[PassedOut]

cherdano, on 2011-July-17, 10:34, said:

Anyway, any 14-year old should be able to figure out that constantly growing debt is not a problem as long as the debt/GDP ratio isn't rising. So the debt ceiling is a silly concept in the first place.

From Truman through Carter, every administration understood that and worked successfully with congress to cut the debt as a percentage of the GDP. Every president, democrat or republican, accomplished cutting the debt -- despite the Korean and Vietnam wars, the space program, and all the great society programs.

Reagan began the period of fiscal irresponsibility, although whether he understood what he was doing is hard to say. Clinton got the US back on track, but Bush Jr. restored fiscal irresponsibility. That's not Bush bashing: it's a simple fact.

It was obvious when the Bush tax cuts were passed that the cuts were irresponsible and that we'd have to clean up a huge mess later as a result. (Yes, Alan Greenspan advocated tax cuts when Clinton left office because of the danger that the US debt would be eliminated entirely, but he wanted a built-in trigger to kill those tax cuts if the debt started to rise again, as he no doubt knew was bound to happen.)

Now Obama wants to restore fiscal responsibility once again, as do many on both sides of the aisle. But a band of free lunch morons is determined to stop it.

[helene_t]

kenberg, on 2011-July-17, 08:58, said:

What I have come to, regarding the "creation of money", is that QE definitely creates money and fractional reserves is sort of a leveraging idea that "creates money" in the same way that any leveraging does. Whether it should really be called creation is mostly a semantic issue, but the distinction between QE on the one hand, which really does unambiguously create money,and the lowering of reserve requirements which enables greater leveraging, is worth keeping, whatever words we choose to use.

semantics, seschmantics, but if "money creation" is to be defined in a way that makes it a useful concept then the important thing is that it is process that increases the amount of liquid dollars i.e. dollars that can be spent readily. If the government wants to increase the circulation of dollars then it can either increase the amount of dollars or it can make existing dollars circulate faster. As I understand it, both fall under monetary policy (or fiscal policy in the case of the govt borrowing money) but only the first kind involves "money creation".

Any increase in the amount of money on accounts in private banks is an increase in money supply, whether it results from the FED injecting money into the economy or from e.g. a change in the regulation of banks. I think this makes perfect sense to talk about "money creation" in either case: if you have more money on your bank account then you can buy more potatoes, it doesn't matter whether the extra money are backed by extra FED credits or if your bank was allowed to back more debt by private or foreign credits.

It is important to distinguish between creation of different kind of money, though. When I went to business school back in the 80s (debit cards were just about to become popular) the Danish central bank had different measures for the money supply, the most narrow ones based only notes, coins and cheque accounts, the intermediate one including accounts with immediate cashier withdrawals and the broadest one including funds that could be withdrawn with a month notice or so. The idea being that if cheque accounts circulate (say) at one fourth the speed of cash then a cheque account crown should be weighted as 0.25 coin crowns if one wants to compute a measure of money supply that is proportional to the money circulation. (This is a little oversimplified as money on cheque accounts with high balances circulate slower than money on accounts with low balances but anyway).

Today much more funds are available for immediate withdrawals. Heck I can even increase my mortgage by a few thousand quid by a click with the mouse and spend the money on renting BBO robots a few hours later. So the money supply definitions must be different today, but I am sure the basic idea is the same.

[mike777]

BTW just a reminder

WE DONT KNOW WHAT CAUSES A RECESSION

I have been out of school for awhile but all the economic papers Ihave read tell me we dont know what causes a recession.


We are told we are not in a recession now.


I just wanted to throw that out.


-----


otoh if you know what causes a recession I would think there are hundreds of people who are against another one. Pls stop.

[hrothgar]

mike777, on 2011-July-18, 02:33, said:

BTW just a reminder

WE DONT KNOW WHAT CAUSES A RECISSION

I have been out of school for awhile but all the economic papers Ihave read tell me we dont know what causes a recission.

