Why No Jobs
aaronsw.com
aaronsw.com
Okay, I was with you until this part - that's a pretty serious claim to make without any substantiating evidence, or even something that kind of looks like evidence.
This seems like a gross oversimplification of a complex problem to me, and like most other gross oversimplifications of the recession, seems to just pin the blame on "greedy bankers".
I think that I have every reason to be concerned that my little nest egg might be devalued. More apropos to the community here, this could also mean a shorter runway for a bootstrapped startup; I don't see how founders would be pleased by such a move.
This reminds me of my grandfather's stories during the Chinese Civil War (or shortly after the capitulation of the Nationalists anyway), where he'd get his pay and immediately bike at lightning speed to the market to trade it for sustenance.
Of course, the only thing that fixed that was a complete currency reset:
http://en.wikipedia.org/wiki/New_Taiwan_dollar
I'm not sure if the US would really be better off with that.
If there are other solutions, I don't know of them, but would like to.
Central fiat banking is the best known solution to the currency problem. This solution gets hated on by a lot of people who don't know any better, but think they do. The central requirement is that the currency-makers be independent of just about everyone, so that nobody can debase the integrity of the currency for political reasons. This angers everyone who thinks they know better than the central bank, but the anger of the average anti-establishment type is fickle and transient. It also angers the politicans, who are more dangerous--the examples of Argentina and Taiwan given here demonstrate not the dangers of fiat currencies, but rather that any currency should be kept far, far away from politicians.
Thus ignoring our entire system of checks and balances. Do you not see the danger, here?
> This angers everyone who thinks they know better than the central bank
AKA, every market participant.
> but rather that any currency should be kept far, far away from politicians.
In what sense are central bankers not politicians? They are not elected, that's for sure. However, they exercise a large amount of control over our economy and very much influence official political action. In a sense, they are very much a separate executive branch of our political system.
As an analogy, consider that we have managed to get on with a politically independent Supreme Court, with their least proud moment (Dred Scott) being when they decided to ignore their charter and bow to the will of the people.
I have no problem trusting independent bodies with things, so long as they are well-chosen and truly independent. History shows that this is a much better idea then trusting either the econo-politically elite or the demos.
Right, and a well-chosen king rules better than a representative democracy. The problem is, how do we choose a king well? Likewise, how do we guarantee the Fed is well chosen and truly independent? I submit that we can't.
> History shows that this is a much better idea then trusting either the econo-politically elite or the demos.
Care to elaborate?
Except that we have checks and balances. The chief central banker must be appointed and confirmed and reconfirmed on a regular basis. This in itself provides a check and balance very similar to the one where the Supreme Court Justices must be appointed and affirmed by the other two branches, but are then almost entirely independent afterwards.
Similarly, the other two branches could pass legislation affecting the other levers of the economy if the Fed is doing poorly or even disbanding and replacing the Fed if it truly must. Doing something like this would be incredibly difficult, but this is part of the point. The Fed is meant to be mostly independent.
There are checks and balances to reign in the Fed in the extremely unlikely event that it goes out of control, and the rest of the time it is meant to be independent and sheltered from most of the ups and downs of the rest of the political process.
You are referring to hyperinflation? When money can loose significant value overnight?
Or maybe you know what bad things are caused by high (but reasonable) inflation?
Most US citizens not only spend all the money they have just earned but they spend money they are yet to earn, and their economy was rolling just fine.
A more moderate level of inflation though will not cause such problems and a modest and predictable level of inflation can be beneficial to economies.
It's true to a degree that bankers don't aim for zero unemployment - i.e. implicitly they "let millions and millions of people be unemployed" - because to do so would create inflationary effects. Such an economy would be overheating. In an economy the size of the US, you would expect there to be a few million people unemployed at any given moment, simply because of turnover.
