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2009: Why It Will Affect Everyone's Future For Generations To Come
- AIG
- American International Group
- Bank Failures
- Capital Positions
- Chrysler
- Commercial Real Estate
- David Rosenberg
- Deficit Spending
- Excess Reserves
- Fail
- Gluskin Sheff
- Green Shoots
- Gross Domestic Product
- Housing Market
- Japan
- John Paulson
- Keynesian economics
- Krugman
- M1
- Mises Institute
- National Debt
- Neo-Keynesian
- Obama Administration
- Paul Krugman
- Paul Samuelson
- Proposed Legislation
- Real estate
- recovery
- Regional Banks
- Rosenberg
- Silvio Berlusconi
- Too Big To Fail
- Unemployment
- Universa Investments
- Wall Street Journal
From The Daily Capitalist
This has been a phenomenal year for the economy. There have been major, fundamental changes that will affect our lives for many years to come. I don't see these changes as a good thing for the short or long term.
These changes are generational in that they don't occur often and they will radically impact the economy and our well-being for decades. I thought of doing a decade review because it explains so much of why we are where we are today. But so much happened this year that I'm glad the year is over.
1. The Triumph of Keynesian Economics.
Liberals, Progressives, and Democrats were eagerly waiting for an economic crash so they could clip capitalism's wings. They got their wish.
When the crash happened, most people, including most Conservatives, scratched their heads and said, "Yup, it's capitalism. Bad, but necessary system. Got to control it even more." They ran to the Keynesian-New Deal play book.
Very few economists stood against this proposition and when the Democrats acted, it was right out of the Keynesian playbook: keep interest rates low, flood the economy with credit, pass spending bills to implement fiscal stimulus, and adopt more stringent rules to regulate financial institutions.
This is a result of 70 years of Keynesian economics education in America and the rest of the world. Paul Samuelson, who just died, was the father of the Neo-Keynesian econometrics movement in academia, and he and his fellow Keynesians are mostly responsible for this.
My fellow free market Austrian theory economists lost their seat at the policy table, and in fact have been banished to the back room. We need to do something about this. Our well being rides on it.
2. The Failure of Keynesian Economics.
The only problem with Keynesian theory and its policy applications is that it doesn't work.
I am not unaware that many commentators and economists are pointing to recent "Green Shoots" as proof that Keynesian policies work, but it doesn't. By their own admission, at least according to Paul Krugman and many other Keynesians, the fiscal stimulus has been insufficient to bring about a lasting recovery. Krugman worries about a second collapse when the stimulus runs out. He's right.
What we are seeing in the economy that is labeled "recovery" comes from two things:
a. The temporary effect of federal spending from the $787 billion American Recovery and Reinvestment Act of 2009; and
b. Normal recovery behavior that occurs after every crash and that is unrelated to fiscal stimulus.
Much to the chagrin of our Economic Czars there are nagging problems of deep concern. Unemployment. Falling asset values, especially in the real estate market. Lack of bank liquidity and bank failures. Lack of credit. Falling consumer consumption and rising savings. "But, it's supposed to work, dammit!" Keynesian theory was supposed to open the liquidity trap, create jobs, and stoke the economy by taking my money and give it to someone else to spend. It didn't work in Japan and it isn't working here.
The stimulus won't last.
3. New Deal v. 2.0.
The Washington--Wall Street Economics Complex is in full swing.
Too Big To Fail has been the motto of this Administration (as well as the last one). As always there are many political strings tied to economic policy coming out of Washington. While TBTF is not this year's story, the bankruptcy and bailout of GM and Chrysler in 2009 is. It is a bailout of the UAW and other auto industry unions and nothing more.
The bailout of the banks and major financial institutions is just the same. Yes, Citi didn't fail and AIG was taken over, but this temporary relief will just stall a recovery. Bankrupt institutions must fail; otherwise their balance sheets will remain fouled and valuable capital will be lost, mired in unprofitable loans.
The Administration and Congress are now putting forward new legislation to further regulate businesses and financial companies. These new laws are not re-regulations, but are increased regulations that will give the federal government even more control over the economy. By asserting itself further into commerce in order to wield greater power, the center of power has moved farther from the money and commercial centers like NYC, Chicago, and L.A. into Washington, D.C.
These policies are political expediencies and work to undermine the best interests of the American people because they reward the very companies that ought to fail. It will delay economic recovery by propping up essentially bankrupt companies who are now relegated to begging Washington for more money.
It will be a boon for lawyers.
4. Spending Unleashed.
Deficit spending will be a huge burden on our children, grandchildren, and generations of our great-grandchildren. It will be bad for the economy.
As the national debt becomes a greater percentage of GDP, the taxes required to support it will be a permanent drag on the economy. This year alone, the deficit will amount to about $1.8 trillion, depending on how you count it. In ten years, according to the Obama Administration, the national debt will double.
Considering that the debt is being incurred to fund dig-a-hole-and-fill-it programs that result in almost no long-term benefit, the cost to our descendants amounts to inter-generational theft.
5. The Health Care Bill.
This is an economic game changer.
While the bill has not yet been passed by Congress, it will and it will mark the point in history when the U.S. joined the group of countries, mainly European, which blend market economies with the welfare state. These quasi-socialist Nanny-state systems have long-term issues with economic torpor, permanent high unemployment, and a lack of innovation. We will have the same experience.
Comparative economic studies of health care systems similar to the current proposed legislation reveal that even the best of them are running large deficits. More and more, these countries are seeking market-based solutions to bail them out as their citizens reject higher taxes. They are beginning to understand that their problems exist because their tax burdens are too high and their regulations are too rigid.
The rising federal cost of this program will be another huge burden for taxpayers, especially for young workers who will be disproportionately saddled with the cost of supporting their elders.
This bill also marks the beginning of the end of the finest medical system in the world. Just ask Silvio Berlusconi and other wealthy world leaders who come here for medical care.
6. Stock Market Gains.
If 2008 was the Year of the Crash, 2009 was the Year of Recovery. In October, 2007 the Dow hit its high of 14,279. In March 2009 it touched its low of 6,440. Today it closed at 10,548, a rise of about 46% from the low in March.
We can argue about whether the market is properly valued. I tend to agree with David Rosenberg of Gluskin Sheff that the market is overpriced relative to fundamentals as well as macroeconomic trends. Whatever.
I have two points you may wish to consider:
a. Traders believe that Keynesian fiscal stimulus works; and
b. While market gains have traditionally created a feeling of wealth in the economy, this time is different.
With regard to the recovery based on Keynesian policies, see above.
Normally people feel better about themselves and their fortunes because their stocks have rallied. People with 401Ks feel better about their retirement. Retired people feel better about their portfolios.
I don't think its working that way this time. I sense a feeling of caution, if not dread about the future of the economy.
I live in a very wealthy community, Montecito, California. Money here comes from real estate, business people who have sold their companies, or financial guys (hedge funders, Goldman types). In the last two months our sluggish real estate market has seen a sudden and dramatic rise in listings. You would think that these folks wouldn't have a problem with their housing, but they do.
I think many of them took (and are still taking) big hits to all of their assets: typically, commercial real estate investments, aggressive stock trading programs, and venture capital deals. Combine this with falling incomes and a high debt load and you see homes on the market from $1.5 million (formerly $3 million) to $15 million (formerly $25+ million). Not everyone you think is flush, is.
No offense to the great unwashed out there, but these people are big, big consumers.
If it's not working with the "rich," you can imagine what regular folks feel.
7. Year of the Contrarian Investors.
I get a certain amount of guilty pleasure from the market success of the contrarian investors who made huge market fortunes as a result of economic turmoil. They strayed from the orthodoxy and made huge fortunes.
