11:00 AM John Lounsbury wrote:

"Individuals are not banks and should not necessarily be held to the same accounting standards. However, I find it interesting that I would not have survived the 1970's if I had personally be subjected to mark to market accounting rules. My story emphasizes how the passage of time can assuage financial distress."

There are two reasons (at least) why individuals and banks should not be held to the same accounting standards. Individuals are not making bets backstopped with trillions of the public's money and they are not selling regulated securities to individuals that want to assess their financial position in a fair and transparent manner. Those differences make your personal story somewhat irrelevant.

For all those clamoring for more regulation to protect the public from the greedy banks, I don't understand this rush to abandon one of the regulations that helps protect the very same public.

Rethinking Subsidized Finance

As always Steve, a great article, and I agree we need to try something new in banking, but I don't understand this one statement: "We want investment decisions to be driven by economic value rather than political diktat, but at the same time capital formation has positive spillovers so we'd like it to be publicly subsidized."

I would think that pursuing purely economic values would dictate capital formation free of public subsidy. What are these positive spillovers? We don't want more or less capital formation than that amount which is sustainable, based on our true desire and capacity to save out of income. If you subsidize capital formation, don't you trick investors into thinking there is an availability of capital which can't be sustained?

In fact, because of credit created via fractional-reserve lending, isn't it true that much of the supposed "capital" doesn't even exist, thus causing many of the painful swings that you mention? Could not these be the true causes of the "low frequency, high amplitude breakdowns?"

I appreciate your thoughts.

The Economy, And Why It's Taking So Long to Fix It

--There have been half a dozen government programs to stem foreclosures and help stabilize the housing market. But too much help would falsely subsidize prices once again, and prolong the problem.--

So a little help only prolongs the problem a little?

--For the most part, bubbles need to work themselves out.--

For the most part? You mean we should try to keep them a little inflated?

I'm struggling to follow this line of thinking.