We are told we are not in a recission now.

I just wanted to throw that out.

-----

otoh if you know what causes a recission I would think there are hundreds of people who are against another one. Pls stop.

Mike, I keep telling you that all the voice will go away as soon as you go back on your meds...

Regardless, No one here is claiming that we are in a recession.

We have a very sustained level of high unemployment.
We have a looming fiscal crisis.
However, we are not in a recession.
So what?

As for the "Great Recession"
I think that there is a fair amount of agreement regarding the causes of this economic crisis:

Most economists believe that the recession was triggered by a collapse in the mortgage backed security bubble due to spikes in commodity prices

[kenberg]

When it comes to statements such as "X was caused by Y" I am at least as skeptical as the next guy.However I really dislike "No one knows what causes recessions". It's like "No one knows the meaning of life". Maybe so, but I still have decisions to make.

One thought, going back to Roosevelt's "We have nothing to fear but fear itself", is that psychology plays a role. With the Tea Party playing a game of Budget Chicken with the nation's future, confidence is not high. Whether it will cause a recession or not I don't know, but I don't think it is doing us any good.

[hrothgar]

kenberg, on 2011-July-18, 06:35, said:

When it comes to statements such as "X was caused by Y" I am at least as skeptical as the next guy.However I really dislike "No one knows what causes recessions". It's like "No one knows the meaning of life". Maybe so, but I still have decisions to make.

Here's what makes macroeconomics so complicate:

Economies are made up of groups of rational actors who change their behaviour based on observations about the state of the economy, government policy, etc. Many economic models suggest that individuals in the economy are able to insulate themselves from policy decisions and sterlize macroeconomic policy. (The "Rational Expectations" models that came out of the University of Chicago are the best known example of this philosophy)

http://en.wikipedia....al_expectations

I was never complete comfortable with this line of study (If anything, I'm in the New Keynsian camp); however, it does provide some useful insights. Here's one of them:

Let's assume that we figure out how to stop recessions arising from X,Y, and Z. We take policy actions to do so.
Now, the economy is cyclical. There are going to be upswings and downswings.

If we're able to stop all the downswings from the causes that we know about, by definition the next recession will be attributed to something new / different. Such is life.

For what it's worth, I don't think, in any way, that this invalidates taking actions to manage the economy.

Anyone who thinks that the 1800s or the 1930s or whatever were some kind of golden age of economic prosperty has no understanding of economic history.

The boom and bust cycle before the Fed was incredible nasty...

[mike777]

"Most explanations of the 2007-2008 financial crises-including excessive leverage, subprime mortgages, exotic derivatives, reckless risk taking, and easy money that spawned a housing bubble-are inconsistent with the elementary principles of finance."



From a paper by Richard Roll in 2011.

I think in the past here in the forums I posted comments from an article written by numerous profs from the Univ of Chicago which basically stated economists dont know what causes a recession but I cannot seem to find it with the search function.
-----


In any event Roll goes on to suggest that if we misdiagnosis the problem we may be using the wrong treatment protocol and the current medicine may be making the problem worse. Hence the stubbornly high rate of unemployment and lethargic consumer spending.


He says that perhaps Human capital values starting falling in mid2007 because the anticipated growth rate in labor income declined.

---


All of this reflects back on the current budget talks and whether we should advocate for a larger or relatively smaller public sector.

Financial Anaylsts Journal volume 67, number 2. 2011.

[Winstonm]

Mike777,

Might the problem be the theory rather than reality? Classical and neo-classical thought as I understand it has no provisions for disequalibrium - the assumption is price is a function of equalibrium, that supply always equates to demand, that supply imbalances are short-lived corrections, and that lower wages reduces unemployment.

This thinking makes it difficult to explain a 9-month excess of housing that will take years for the economy to absorb, even coupled with the dramatic reduction in prices of foreclosed properties - and that is without bringing in the problems of the commercial real estate market.