While this was also a 2008 story, the results of the Harvard University endowment fund is all 2009. I like to pick on Harvard because they are a center of econometric, Keynesian economics. So, you might ask, if they were so smart, why did they take a huge hit? Why did they invest in so many stupid deals at the top of the market? Some say that their portfolio is half of what is was.
Yet you have Universa Investments and John Paulson who made huge fortunes for betting against the crowd. It demonstrates that most economists and investment advisors don't think. They behave sheep-like because they know there is safety in numbers and they won't be criticized if they lose clients' money when everyone else is doing the same thing.
If you want to make money, think, don't copy. You might also want to read anything by Taleb and Mandelbrot.
Good luck in 2010.
8. The Inflation-Deflation Debate.
This is the great debate right now.
Everyone is looking at money base vs. excess bank reserves vs. M1 and are betting that either the Fed can sop up the money and credit or, they can't. This issue has been debated in the blogosphere at great length by all spectra of economists. Krugman sees inflation. Many Austrians are predicting inflation. Most Monetarists are predicting inflation. A few like Mike Shedlock (Mish) are predicting deflation.
The Fed is betting that if it pays interest on banks' excess reserves, that they can prevent the money from hitting the economy.
This is a huge issue. The government and the Fed would love to see inflation. Rising prices would show ephemeral profits, enable debtors to pay off debt with cheaper dollars, and the economy would be back to a growth and boom-bust cycle.
I have been doing a lot of thinking about this lately and I will credit Mish for helping me to crystallize my thoughts. I plan to write an article on this soon. I don't think inflation is imminent, but I think it's coming sooner than Mish thinks, and not for the exact same reasons some of my fellow Austrians think. And I'm not just trying to synthesize the two poles. See No. 9.
Like Mish, I don't see these reserves as being "excess." They are being held by banks because they are unsure of their capital positions and they see too much risk in lending money. So, these reserves serve an economic purpose and aren't excess, just sitting out there because the Fed forced money on them. It won't be that easy to pry them loose from the money.
9. The Great Real Estate Reflation.
The government is trying to reflate the real estate market with fiscal policies.
It is clear that fiscal measures are having an impact on the housing market. The government through tax policy and lending requirements (Freddy, Fannie, and the FHA) are already starting to put a floor under the housing market. New rules related to commercial real estate loans ("extend and pretend") may help stabilize the commercial real estate market.
This is not to say that the real estate market won't have continued weakness, but I believe that these policies will have a positive impact on real estate and it will stabilize the market and banks will be able to account for the risk in their loan portfolios. Remember that 90% of the working population have jobs.
I would expect this impact to take effect by late 2010. Yes I understand the shadow market and the problems in the housing market. But don't underestimate the power of the federal carrot.
Banks, especially the regional banks who finance most of commercial real estate and small business, will be bailed out of massive losses. This is what is holding back credit.
Combine this with inflation and we will see the beginning of the next boom-bust cycle. It won't end well.
10. Bloggers Are Taking Over the Economic Media.
Anyone can blog. Few get noticed. But great upheaval drives people to find explanations they don't seem to get in the mainstream media. I think the Wall Street Journal, Bloomberg, and The Financial Times are great at reporting the news. But people want more and different analysis than they offer and they also want a forum where they can express their opinions.
It is refreshing to see the bloggers that I admire do well: Calculated Risk, Barry Ritzholz's Big Picture, Mish's Global Economic Trend Analysis, and the Naked Capitalist are now the big dogs in the blogosphere, getting 50,000 to more than 100,000 page views a month. It is also wonderful to see the Mises Institute get 1,000,000 page views per month as people are finding that the Austrians have something to say.
I am also pleased to report that my blog, The Daily Capitalist, continues to grow. I am also proud to be a part of Zero Hedge, which has quickly become a very popular and rising blog star.
Thanks for reading Zero Hedge and The Daily Capitalist. And best wishes for 2010.
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Predicting the end of Keynesianism:
http://prudentinvestor.blogspot.com/2010/01/prudent-investors-outlook-20...
I use technical analysis and more analysts should study share price trends in my opinion.
Technical analysis can assist us as to the direction of the economy as it is a leading indicator.
The main trend for the stockmarket has remained down since early 2008.
The rally since March 2009 has been a bear market rally contained within a much larger bear cycle that started in 2000.
http://www.zerohedge.com/forum/market-outlook-0
Oh, no! I actually find myself agreeing with Grand Supercycle!
From a definitely different POV - The main thread being Keynes or Austrian school of economics.
Neither one. How about a hybrid? Anyone follow the teachings of Steve Keen? He is an Australian economics professor that predicted this current financial mess way back in 2005. His economic models use both Keynes and the Austrian school of thought as well as his own insightful thoughts.
This will be the successful future of the study of economics - hybridism.
thanks for the answer to my Q from a couple weeks back on this.
yes, agreed, it's all about the remix.
Yes, Steve Keen is definitely someone to follow. Thanks for reminding me of this.
For those who are interested, his main web site is at : http://www.debtdeflation.com/blogs/
Well, nothing new to add here - the debate (and animosity) between both schools go back a long way - though i'd just like to make a suggestion for anyone interested in this topic to read up on the developmental histories of Hong Kong (pre-1997) and Singapore. Each one emphasizing a particular model, HK being free-market while Singapore adopted a more structured/planned approach.
Now this pair of asian tigers are very similar in their basic makeups: small population, scarce land and almost non-existent resources, reliance on sea-borne trade, colonial backgrounds, etc. which makes it a fascinating study in contrast of the merits/deficiencies of each theory, as demonstrated through practical application. One can reasonably argue that both have been successful.
new ideas on new work for the new year:
http://newworknewculture.com/content/what-new-work
"We can't solve problems by using the same kind of thinking we used when we created them." - einstein
Canada will blow up shortly, there is no escape! They have their own ways to bailout banks (quiet ones) but the time of reconning is coming, there is no economy in this world which can exist with more than 70% input for services sector! That guy is proud? Of what, we will see it shortly, for now they suspend their parliament for good reason, Olympics!!!! Don't make me laugh!
I should be able to tell from your spelling that you're not very bright, but:
Prime Minister Harper prorogued Parliament because Canada's upper chamber, the "Senate", currently has a Liberal majority, which obstructs and delays legislation from the lower house. Canada's Senate is NOT elected; members are appointed by the Prime Minister. During the next few months, a number of Liberal senators reach the mandatory retirement age of 75. This allows Harper to appoint Conservatives in their stead, and will give him a majority in the Senate, allowing legislation to move ahead. It has nothing to do with the Olympics, and only an ignorant moron would suggest that it did.
Can we please stop calling liberals "progressives??" It appears the liberal label gathered so much bad connotation that they wanted to try the same bad ideas with a new label -- hoping folks will be confused.
Socialists?
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You know -
Wishing won’t make it so,
Hoping won’t do it,
Praying won’t do it,
Religion won’t do it,
Philosophy won’t do it,
The Supreme Court won’t do it,
The President and the Congress won’t do it.
The Union won’t do it
The H-Bomb won’t do it
The Sun & Moon won’t do it
God won’t do it,
And I certainly won’t do it.
That leaves you,
You’ll have to do it……..
Todd Rundgren (Fair Warning)
I live in Denmark, and being European I have a bit of an issue with a couple of statements in this article.
I agree with most of the anti Keynesian rant, ( I’m Austrian school by nature) and think Leo K. Has a point that his name is being misused to justify criminal behavior, Keynes would turn in his grave if he saw the abuse.
To the point of a common American misunderstanding of the European system, although I speak only on behalf of Denmark.