But this is pretty basic stuff. See e.g.:
http://www.investinganswers.com/term/unemployment-rate-809
http://en.wikipedia.org/wiki/NAIRU
It is however true that the Fed has a rather ridiculously overloaded mandate. It has basically one lever - the interest rate - with which it is supposed to target multiple goals - "maximum employment, stable prices, and moderate long-term interest rates". If you think about this for a moment, you'll realize it's not possible.
I was a bit imprecise. Not equivalent of whole FED but equivalent of part of FED that makes decisions about monetary policy.
http://en.wikipedia.org/wiki/Monetary_Policy_Council
In Poland monetary policy is understood as keeping prices stable not as attaining a set of objectives oriented towards the growth and stability of the economy.
I think they don't try to shorten recessions, but they intervene in case of crashes and bursting bubbles in order to keep the financial markets functioning.
I'm not sure there is much evidence that lowering interest rates help the economy to come out of a recession. I studied economics almost 20 years ago and then the prevailing opinion of economists was that you can't know when a recession will end, so lowering interest rates to spur growth is likely to just cause inflation after the recession ends.
Anyway, if the central bank targets inflation, it also has lower interest rates in a slow economy that doesn't risk overheating.
They of course monitor unemployment but only because unemployment rate (which is currently 12.7%) can influence future behavior of inflation rate.
[1] Via quoting from the Economist: “Mr Bernanke does not want to risk a de-anchoring of inflation expectations. He is willing to accept 10% or greater unemployment and the resulting economic and political fall-out in order to avoid that risk.”
Isn't that assumption always taken by default when considering nearly all market actions? That actors in the market are primarily motivated by selfish goals?
It also assumes that the home-borrowers, politicians, realtors and bankers who created the housing bubble were motivated by selfishness, as were the hedge fund managers and bankers who helped pop the bubble.
That needn't hinder one from constructing a conspiracy theory, though.
Greed is (not always) good.
Yes, and bankers are generally motivated by self-interest when undertaking market actions. However, we are not talking about a market action. The question is what motivates Ben Bernanke's decisions as the head of the Fed?
Is he a selfish kleptocrat trying to enrich himself and his buddies, or is he providing prudent guidance to the country and economy as a whole? Personally, I disapprove of his role and distrust the Fed's entirely, so I cannot provide a reasonable answer here.
He is still Ben Bernanke, right? Does the hat he wears change him? Assumption that people undertaking government position will forget about what their life was all about up to that point seems far fetched.
If I have $1M and I can decide between two options
a) tomorrow my money is worth $2M
b) tomorrow my money is worth $500k
I don't see it as much a conspiracy theory as an understanding of human nature.
Originally, the fed was created by a secret committee of bankers on a remote island. It was rushed through congress quietly -- I know, because I read the decades old NY Times article covering the legislation at the Will Rogers Museum.
Then, if you watch the recent Moore film, you'll see that the current bail out was voted down in congress, then secret meetings led by many of these bankers, GS and the like, prompted a revote and they rushed it through again -- when it passed.
What Aaron said is pretty accurate. The bankers aren't looking out for main street and the jobs won't be back for a while.
I've been trying to sell a house now for almost a year and many people want it and none of them can get a loan -- they've tried. They have jobs. They have income and the ability to repay the loan, but the banks just aren't giving out any money. Contrast that to 4 years ago when you didn't even have to have a job at all or verify income to get a million dollar loan -- I know, because it was my job to build information systems to help the subprime match makers connect home buyers with the banks who wanted to give them the loans.
When I realized how dirty it all was -- I quit and started my own company and I'm very glad I did.
a) His $1 million earns ~3% interest and depreciates by 2% per year, or
b) His $1 million earns ~4% interest and depreciates by 3% per year.
You're arguing that these guys are promoting multi-trillion dollar swings in the country's wealth in order to earn a couple more basis points on their investments. If you're going to posit a Greedy Ben Bernanke, why is he being so slow and cautious? He can probably make, at most, 1% per year extra by manipulating the value of the dollar. Or he could take a suitcase full of cash.