Quote

Human capital values starting falling in mid2007 because the anticipated growth rate in labor income declined.

To blame the Great Recession and aftermath on the lowered value of the working class has got to be one of the more disgustingly blatant perversions of reality I have ever seen in print.

The derivatives markets were unregulated due to direct interference in the process by the Republicans and their laissez-faire mentality.
Ridiculous loans were made to people who could not pay by the mortgage industry, not the highly regulated banking industry.
TBTF banks were allowed to lower capital requirements and move investments off-book.

The Great Recession was a direct result of unparralled greed within a market whose regulatory infrastructure had been compromised and made impotent by the implementation of the dogma of the Bush/Cheney administration and the carryover of ideology is as old as the Reagan administration.

[luke warm]

Winstonm, on 2011-July-19, 07:24, said:

The Great Recession was a direct result of unparralled greed within a market whose regulatory infrastructure had been compromised and made impotent by the implementation of the dogma of the Bush/Cheney administration and the carryover of ideology is as old as the Reagan administration.

was not

[kenberg]

mike777, on 2011-July-18, 13:57, said:

"Most explanations of the 2007-2008 financial crises-including excessive leverage, subprime mortgages, exotic derivatives, reckless risk taking, and easy money that spawned a housing bubble-are inconsistent with the elementary principles of finance."

A philosophy professor once insisted that I must always go through the motions of having an open mind, so I will try. But really, I think that if all of the explanations that he cites are inconsistent with the principles of finance then maybe these principles need some re-examining. It sounds to me like he is saying "My theory is perfect, it's just that reality doesn't match up properly.". That's not reality's fault.

Quote

In any event Roll goes on to suggest that if we misdiagnosis the problem we may be using the wrong treatment protocol and the current medicine may be making the problem worse.

Surely no one disagrees. The problem comes with how this truism is to be applied.

Quote

He says that perhaps Human capital values starting falling in mid2007 because the anticipated growth rate in labor income declined.

I don't have the visceral reaction that Winston does. My thought is more "And what the hell does this wonkspeak mean, if anything?"


On the web, http://www.hrfolks.c...n%20capital.pdf, I find:
The human capital can be defined as "the knowledge that individuals acquire during their life and use to produce goods services or ideas in market or non-market circumstances."

This declined? Or it's value is falling? I have no idea what the man is saying or what it has to do with the recession or the budget or whether I should take the finesse or play for the drop.

[hrothgar]

kenberg, on 2011-July-19, 12:28, said:

He says that perhaps Human capital values starting falling in mid2007 because the anticipated growth rate in labor income declined.

I don't have the visceral reaction that Winston does. My thought is more "And what the hell does this wonkspeak mean, if anything?"

This declined? Or it's value is falling? I have no idea what the man is saying or what it has to do with the recession or the budget or whether I should take the finesse or play for the drop.

Roll is out of the Chicago school, which doesn't deal well with market imperfections like speculative bubbles.

I'm guessing that Roll's is arguing that the United States suddenly woke up in 2007 and decided that human capital was dramatically over valued.
(Perhaps we all suddenly took notice to competion from China and India and recognized that this would cause wages to fall)

The followed revaluation in long term purchasing power then triggered a dramatic drop in housing prices since folks could no longer afford what the could a couple days ago.

I'd welcome a link to the actual paper...

[kenberg]

Well, my first thought was that "Human capital values starting falling" meant wages fell but then I figured if that were true he would just have said wages fell. His argument would be "Wages fell because people anticipated wages would fall". Perhaps this is all he meant.

We need all the wisdom we can get so I don't dismiss anyone out of hand but so far I think I would not sign on to his analysis.

[hrothgar]

kenberg, on 2011-July-19, 13:19, said:

Well, my first thought was that "Human capital values starting falling" meant wages fell but then I figured if that were true he would just have said wages fell. His argument would be "Wages fell because people anticipated wages would fall". Perhaps this is all he meant.