1. These quasi-socialist Nanny-state systems have long-term issues with economic torpor, permanent high unemployment, and a lack of innovation
NO,.. we pay as much as between 30 and 70 pct tax, but it has never lead to a flight of capital or talent in any note worthy numbers. Many companies in Denmark are world leaders in their field and could have fled decades ago. A.P moller, Lego, Novozymes, Vestas, Fl.smidt, Novo Nordisk, Danfoss,.. (just to name a few) ALL innovative and many subsidized in their creation which is why we keep VOTING for high taxes,. We see it coming back as ROI. Note I there is not a financial product among these innovations,.. and further more we are deep into biotech, medicine, and alternative energy research as well as agricultural innovation, all fields which will have future needs on a world basis.
2. They are beginning to understand that their problems exist because their tax burdens are too high and their regulations are too rigid.
NO,.. again I refer to the above, and expand with the fact that we pay around 11 pct of our GDP to health care,.. but mind you,.. we hardly have any personal insurance expenses, and further more both nr 1 & 2 has happened in an area of too much regulation, which usually is prohibitive, but it does provide for some faith to counter parties.
I cannot speak of the problems of Ireland, Greece, Spain, Portugal and Italy, but in Denmark there is little corruption, a great deal of transparency and somewhat honest regulation, so the tax we pay is regulated through the constituency and gives a sense that they are not wasted and that they are spent wisely. (There is always waste, and it is constantly debated, but the benefits seem to outweigh.)
That being said, our system is not perfect either, and I´m not advocating it being transferred to a large society as the U.S,.. I think it only works within a small community like Denmark, but don’t rant on our system as being failed, or at least specify, as Europe I many different things.
I remember in 1992 when we had a referendum (the Maastricht) and many were skeptics especially in regard to letting the southern poorer and more corrupt nation join the club, I was in doubt back then, but gave them the benefit of the doubt,.. and yes the PIIGS can leave again if they don’t behave, but there was a union before them, and there will be one after they leave again. (And don’t ever bet on Turkey joining the EU,.. not going to happen)
Furthermore, there is not that high unemployment I Denmark, (although rising) but it will come as this crisis is coming to unfold. Just remember that all the social benefits we pay via taxation keeps people a little longer in their homes (losses to banks are postponed) we keep consumption high for a while (less bankruptcy in private business), so we stimulate before the crisis, leaving the need to raise tax or borrow during one much less (just a matter of time I know), and for the final word our nation is not in deep govt. debt going into this, while the private debt is high, but mainly tied to housing but not consumption. People might have to live in their houses the next 30 years until it is paid off, but we borrowed to have a roof over our heads, not to consume beyond our means.
All that said I weep every day as I see my country blindly swallow the endless propaganda from the MsM in the U.S. Very few people here have a clue as to the lurking dangers, and our media just babbles of the bankers, and the mainstream media in the U.S.
I thank Z.H and all the blogger here for the constant input and diversity, as I now know how ignorant I would have been without.
Bless you all, keep it up, and I hope 2010 will be as full of insightful information her on Z.H as was 2009
M. Copenhagen
1. I don't know about Denmark. But France, UK, and Germany have long-term unemployment rates that we don't see in the U.S.
2. Again, I understand that most health care systems are facing the same long-term problems. I don't know about Denmark, but even in France, whose system is most like what we are adopting here in the U.S., is facing serious cost issues.
Thanks for reading!
Econophile:
You point #1 just brings this retort: "Wait for a couple more years, you are almost there already...". As most ZH readers know, the unemployement statistics have been fudged, distorted and are pretty much meaningless today anyway. And not just in the USA.
As far as #2 is concerned, I can comment on France, having lived there for a while, and one of the reasons French Social Security is deep in the red is because the French government has chosen to lower taxes and not pay its dues to its own Social Security. If the French Government actually paid what it is supposed to pay -- it is, after all, an employer like any other -- I have been told, on good authority, that French Social Security would actually show a modest profit.
Make of that what thou wilt.
"... watershed legislation of 1913: the income tax, the interstate commerce commission and the FRB."
Don't forget direct election of Senators.
To Leo, and others who have defended government economic intervention:
Leo, I would say I don't just have disdain for Keynes, I have great disdain for Keynes.
In reviewing all of the comments, except for a few, it is apparent that very few readers have an understanding of Keynesian theory or Austrian theory. I can claim to have read Keynes's General Theory, but I will guess few have read anything "Austrian" much less Mises's Human Action. So many of the comments are just wrong about both theories.
Before I get too far into the subject, I need to first say that theory is everything. There is no such thing as "pragmatic" theory or just taking "the best" from each school of economics. This is just a basic lack of understanding of any economic theory.
If you wish to examine an economic phenomenon, you start with an idea. That idea is "theory." If you can't first support your theory with logic, then going off and studying data will lead you down the wrong path. Most interventionist economists, and especially Keynes, have faulty theories.
Regardless of what Keynesians claim, the application of their theories have never worked in any economic system. Just ask the Japanese who for 20 years have tried every trick in the Keynesian book. So, Leo, no, it isn't that Keynesian theory has been misunderstood or improperly applied: it doesn't work.
Keynes was challenged many times by Austrians and they proved his assumptions wrong. His ideas are simplistic and appeal to academicians who like to use math to figure out human behavior. This was the great debate during the '30s and '40s, and by the '50s most people assumed Keynesian theory was a dead end.
Secondly, most economists just start by looking at data and then draw conclusions. Hayek and Mises proved that doesn't work. How do you know if you are looking at the right data? If there are millions of economic decisions made every minute of the day, is your data base big enough? Are you measuring the right things? Only in the broadest application does this work. But when you try to use it to specifically impact certain economic behaviors, it doesn't work, or at least the results aren't what was hoped for. These are basic, epistemological issues that neither Keynes, nor any of his followers bothered to examine.
You point to the Canadian system as being exemplary of a hybrid system. I read the speech by Eric Siegal of Export Development Canada (EDC). It was the usual kind of statement from a well meaning bureaucrat justifying his and his agency's position.
Basically EDC is a mercantilistic setup to favor certain Canadian businesses over other businesses. That is, the government favors exports and uses taxpayer money to support exports. What Siegal doesn't mention is what businesses would have done with their own money if the government hadn't taken it and spent it on the things the government wants. Adam Smith trashed this concept 233 years ago.
Leo, you might ask what the Canadian economy would be like if there were no EDC. I would guess it would be more efficient, more profitable, and more geared to satisfying the wants of Canadian consumers rather than politicians.
Further, nothing Siegal said about the superiority of the Canadian system had anything to do with why Canada did better than the US in this cycle. In effect, we had the same things operating here: farm credit, housing support, TARP and TALF, the Ex-Im Bank. So, why the difference?
Well, one thing he said may be true in that Canadian financial institutions may have operated under tighter lending rules than the US. I haven't studied the Canadian economy so I don't know, but according to David Rosenberg, a fellow Canadian, this was a major factor. I would say that Canada didn't have the same monetary, housing, and lending policies that created the crisis here. That is, there was probably less interference in the in the housing market by the Canadian government than existed here.
Also, many other "hybrid" systems crashed just as hard: UK, France, Germany, Iceland, Spain, Ireland, Australia, etc.
I think you and many commenters assume that somehow the economic system in the US is a free market system. It isn't. Our financial industry is heavily regulated, yet for all the regulations we still had a crash. Perhaps you should look to the actions of the government instead of industry to discover what the cause of the crash was. If it were the free market, why would anyone lend money to a home buyer with a 500 credit score, 3% or 0 down, and liar docs? And then wrap paper around it and call it AAA? No one ... unless.
You can't blame it on greed or animal spirits because they existed before the crash and continue to exist today: that's human nature. You have to first ask instead how the playing field changed. All cycles start with central banks. With money and credit flowing into Wall Street, with housing regulations geared to attract bubble mania, with faulty risk models (see Taleb), you have the perfect storm.
I apologize for being so pedantic, but it's a complicated subject.
In effect, we had the same things operating here: farm credit, housing support, TARP and TALF, the Ex-Im Bank. So, why the difference?