Most likely his money is managed in a blind trust, which means he has no control or knowledge over how it is invested. For all he knows, inflation will help his portfolio. In the most likely event, his money is invested in a mix of equities, stable funds and bonds, and all his money does is track the general health of the economy (with a smaller upside/downside due to hedging and diversification).
You're also dismissing the social wins aspect of this: you definitely can't argue that Bernanke doesn't know the way his friends are betting, even if he's "blind" to his own portfolio. Bernanke doesn't have to win directly off this for there still to be a possibility of him making corrupt decisions that help both him and his social network.
Bernake doesn't know what's in his portfolio, because his money managers don't tell him. That's why many agency heads are required to put their money into a blind trust. If you have evidence to the contrary, by all means notify the proper agency (I think OTS, not really sure).
As for Bernake's friends, I expect most of them don't tell him (or anyone else) how they are betting. If I tell you my trading strategy, you can turn around and take my money.
What I would argue is that Bankers and Wallstreet just want it to go back to what it was. They're trying as hard as they can trying to build a time machine to go back before everything fell apart, and resisting all attempts at changing for the better. They just want this to all go away. So given the choice they want that lever to make everything as it was before which is impossible.
Money doesn't run the economy. Confidence does. Economy is and has always been a confidence game.
If people in the baby-sitting co-op are confident to find / earn more scrips in the future, they will spend their scrip today - even if its their last remaining scrip. But if they have no confidence of earning a scrip in the future, they will save it.
But if everyone starts saving the scrip, exchange doesn't happen. And economy suffers. And because the economy suffers, people save more scrips. And it creates a downward spiral loop.
On the other hand - if everyone gets over-confident and starts spending scrips they don't have, we see a bubble and then a bubble-burst. Which leads to some very bad consequences too.
So the trick has always been: make sure the people remain confident about the future. But that they don't become over-confident.
The main purpose of currency is not the eternal accumulation of wealth. It is for liquidity: making bartering easier. If you want long-term stability, you can invest in gold or bonds.
The reason why the US has planned inflation is to maintain liquidity when productivity rises or currency becomes horded. Economists such as Bernanke have learned from the Great Depression that rising deflation with the same productivity results in spiraling unemployment:
...a town full of shoe factories that closed during the Depression, leaving the community so poor that its children went barefoot. "I kept asking, Why didn't they just open the factories and make the kids shoes?"
The reason is because companies know that consumers do not have money to spend so they fire people to preserve their appreciating currency. By doing nothing, these companies gain wealth while children walk without shoes.
From a purely capitalist view, these companies have the right to do so. But would you really still hold that belief if all the farms shut down in this manner?
As Aaron said, it is a personal opinion of how much inflation you prefer.
Do you prefer a relatively high inflation because you want to be employed? Or do you want a relatively low one so your assets appreciate or keep their value?
That's kinda the problem right there. Anyone can "keep asking". It's the "they" that get things done that you really need.
The current greenback is worth approx 4% of its level in the early part of the 20th C.
I know this is inconceivable to most people, pretty much in the way falling real estate prices were inconceivable. You don't really understand it until you see it.
Bartering (or even trade in a foreign currency) adds so much friction that all but the most necessary and unsophisticated transaction simply don't happen.
http://www.aaronsw.com/weblog/depressions
The difference is that now he says it's all because Ben Bernanke wants to, um, profit on his dollar-denominated holdings. Which is sort of like claiming that the CEO of Exxon really believes in global warming, but he wants his next beach vacation to be .1 degrees warmer.
See the inflation charts here: http://bit.ly/aA5MXb
So Roosevelt's plan failed (and it did fail) because the dollar's value dropped. So while more money was getting pumped in to the economy that was being negated by the assets of U.S. companies dropping in value. That drop caused business owners to stop hiring again.