We need all the wisdom we can get so I don't dismiss anyone out of hand but so far I think I would not sign on to his analysis.

Thinking of this as wages isn't quite right. Rather, you're looking at the time discounted value of the future wage stream that you expect to be earning over the course of your lifetime.

[mike777]

http://www.cfapubs.o...69/faj.v67.n2.3

[y66]

So, is this how it ends?

Obama and key Senate Republicans endorse the Gang of Six plan, including raising the debt ceiling. Cantor & Co. cave on raising the debt ceiling. Mark Warner succeeds Obama as president in 2016.

[kenberg]

Perhaps some sort of sanity will prevail. The number of prominent Republicans, businessmen, conservative pundits, etc who have in recent days made it clear that not raising the debt ceiling is irresponsible idiocy is large and growing. Late no doubt, damage has been done, but it's progress.

For that matter, taking the position that denying Obama any success or any appearance of success no matter what the collateral damage is also a really irresponsible approach. It's in the nature of extremists, right or left, that they need to be shown through very clear action that the rest of us have had enough of their nonsense. Hints fall on deaf ears.

[luke warm]

kenberg, on 2011-July-20, 10:12, said:

It's in the nature of extremists, right or left, that they need to be shown through very clear action that the rest of us have had enough of their nonsense. Hints fall on deaf ears.

i'm just throwing this out there for discussion purposes, but is it possible that there are some who *sincerely* believe the fed gov't is spending way beyond its means and that a balanced budget is not beyond the realms of possibility? i understand that it's different at the state level, but it's still factual that 49 of the 50 have bal budget mandates in their constitutions

[kenberg]

Yes, it's very possible. I by no means think of people who favor a balanced budget as extremists. Debt renders both people and nations less able to deal with the unexpected. I have mentioned, perhaps often enough to be tiresome, that the frequency with which I encounter a very cavalier attitude toward personal debt astounds me.

But there are those who have signed on to a crusade. There must be pledges. There can be no compromise. Everything must be done their way or we will not raise the debt limit and just whatever will happen will happen. Some of these people, say Ron Paul, act in accordance with long held principles. Others, I think, are caught up in the moment. They will like all of this cutting back exactly until one of their programs is cut. Larry Summers wrote an op ed piece the other day, noting that the get tough with Lehman Brothers policy was very popular for about twelve hours, until the consequences started rolling in.

At any rate, I favor paying attention to budget limitations. I don't favor announcing that we will demonstrate our new enthusiasm for financial responsibility by stiffing our creditors.

As to my own views on government:
I went to college on a scholarship, the school was government financed. I find it difficult to view that as a waste of money. That doesn't mean that I think every program the government runs is a great idea, but I do think that the government has done some good things and I would like them to keep on doing it.

[mike777]

I agree, of course the govt does lots of good things but that is not the issue.

To say an education or food or doctor or a home is a good thing and important is not the issue.

If we dont have money to house/feed/doctor/ and education all the poor then we must make hard choices.


I just hate it when people say then you dont care if people will die on the streets/ live on the streets, go hungry or cant get an education. These are hard choices when you dont have money for roughly 30-44% of the current budget.


To say some of the poor will suffer is a hard choice but it is true.


To say we dont have all the money to fund teachers salaries and pensions is just a fact in education. We just dont have the money to fund the needed school building and yes this means larger classes.

[blackshoe]

kenberg, on 2011-July-20, 16:13, said:

Yes, it's very possible. I by no means think of people who favor a balanced budget as extremists. Debt renders both people and nations less able to deal with the unexpected. I have mentioned, perhaps often enough to be tiresome, that the frequency with which I encounter a very cavalier attitude toward personal debt astounds me.

To be fair, we in this country at least have had several generations of the shining example of our Federal government that "it's okay to be in debt, and to continually run a budget deficit". Which is pretty much guaranteed to get you deeper in debt, even if you're the Federal government.