Because we don't have the same things operating here (Canada). There is no TALF/TARP program. The Canadian government pledged a line of credit to Canada's big banks, but not one of them had to draw from it. I can't comment on "housing support" because I don't know exactly what you mean by that.
Well, one thing he said may be true in that Canadian financial institutions may have operated under tighter lending rules than the US. I haven't studied the Canadian economy so I don't know, but according to David Rosenberg, a fellow Canadian, this was a major factor
I've ranted about this a few times in this thread, but yes, tighter lending rules is a bit of understatement. In Canada, to get a mortgage, you normally need to present both proof of employment (as in a current paycheque), and proof of income (as in an income tax return or T-4 (W2) slip). Mortgage interest is NOT deductible in Canada, so you need to be able to cover the whole whack - principal, interest, and taxes - and the percentage of that amount to total income cannot be more than very strict limits, or YOU DON'T GET A MORTGAGE. I can't understand why so many people here (hi Mikla!) don't get this basic point. There are no NINA mortgages here; no "zero down" paper; no "interest only" paper. You don't get the mortgage unless you can make the payments.
Does this mean there are never any problems? Of course not. If you lose your job, it's going to be tough to make your payments. Our banks are pragmatic - they won't immediately move into foreclosure if they can find a way to make things work, but if they have to, they will, and because the banks have clear title, there are few of the problems that exist in the US. There is no such thing as a non-recourse mortgage in Canada, so we don't have "jingle mail". If you default on your mortgage and it goes into foreclosure, the bank will sell the property for what it can get, and YOU OWE THE DIFFERENCE. This is a powerful incentive for people to find ways to work things out. So, yes, the facts are that people aren't allowed to get in over their heads in the first place, that abominations like NINA don't exist, that the banks have clear title unlike MBS properties, and most important, Canadian banks HOLD THEIR OWN PAPER. They don't bundle and flip it as soon as they can - they know their mortgages are good quality investments, so they hold on to them.
If it were the free market, why would anyone lend money to a home buyer with a 500 credit score, 3% or 0 down, and liar docs? And then wrap paper around it and call it AAA? No one ... unless.
No one, unless... there was a huge mass of stupid, lazy "investors" (aka pension fund managers) greedy for another point and a half of yield so they could get a bigger bonus that would buy crap. I understand perfectly how this worked: at a, say, Countrywide office in San Bernardino, the manager opens every Monday morning sales meeting with "Write some paper! Write some paper! WRITE SOME PAPER!". Salespeople fan out across the city, seeking warm bodies where they can. When they find one, they offer a mortgage on ridiculous terms, either don't ask for or fake the documents, and .. wow.. write the paper. They get paid (1/4 point, maybe?). Sales manager is happy, as on Friday, he has 50 new mortgages worth $20 million. He gets paid (1/20 point?). The paper gets kicked upstairs. The regional manager is happy; he's got $200 million from ten offices. He gets paid. $200 million is enough to sell it off to Goldman or whoever, who will slice and dice it into CDO's. At this point, what is Countrywide's risk? Zero, zip, nada - and everyone got paid. Lather, rinse, repeat. Meanwhile, Goldman or whoever palms off the useless paper on the aforementioned lazy and greedy PF managers, and 1) gets paid and 2) has no f***ing risk on their books. Lather, rinse, repeat.
None of this requires easy credit, although it helps. It just requires a pool of stupid, lazy investors who are more interested in their next bonus than their fiduciary duty. (Retroactive bonus grabs might be a regulatory mechanism that would actually make some of these people diligent, but I don't think that would be possible in the real world.) So long as people from Podunk and Peoria can be seduced by the Wall Street watusi, some chickens are going to get plucked.
KB,
Thanks for the comment. What you describe at Countrywide (BTW, Mr. Mozillo lives in my town), is nothing but typical bubble behavior. Greed on the way up and fear (panic) on the way down. No one can excuse such behavior by actors in the economy. Everyone thinks they are smart when the market is going up. But this is basic human nature. I recall in the Dot.com boom when the son of one of my friends (he was involved in a web-based start-up) talked to me about a "new paradigm" when I asked him about how the company was ever going to generate income. Lots of similar stories.
But these bubbles don't just appear out of thin air. If greed always exists, what has changed? My opinion, and the opinion of the Austrians, is that they always start with inflation which is only caused by the Fed or some central bank (yes, I've read Steve Keen). What has changed is inflation. The bubble is different every time. This time it was housing. Last time it was tech. Before that it was commercial real estate. Without the appearance of profits, people wouldn't jump on the bandwagon. An inflation makes it look as if these things are profitable. We all know (now) that they aren't.
Econophile: playing devil's advocate again... But what can you expect from me?
I would like you to ponder the following little ditty:
"In theory, there is no difference between theory and practice. But in practice, there is a lot of difference between theory and practice".
Reality -- especially the current reality -- is the ultimate test. If Austrian "theory" can get us out of the mess we are in, I'll be the first to cheer it and raise its banner. But I strongly doubt it. As I have said before, I believe this crisis could well be the ultimate test for all economic schools out there. And I am afraid they will all be found wanting, for different reasons.
On this (somber) note, I wish you a very happy new year for 2010, and I look forward to your next article on ZH.
Yes, let the sheep demostrate her case before a room full of reasonable wolves.
It's like saying, "Oh, I would love there to be equality, I just can't support it until I know I would still make a profit."
Bargaining with wolves only produces one result.
BTW, that ditty is great. Very clever. Of your own design?
Nope, it's a classical engineer saying.
And I disagree with your "sheep arguing with reasonable wolves". Again, if the Austrian school is right, its ideas will be vindicated in the long run. But "in the long run, we are all dead anyway", right? That one was from Lord Keynes, by the way.
Thanks, Anton! I appreciate your commentary. You are a clever dialectition.
More coming.
@Jeff Harding,
The great thing about bad theories is that time proves just how bad the theory is. We witnessed the failure of central planning repeatedly throughout the 20th century, so one would think it would have been repudiated. Unfortunately, we learned nothing. I disagree with you that the health care bill is a turning point in American capitalism. We haven't had free or efficient markets since the watershed legislation of 1913: the income tax, the interstate commerce commission and the FRB. As Hyman Minsky, a Keynesian no less, keenly observed, a debt-based economy will reach a saturation point where new debt cannot be serviced and the Ponzi must be recognized. I believe we are at the Minsky moment.
"The great thing about bad theories is that time proves just how bad the theory is. We witnessed the failure of central planning repeatedly throughout the 20th century, so one would think it would have been repudiated. Unfortunately, we learned nothing."
I'm hoping that at some point, people who put forth the argument that "If we had just had the right people in charge, or just DONE MORE, it would have been different!" will end up being shunned and put in insane asylums where they belong.
The death of the cult of Social Engineering can't come soon enough, in my opinion.
yay! another Austrian to sadly commiserate with as everyone else willingly walks off the face of their flat, geo-centric earth with maynard, MPT, exogenous causality and the egregious concept of randomness.
GREAT piece and great comment, Econophile.
just about the only things to chime in on an excellent piece would be to add a heavy helping of Schumpeter and Socionomics into the mix alongside Hayek.
as for Mandelbrot: Benoit is undoubtedly one of, if not the, conceptual mathematician of the century. unfortunately he may also be its greatest plagiarist. apparently, one of the greatest conceptually mathematical minds in the history of humanity, who had read damn near every single printed utterance with seemingly any tertiary relation whatsoever to his field of study, just "happened" to somehow miss not only all the work of R.N. Elliott but also had the nerve to claim that he basically never even heard of the man, let alone his work ... which, is about as likely as Orenthal James not having wielded the knife on nicole n ron or retail having any prayer of remaining fiscally / psychologically intact over the upcoming two years.
Why is it We never learn from History?.