My understanding of the Obama administration's basic plan is to pump money into the economy while trying to control inflation. That way companies will get the benefit of the Government's money without having their own assets devalued (and Ideally that will cause them to start hiring again)
Here is a more complete graph of unemployment during the Great Depression where you will notice the unemployment levels never reaching the peak, and dropping back down with Roosevelt enacting even more policies and spending bills.
http://www.inewscatcher.com/timages/50154f373744ae8603a61449...
There's nothing wrong with expanding your horizons (I'm an armchair economist as well) but trying to write critically on a subject you don't really have the background to do so on is counterproductive.
He mentions Krugman briefly later, in support of his argument, but doesn't properly cite the material in question or mention the fact that Krugman is in fact the one making the argument...
It's been too long since I thought about it, but back then I felt there were some aspects missing from the story. Must think about it again, but overall, it is a very limited experiment, hardly the same as a full economy.
Also, doesn't the co-op story show that people can also create their own money? If lack of money was the problem, why don't they just exchange services and products (I mow your lawn and you clean my car)? Money is just a tool to make exchanges more efficient, but it's not that without money they become impossible.
Of course, it is always appealing to blame everything on some rich elite.
There are people who dedicate their careers to studying this stuff... and they have better examples. That's just a simplified example used to communicate the idea.
> why don't they just exchange services and products
What money makes possible is more complex exchanges. Say, I make a web site for some guy, who gives a book to some other guy, who gives some steaks to another guy, who gives some pasta sauce to another guy, who gives some milk to me.
Without money, complex interactions necessary for a modern economy wouldn't be possible.
> Of course, it is always appealing to blame everything on some rich elite.
Actual economists generally don't do that. I wish if people wanted to post economics articles, they'd 1) do so on reddit, but if they really can't contain themselves, that at least they'd 2) post actual papers by real economists (and not just their opinion pieces) or something more than politicized handwaving.
Yeah, but last I heard, not all of them agree with Keynes. Also, please point to some examples. I have heard Krugman repeat that baby-co-op several times now. You'd think he'd provide some other examples occasionally if they are so abundant.
I know that money is a very useful tool, but it still seems to me that if only money was the problem, people could find workarounds. They could create their own money, if the state did not provide enough. The baby co-op did just that, it seems.
It just takes a little more than one baby co-op to convince me that availability of money is the only factor that makes an economy work.
It is however a very appealing theory to governments, because it justifies them printing more money. And as we see, it appeals to conspiracy theoreticians, too.
My own view (without academic seal of approval) is that efficiency is the main factor that determines our well-being.
Well, "productivity" for efficiency, but yes, you're essentially correct. I wasn't trying to defend Aaron's post, and indeed, economists do differ, widely, on various things. It's a relatively recent field, one where there are lots of messy human factors, and of course it's difficult to do many experiments.
I'd rather not see it here, though, as it usually rapidly devolves into essentially political discussions.
Ultimately long-term, sustainable economic growth can only come from improvements in productivity. So if quantitive easing is undertaken to build things that boost national productivity, it probably isn't such a bad thing. If the money is just going to go on buying consumer stuff from overseas I question its value.
I realize that not everyone can be super-professional at what they do, and that's fine. But in my social circle (which includes all kinds of people from no skills/no education immigrants to highly specialized professionals in a variety of locations throughout the U.S.), nobody is really struggling. So what gives?
But clearly the demand for talent in banking is much higher than that. These people get paid extraordinary amounts of money. So where is that demand coming from? What service is being provided by banks that warrants the compensation?
As far as I understand it, beyond the basics of arbitrage, risk hedging and market making etc., investment banks are a zero-sum game - which after you add in the overheads and the profits, they destroy value.
My own train of thought lead in a similar direction as yours. What I'm really hoping for is the opinion of a hard core classical economist, because I feel like that's what I'm lacking. Are you familiar with such arguments? The free market determines salary, after all.
Finance as waste: There's an arbitrage opportunity somewhere worth 100,000, and it will be picked up within a week of emerging. It is privately profitable to spend up to (100,000 - trading costs) to be the first to notice this, but the social benefits of it being discovered in 2 days rather than seven verge on zero.