"We are in danger of being overwhelmed with irredeemable paper; mere paper, representing not gold or silver; no sir, representing nothing but broken promises, bad faith, bankrupt corporations, cheated creditors and ruined people."
-Daniel Webster
Econophile,
100% dead on................
My take on how to correct all this Unconstitutional BS, is so simple it boggles the mind.
Why no one is pushing for it, is beyond me.
''We the PEOPLE", still control this country, IF we just use the tools the Founders gave is.
To cancel out all the damage done, being done, all we have to do is have a Constitutional Convention, appoint our representatives for each state, and Amend the Constitution, to make it how WE want it.
Stop these inane morons in their tracks!.
Why is this so hard for peole to grasp?. Especially our Governors.
Maybe after the 2010 Elections, and before mass riots and armed conflict hits the streets,( God forbid), we can GET one called.
NO one can stop us. If we simply agree to hold it, and make the desired changes.
Congress MUST comply, if the states call for one, and WE get to appoint the Reps.... not them, not the POTUS.
Trick here, is to do it,before THEY do. Even if they did, we still hold the ACE..........3/4th's the states MUST agree to their changes.
#1.
Liberal progressive democrats, REAL ones, are of the mold of FDR.
FDR was no keynsian. In fact he barred JMK from the Bretton Woods Conference. Those that convey FDR with Keynsian was taught wrong. Maybe it was FDR was so successful, people tried to latch onto it, even though their viewpoints were markedly different.
Remember FDR wanted something no democrat has really offered since. JFK got close, but other than him, no other democrat, has really been a democrat in the way we think of democrats. They were part of the party, but none of them picked up FDR's flag and pushed it forward.
Every real progressive democrats understands this.
Besides, Obama, and the DNC are anything but progressive. Rockefeller is a plant, he's not a true progressive. DNC = Wall Street Lackeys. Just like 90 percent of the repubs.
It's only the progressive democrats, and the ron paul republicans that are on the ball right now.
The Austrian school, fits better now, but isn't the end all be all of fake economics. It's just the one that fits the monetary systems best at this point. The austrian school does have a lot more reality in it, which is why progressive democrats understand that and can agree with many points coiming out of it.
But Ron Paul and other austrian thinkers dramatically overestimate inflation from social spending through the utterance of credit via an American Credit System, which for the purposes of such project DO NOT NEED to tap the private credit markets. There would be inflation, but inflation for things needed isn't a death knell.
It's understanding what you give up for what you get. Because it doesn't need to go through the private credit market, it's effects upon the credit market are muted. That 2 trillion of credit utterance via an American credit system, would be tantamount to 1/10th to 1/5th of one percent inflation over the programs duration. That's not much to give up for what we would gain. There WOULD be inflation. It just wouldn't be much, in fact, there would be far less inflation through such methods over the course of decades, that we currently get from our current system, in a single year, perhaps two.
Or we can keep having 2-3 percent target inflation, with real 12-15 percent inflation.
Remember again, it wasn't social spending that drove us to 12 trillion+ debt. It was our monetary system, and what we used it for (bailouts, tax cuts, wars).
These are far more inflationary, than social spending, or infrastructure projects. (and unlike them they ACTUALLY have a benefit, and can provide cost savings to business, for generations.) This is anything but a temporary benefit.
Who is a progressive democrat? Dennis Kucinich
If you think Dennis Kucinich is a John maynard keynes supporter, than you do not know Dennis Kucinich, nor progressive democrats.
Real progressives want to return to the FDR model, and the FDR model was not Keynesian.
It had elements that can be most closely attributed to Keynesian, by piss poor quality students attributing it to it, because our segmentations of different economic camps are juvinile that we lump everything into a couple of people's ideas, even though it's far more varied.
FDR was for a fixed exchange American Credit system, with credit uttered for the works programs.
That was the plan, he died before he could switch from monetary to credit system. Then Truman gave back the colonies to the British. Did you know that we fought WITH HO CHI MINH in WWII against Japan. That we routed Japan, WITH HIS HELP, side by side, like English and Americans taking on the Germans in Western Europe, at the same time in SE ASIA, we were fighting with Ho Chi Minh. He wasn't a son of a bitch. We screwed him. We had caputred all the japanese, and had them in internment camps in Vietnam, Laos, Cambodia, Burma area. When FDR died, his dream of ending imperialism, and making the Brits feel the pain of WWII, which was an imperialist driven war, and to pay for their sins of creating the situation and actively backing both Hitler, and Japan, to do what they did. Hitler was British royalty backed, until he revolted and would not kill his people through austerity. He'd kill jewish, and gypsys, and poles, and homosexuals, but not, true germans as he saw it. So you see, it's quite easy for someone to go look, he'll kill these people, so therefore he'll force austerity to his own people. Nope. He was just for killing those people. He was a psycho, brought in to do the business of the Queen of England, and he revolted against her, and almost destroyed her. (which would have been fitting considering they caused WWII, and because they put hitler in power knowing he would kill people, indirectly complicit in the holocaust.)
Now anyways, what happened was this. After FDR died, Truman became president. He didn't know the ins and outs of what was going on between FDR and the Queen. So the brits played a little game called, we know something, you don't, and we're going to play you....and so they did. They got Truman, to instead of END IMPERIALISM, to actually PERPETUATE it. How? Well he had OUR american soldiers who risked their lives, and fought with Ho Chi Minh, to screw him over by letting the Japanese out of the internment camps, and retake SE Asia, including Vietnam.
Ho Chi Minh, wanted to be a democracy. But after he got sold down the river and saw the drawbacks of what can happen in a democracy first hand, by the seizure of his country by those he was fighting under orders of those he used to be fighting WITH, drove him to another system, that system, communism. So the only reason Ho Chi Minh and Vietnam is communist, is because of US, and how WE screwed them over. Or again how Truman screwed them over, under orders from the Queen, because she played Truman like a fool.
Which of course had huge implications, because we then got goaded into another war, with our friend Ho Chi Minh. America did Britain and France's bidding by being in that war. (and against every fiber of WHAT the USA stands for NO LESS!!!). It was just an imperialist war, and not even for our own interests! It was for ANOTEHR COUNTRY'S IMPERALISIM. How sad is that. Even then, they double crossed us AGAIN. Because you see, we were running an account deficit to pay for the war. So the British staged a sterling drop in 1967-68, and later the French called in their dollars for gold.
A 1-2 financial punch by those that wanted us IN THERE for THEIR INTERESTS, were now USING it against us, and forced us off the gold standard.
So why did we get off the gold standard? FDR died. We gave Japan back Vietnam. We made Ho Chi Minh our enemy. We went into Vietnam to fight our friend for our other friends - France and Britain. France and Britain then screwed us out of the gold standard.
Are we going to continue to be idiots? I mean is there anywhere else in the world we can fight like Vietnam, against our own interests, and one that could screw our currency, like Vietnam did to our gold standard?
The answer is yes. We've been watching it play out for over 8 years. That's what this war on terror is. That's why we're in Iraq and Afghanistan. Because Britain wants us there, just like they wanted us in Vietnam. To destroy us.
What is the similarity between Vietnam, Iraq, and Afghanistan? Simple - they are all former British or French Colonies.
Quote- "When the crash happened, most people, including most Conservatives, scratched their heads and said, "Yup, it's capitalism. Bad, but necessary system. Got to control it even more." They ran to the Keynesian-New Deal play book."
No Bush passed the bailouts, after he let the situation crumble for 8 years into what we are dealing with. Bush listened to Tony Blair, who convinced Bush that he should go into Iraq. (which of course wasn't hard because of Bush's own psyche and need to be bwetter than his father)
Obama who needed to be much bigger than he was, did not want to waste that 'sunk cost' from the bailout, and with all of his bush-like-minded econoimc advisors, convinced him to continue on with Bush's mistake.
New deal does not equal Keynesian. If someone doesn't know that, they don't know FDR, and obviuosly can't comment about his policies accurrately.
Keynesian adopted FDR's policies, and skewed them into something different. If you just take what FDR did and apply it to a monetary system, it looks very keynesian because you have to borrow the money from private citizens. Thus creating the mess the Austrian school talks about.
But under what FDR's plan was, to re-create the American Credit system, and to do away with the fed 40 years before Ron Paul, you'll see that this issuance, or uttering of credit would not be done through the markets, and thus not have a direct affect upon them, since they are not competing with each other, nor is it taking away any legitimate market participant.
Quote "Very few economists stood against this proposition and when the Democrats acted, it was right out of the Keynesian playbook: keep interest rates low, flood the economy with credit, pass spending bills to implement fiscal stimulus, and adopt more stringent rules to regulate financial institutions."
Again, it was BUSH who did the bailouts. Everyone keeps forgetting that. It was BUSH WHO BEGGED FOR TARP, FOR THE BAILOUTS OF AIG, FANNIE MAE, FREDDIE MAC, etc. Or else as he stated, 'this sucker could go down'.
Democrats did republicans a FAVOR by taking ownership of the problem. One they shouldn't of done. But let's not get revisionist here.
2. Is also wrong. Because you think the amount we threw into stimulus, was enough to produce an effect. It wasn't. Because well, 1/2 went to 'do nothing for the economy but enrich the rich who won't spend it' tax cuts. The other half went who knows where, it sure didn't go into building ANYTHING. Of course Obama deserves flak on this, because his stimulus, wasn't stimulus. It did spend a lot of money, borrowed through the private market, but didn't provide anything, including even short term jobs.
Therefore we had a huge spending bill, and very little stimulus. That's why it hasn't worked, and hasn't created millions of jobs.
Plus again it was done through the private market. I.E. someone HAD TO give the cash, in order for us to borrow it. Under the American Credit system, that need not be the case.
We could have uttered in 2 trillion for infrastructure spending, it would have created millions of jobs (or at least many hundreds of thousands), and allowed us to pretend like things were fine for a couple of years, but at least we would have built the things we need, and it's effect on markets, about 1/100th of what we saw from borrowing this much from the private markets.
There is no temporary effect with a maglev rail system. Or new waterways, or desalinization projects, or nuclear power plants. sorry, these are all long term projects we must build. Seemed pretty obvious. Fusion reasearch, definitely.
We need(ed) to build all these things to survive anyways, and now we have a huge hole, need to spend money on something to bring the economy out, why not this. Round peg, meet round hole.
But we didn't go that route.
Can we please stop saying that any spending is x or y way. We haven't done anything in the fashion of FDR, and even if we wanted to be keynesian, if he were alive, he wouldn't take ownership of this, because even he would say, 'you aren't doing things my way, you're doing things your way, half-assed, and attributing the effects to my full-assed way of doing things. Well they're not equal. Or if we can't stop saying it, at least stop claiming it is the truth.
Therefore we haven't even done what Keynes would have done. It wouldn't of worked overall, it would have worked alot better than what we did. What have we done? Simple, whatever the bankers wanted.
3. Well what we need is much more regulation, seeing how we gutted what worked. We also didn't regulate derivatives which weren't around in 1929. Thus we do indeed need REAL REGULATION. I can whole heartedly agree that what we are doing on the regulation front is unneccesary. Why? Because the regulations they are mostly talking about, won't fix the problem. 80 percent of derivatives exempted, what a joke. Nor would it keep a non-broken system, from becoming broken.
Glass/Stegall
HPBA of 2007 - wipes the casino debt and derivatives, freezes home foreclosure, allowing zombied corporations to become fully functional, overnight.
End the Fed
These are but some of the 'regulations' we need to pass. If we don't get to the bone, you're quite right that any other 'regulations' would be useless, and a government intrusion. However not everything the gov't does in this respect is an unneccessary intrusion. But poorly done legislation can. So far, with Obama, and his Wall Street lackeys, replacing Bush and his republican wall street lackeys, that's all we have seen.
It's like the discussion about term limits, I think they're bs, and I'll skip all the particulars except one. If you want to limit the impact of MONEY on our electoral process AND our congress and president,you need laws the LIMIT THE IMPACT OF MONEY.
The real reason we have term limits is to prevent a president for realizing, and learning from his mistakes, because by the 3rd or 4th term you've figured out all the bankers games, and will probably want to crush them, like FDR. That fourth term would have freed us, instead we're now 60 years down the rabbit hole.
To come full circle, just like THAT, you have what we have going on with the regulations.T The financial regulations won't work, because they don't attack the crux of the issues. They only barely touch the symptoms. Thus they are not reforms, and thus they ARE government intrusions which only make business less competitive, without solving ANYTHING.
Thankfully enough ron paul reupblicans and progressive democrats like Kucinich see through this, and have been joining on things like Ending the Fed, or portions of HBPA of 2007.
4.Again the point is missed. Under a monetary system we borrow that money. Under an Amerian Credit system, we don't. Thus building these things, won't burdern our children with debt. So change the system, rather than not providing for the needs.
SO again, we can either quit doing everything to pay off the debt, that shouldn't of been there to begin with, or we can change systems into American Credit System, wipe out whatever debt doesn't meet a Glass/Stegall standard - which would take trillions off our national debt - immediately, and not have to increase it to provide what our citizens need. I think the choice is obvious.
Otherwise you are correct, we continue to go down the monetary system path, that is exactly where we'll head. But we choose every day to be in the monetary system which screws us. This whole crash hasn't been a crisis within the system hitting and then spreading, this is a crisis OF THE SYSTEM, and caused BY THE SYSTEM in which our problems came from the weakest links breaking under the collapsing system; derivatives, sub-prime.
5. Completely wrong - it will save money - BUT we do not want to save THIS money. On the surface it's hard to understand what I mean. But this healthcare bill WILL save money, lots of it, and a higher percentage every year thereafter. Why? IMAB, Independent Medical Advisory Board. This is the death panel.
I want REAL Single payer healthcare, paid for through our revisited American Credit System, which would be part of that 1/10th to 1/5th of one percent inflation per year (an acceptable number to provide what it provides!!!!).
Only REAL scarcity will cause inflation in an American credit system. 99 percent of our current inflation is from not scarcity, but by SPECULATION. Thus having our single payer being paid from the utterence of credit, and not through issuance of debt through private markets, will not put our children in debt, it will not affect those that need to borrow in the credit market, and will provide REAL healthcare.
This Health care bill, isn't about helathcare, it's about cost savings. DO YOU know that the only part of this ENTIRE, that's right ENITRE debacle that was non-negotiable, and thus the only thing the Obama wanted passed was IMAB. That's it.
This isn't a health care bill, it's a reason to get IMAB passed...which WILL bend the cost curve, by denying treatment based on 'cost effectiveness' via rigged statistics whose subjective variables are created and weighted by those who wish a certain answer to be true. Thus if they want a study to say that Vitamin C is bad, they can create one. You can create whatever you want, and get whatever answer you want by manipulating the variables, and these people with healthcare, HAVE! It doesn't take much, were talking about percentage points here.
This healthcare bill is a way to pay for the bailouts, as even within the bill medicare expendures must not increase for the next 10 years, even as it's about to swell big time from all the baby boomers.
I'm a democrat, and this IS death care. It WILL save us TONS of MONEY, but at the cost of our national soul. This has NEVER BEEN the democrat plan for HEALTHCARE.
Plus again, given the option of the American Credit system, this Nazi-Hitler copying (yes COPYING read Tiergarten 4) healthcare plan, is completely unneccesary. Even if it was, I wouldn't go down this road.
IMAB = Deathpanels
IMAB = the board that was saying 40 year old mammograms, don't get prostate screenings, don't use the buddy check for lumps in your breasts.
You see if this board doesn't approve it, it won't be paid for, therefore you aren't covered. Meanwhile, this is going be mandated that you buy, meaning tons more money for the bastard death panels at every HMO. You're basically going to be forced to buy private health insurance, that's worse than anything they offer now, and meanwhile this IMAB death panel board will be making recommendations on cuts basically every time they meet. You cannot get rid of it, because of the unconstitutional perpetuity language in the bill that is included in 6 different spots to try to cover all bases and keep the death panels in forever.
Oh yeah, pages 1001-1002 of the bill has the death panels, if you want to specifically look.
Well if you don't catch cancer in screenings, guess what, you don't do treatment - saving money. Plus if you wait long enough, no treatment will work, so they are hoping you get to stage IV Cancer before the doctor diagnoses you, and then it's too late to do anything. - thus saving money for bailouts. But don't worry they'll at least pay for the drugs to sedate you until your death by starvation.
All unneccesary, all completly betraying the democrat ideals as much as bush betrayed republican ideals.
This IS NOT democrat healthcare, it's just being pushed by people who call themselves democrats.
It will kill millions. It WILL. I wish it wasn't true. I wish I was wrong. But the FACTS are non-negotiable, and they ARE self evident.
But again if it was passed, it would help out our fiscal situation. Not enough to matter, and at the cost of our souls, but it would lower costs.
6. Not much to comment on, think you are pretty much correct in assessing things here
7. Yep, they followed Keynes, made stupid deals, and paid for it
8. You have to look at LaRouche's triple curve to understand what is, and HAS been going on for decades.
Three curves
One if financial aggregates
the second is monetary aggregates
the thrid is physical economic output
You see financial aggregates are needed, physical economic output is needed, but what is the triple curve, should really be a double curve. In other words monetary aggregates are the derivatives (inlcuding other things but 1.4 quadrillion in deriviatives make IT the monetary aggregates) that need not be there.
So under the American Credit System there are only two curves, the monetary aggregates go right out the window.
Which is important because in the LaRouche triple curve, the driving force of the other two curves is made from the monetary aggregate curve.
As monetary aggregates go up, it forces financial aggregates up, which in turn leads to a decline in physical economic output.
Viola, INFLATION and DEFLATION at THE SAME TIME.
Look around, as the REAL ECONOMY collapses, that's your real deflation. It's ongoing during this crisis.
Meanwhile the monetary aggregates need to push higher, and higher, and higher, cannibilazing everything else in it's quest to go hire. Even though it is just a 'thing', it controls, everything.
So as monetary aggregates explode into hyperinflation, every step from where it was, to where it is, to where it will be, a continuous step, maybe think of a bicycle moving, rather than a step, we get our physical economy deflation.
It's a function. As monetary aggregates go higher, physical economy goes lower. This has been at play for 40 years. So we've actually been in an inflation/deflation environment for 40 years. It just wasn't really noticable (by the masses) until now. Even now, they don't most don't or refuse to understand it.
If you've seen the triple curve, I would say 2007 or 2008 was the inflection point, and now we're on the ever increasing downward trend.
To keep this from happening, we increase our monetary aggregates, and our financial aggregates, until finally, not only is the physical economy is contracting, but the financial aggregates are contracting. Meanwhile, monetary aggregates go through the roof. Does this not remind you of EVERYTHING that has gone on since Sept/Oct 2008? Of course, it tells the story PERFECTLY!
Now again in terms of markets we are overvalued, we deserve a correction, a huge one. But eventually, and this thing can cycle up and down for weeks, months, years, until it breaks, but eventually you get hyperinflation. What happens to our physical economy? Simple, it continues to get worse just like it is now, just at a faster rate.
Really that's all that's going on, the monetary aggregates are forcing the destruction of the other two curves, faster and faster, the greater the monetary aggregates are.
9. I still believe that in a few years, there is a much higher probability that you can buy a house for market price for 1-2 oz of gold, than sell a house at it's pre-crash price (or even 20 percent below).
10. Completely agree with you. We're all trying to find the answers. I think we already have them based on my answers, (answers I didn't formulate, but are presenting here).
We all are concerned, thus why we visit sites like Zerohedge, and others. We all learn from each other, in one way or another. Good luck to all. Even though it seems like I was blowing holes in your argument, I do think your viewpoint, is far more realistic, than what you will hear in the media. I also think that if we keep with our current system, your outcomes are the likelihood. I just happen to believe we can change systems if enough of wish it and march on it, or whatever. The answers are there, so we need not go down this road of pain and suffering. If we use our heads, there is always a better solution than the present.
The American Credit system is not unrealistic. It's what we had up until 1913. It worked. We've also seen what building infrastructure. We won WWII and became a superpower...It worked. There is no reason that the public good needs to contract through private means to procure the capital it requires for such works that not only bring temporary jobs, but long term benefit. We choose to have this imperialist, monetary system. We choose to lower our quality of living. We choose to forget to tap science for an answer. We choose these things at our own peril. Because they need not be this way.
Remember also. American Credit System, is implicitly a capitalistic system. So let's not say anything I've said is anti-capitalist. Because, what I have laid out for you is indeed not only capitalisitc, it's far more in the spirit of capitalism than what we currently have. Not to mention the majority of the works projects are subcontracted out to private business. Meaning it isn't the gov't controlling everything.
Again imagine the world without gov't infrastructure, and I'll show you you're looking at the middle ages. JIT inventory, nope. Internet, nope. Highways, nope. Plumbing, Nope. Space Program, Nope. Personal Computers, nope (see space program). So on and so forth. Good luck running a business without those things provided by gov't projects, with long term benefit to business and the American people.
This is also not some magical way for all of us to keep living and spending the ways we do. It will however allow us to keep what is real, allow us to survive, and start rebuilding into what we want to be, and that is a speices among the stars. Our future isn't on Earth, it's out there.
It's not even a hard question. You just have to ask the 'right questions' AND realize when you are creating a border (think painting) around something limiting the possiblities. Those that think we have to keep on with the monetary system, and keep believing we need to judge between MF/JMK/Austrian school and a few others is the wrong debate to have. It's do we want a monetary system, with the failings we so clearly see? Or do we want to return to the American Credit System, where business and gov't are INDEED SEPARATE.
Wow. Don't bogart that joint, my friend.
damn good new year's soap & soak, jmc, merci.
favorite line: "Viola, INFLATION and DEFLATION at THE SAME TIME." voila...
saw this on the subway yesterday, reminds me of this thread:
"Every man takes the limits of his own field of vision for the limits of the world. " -schopenhauer
Deflationary wash-out imminent---followed by inflationary wipe-out.
"This bill also marks the beginning of the end of the finest medical system in the world. Just ask Silvio Berlusconi and other wealthy world leaders who come here for medical care."
Sorry to seem selfish, but I can't work up a tear for the end of a system considered "finest in the world" by billionaires. I would settle for one that offered at least adequate care for the rest of us. Not that this dog's breakfast of reform legislation is going to provide that.
Great site. Excellent posters.
My bet is on a deflationary 'wash out' perhaps sooner than most think. And the yellow brick road so many people are traveling could find itself in a gulch before it reaches the summit. At that juncture though....paper or delivery?
"And I am really afraid it is all going to end in tears. We may be facing, not just the Great Recession, not just the New Great Depression, but the Ultimate Depression. Let us hope it is going to give us a better system."
You damn Skippy! It is grab your ass time - and soon. We-all of us collectively F---ed up and the reeper cometh. Not because it has to,but just because it will. No one has shown even the slightest inkling of being will to pull back from the brink of this so we will all drown in the vomit of our own greed and corruption. Not because it has to but because it just will.
"This bill also marks the beginning of the end of the finest medical system in the world. Just ask Silvio Berlusconi and other wealthy world leaders who come here for medical care."
I don't think anyone has ever denied that our country has the best medical treatment on the planet - for the ultra-rich. It's the 100 million of us on the lower end of the scale who are shafted.
Wow -- "shafted" means you can walk into any emergency room and get free healthcare. Since the lowest 100 million (1/3 of country) pay zero (actually less) in federal income taxes, you should have funds to handle healthcare insurance presuming you do not have a cell phone, cable TV, a house bigger than you absolutely need, two cars or a new car or a car less than five years old, go to restaurants or movies, more then three pairs of pants or two pair of shoes, etc.
Embedded in your comment is the idea that you and everyone is ENTITLED to healthcare (and lots of other things I'm sure).
Folks, despite what politicians tell you, no one is entitled to anything except basic legal protections against person and property. You need to figure out how to find your way through life. Please take 100% personal responsibility and do not rely on others bailing you out.
And I am a guy who gives away a meaningful double-digit percentage of my gross income - so I am not against helping folks. But our country is riddled with victims and those who are entitled -- and they vote for those who tell them so.
Im a paramedic in Houston, if you go to the ER or call an ambulance you will get treated..period.On the ambulance we dont ask for insurance info and the ER doesnt collect payment info untill you leave..after youve been treated.If anyone is getting "shafted" its the middle class that works and pays for health insurance while others are on the gubbnit teet. "Best ax somebody" ;)
despite what politicians tell you, no one is entitled to anything except basic legal protections against person and property.
I believe that's what was intended; and if it wasn't, I vote for that.
The problem isn't with Keynesian economics per se, it's with the inept policies that followed in the aftermath of the credit crisis. Trillions in bailouts targetted at banks instead of homeowners that were reeling from unemployment and foreclosures. So the banks took the cash, and instead of lending it, they traded it, snapping up all sorts of risk assets and making a killing in profits. Those good bankers recently paid back TARP funds but they made multiples of what they received and paid back. This isn't Keynesian economics, it's a perversion of Keynes' doctrine.
"This isn't Keynesian economics, it's a perversion of Keynes' doctrine."
Actually, it's the end result of Keyensianism, even if Keyenes didn't have the foresight and common sense to take human nature into account. A government that promises to take care of "everybody" will eventually include Big Business in that definition of "everybody."
Any economic theory that doesn't begin with the assumption that human beings are greedy assholes is going to be smacked in the face by reality sooner or later.
This isn't Keynesian economics, it's a perversion of Keynes' doctrine.
There was a good post by Edward Harrison over at Naked Capitalism around Thanksgiving, in which he asked whether or not there were any examples of government "bailouts" that DIDN'T end up looking like pigs feeding at a trough. His initial scan was that there wasn't, because, that's what the prospect of free money does to people. They grab with both hands and don't stick around to answer any pesky questions (e.g., the bankers "standing up" Obama due to some light fog in NYC).
Saying this is a "perversion" of Keynes is like saying the Soviet Union was a perversion of Marxism. No, it was always implicit in Marxism, it was just that the theorists didn't understand human nature and so they assumed it wasn't implicit.
Timmy Geithner and the rest of them are about as Keynesian as Stalin and Pol Pot were Marxists!
Leo, what would you call them? Capitalists?
I have heard just about every branch of economics always say, when their policies failed, that these weren't true Socialists/Marxists/Keynesians/Utopians/Fascists. If only the policy were implemented properly ...
I will go further and say Keynes was more technocrat Fascist. Please read his introduction to the German edition of General Theory and draw your own conclusions.
You're not proving the case logically or empirically, you're just saying something along the lines of "Because I believe Keynesianism can exist without the flaws exhibited by the current policies being done in Keynes' name, they can exist without those flaws". That's a leap of faith, not a logical proof. Stalin was a Marxist and Geithner is a Keynesian. Your denial notwithstanding. You might want to believe that isn't true, but do you have any empirical proof?
I have found in life that it is better to find a philosophy that doesn't require me to lie to myself about what would happen if it were implemented by flawed human beings. That's why I'm a full-on believer in competition and free markets. If your philosophy requires some kind of philosopher-king or Jesus-like figure to actually implement it, it's a stupid philosophy.
Leo, your oversight here is alarming.
First, the credit crisis was a direct result of Keynesian policies.
Secondly, your logic is akin to saying that a burning building is not really the arsonist's fault, but the fault lies solely in how well he wields an extinguisher after setting the building ablaze. Umm, hello?!
Not to mention, the policies that are imployed to mediate the situation will have the same effect as pouring water on a grease fire.
Daedal,
"First, the credit crisis was a direct result of Keynesian policies."
Really??? Was it Keynesians who repealed Glass Steagall? Both Republicans and Democrats share blame on the credit crisis but the notion of market will correct itself was exposed as a total fraud. Left unchecked, market participants canabalize each other and the end result is that the financial system almost imploded.
1) When I said Keynesianism is responsible for credit expansion, I'm referring primarily to Central planning, whether it's the Federal Reserve, which would not exist in an Austrian economy, government spending, or any other interventionist social experiment the government undertakes.
2) Your assumption that Republicans are "Austrian" is offensive to Austrians. Take a look at Ron Paul, who is the closest example of an Austrian in the House, and you can't find a handful of republicans that adhere to Austrian principals even remotely as Paul. A wolf is sheeps clothing is still a wolf, and when Republicans "abandon their free market principals to save the free market" they are not Austrian.
3) How is the notion that the market will correct itself a total fraud? Perhaps you should do a little bit of digging before making such bold, and baseless, claims. You can start here: http://www.usnzcouncil.org/Miracle%20Down%20Under.pdf In fact, I am quite certain that if left to the free market, GS would not even exist today, and its managers would long have been fired. Meanwhile, Keynesianism has bestowed record bonuses on these schmucks. Free market punishes failure and rewards success -- Keynesians have managed to do the opposite.
4) What we had in the United States prior to the collapse was not a "free market". Government interfered with the free market constantly... Ever heard of a little company called Fannie Mae?
5) Free Market (Austrianism) does NOT mean Anarchy. In a free market, as austrians define it, you have to have 2 qualities (in addition to real currency): 1) Property Rights and Contracts 2) Government that protects property rights and enforces contracts. Instead, what we have is a government that often times blatantly infringes on property rights and contracts. Not to mention all of the moral hazard that is created by the government and the Fed backing various loans and deposits. That is NOT a Free Market!
6) I agree that Glass Steagall should not have been repealed. It's precisely because our government is an active manipulator that constantly changes the rules that this is nothing resembling a free market.
7) Whenever you have government intervention in the markets (like bailouts), Fed-funded credit/money expansion, government backed loans and assets, etc etc, that is all Keynesian. Every problem that we have has been traced back to the insane Keynesian policies, policies that Austrians warned of and fell yet fell on deaf ears. Here's a reminder: http://www.youtube.com/watch?v=HQ79Pt2GNJo
8) From an Austrian to a Keynesian, Leo, I wish you a happy, healthy, and safe New Year! Til' next year!
inpet [enforcement of existing law]
Currently, whistleblowing leads to tears - for and from the family and friends of the whistleblower. Ya wanna tattle on Uncle Sam? You'll wake up dead if you don't take the bribe-promotion.
Your average citizen has come to believe that the founding fathers are now quaint. This is a lie. They understood human psychology very well - and that is timeless.
But you make a good point Leo: current Keynesian economics is perverted. Which way is up anymore. You can't even classify the fuckedupness anymore. Oh, wait. It's just corruption now. Open corruption. It's really easy now.
Although, Leo, you are very good at being contrariwise. I wonder if you'll be right about a recovery instead of a hard reset. I've been quite wrong for quite some time now, when it comes to predicting what the economy will do.