The former is useful to the economy, the latter is a tremendous waste of valuable human capital.
1) Officially a lot of the stuff is there for hedging/insurance.
2) It's quite hard to regulate this stuff out of existence, because the aforementioned really smart people will find holes in your regulation.
3) The financial industry is quite powerful and can hire a lot of lobbyists that talk about "improving efficiency" by reducing red tape surrounding their industry.
4) During the good times it looks like a lot of wealth is being created and no-one wants to commit political suicide by spoiling the party.
For M&A and IPOs it's also relatively simple; the differences in the amount of money you get can relatively easily be 20% or more depending on who's representing you. These are complicated transactions, you need a lot of expertise to do them, and you need a sales team in place to sell it, and an organisation capable of doing the research to drum up the deals. When you're dealing with huge amounts of money anyway and the top guys are vastly better than the mid market they'll be able to demand $BIGNUM because they're judges to be worth it.
2% of $100 million is a lot. If you need to pay the #1 guy an extra $100,000/year to keep him, it's well worth it.
http://www.theatlantic.com/magazine/archive/2010/04/my-infla...
This writer also comes to the conclusion that inflation might be the way out.
Frankly the Fed is probably only doing their job if everyone is angry at them. Which seems to be the case, so I tend to think they're probably making a decent trade-off at this point, as hard as it is for both sides to stomach.
Sounds like a win win.
Probably it isn't though.
If you want jobs, let people accumulate capital and invest it how they like.
If you want a TLDR version of the economic crisis, like Aaron attempts here, you really want to just look at the increasing divide between rich and poor in the country (aka the unbalanced distribution of resources = unbalanced distribution of power = system susceptible to corruption, greed etc = incentives lined up to benefit small portions of society not large = economic failure.)
What greatly exacerbated the economic crisis were decisions made for small amounts of people wall street that impacted large amounts of people everywhere. Many of these decisions were corrupt (ie they did more than prevent others from making wealth, they actually took it out of their pockets), but even in the times when they could be simply considered "competitive," the ability to make such decisions that impact such large portions of the population should be limited greatly. This is a systemic problem, not a person problem.
The quick response to that one is that you need a system of incentives that get people to work hard enough, and part of that system is having positions like that where people can make decisions like that. I disagree, and actually take something like the NBA as an example: basketball players accumulate great deals of wealth (monetary and otherwise), enough so to keep people training at the peak of their abilities. Yet I can't remember the last time someone accused Michael Jordan of destroying jobs or the economy...
At least this is what I'm getting from all the CNBC/Bloomberg watching ;p
Wait... where did the old pieces of scrip go?
Some are lost (you need to print money to replace torn/lost bills).
Some people join the group without new scrip being added (money supply needs to grow with population).
Some people de-facto left the group (kids grew up/they moved away) while holding scrip (people stuffed cash into their mattresses and forgot about it/died).
So to answer your question, Mr. Author, I will listen to you when you back up what you say with something tangible I can hold onto.
If I have $billions then I can invest my money in a way that hedges against inflation. Conversely if I make $20k/year I can't insist that my employer pay me in a fixed number of long oil positions. So it's not true that inflation always hurts the bourgeoisie and helps the proletariat.
It is true that inflation hurts a lender and helps a debtor. If inflation is at 10% and your mortgage at 6% then you're effectively making a 4% return on debt. Conversely the bank is losing money because the money repaid is worth so much less than the money lent. Bonus points for anyone that figures out why the banks aren't lending
As for Bernanke/cronies motivations; the federal government would like inflation to be as high as possible without risking collapse. So if "money for their masters" was the Fed's goal they will keep gunning for sustainable inflation. Bernanke/cronies can hedge against it, and the largest debtor in the world would prefer to pay a low interest rate.
Except that the bank isn't really lending its own money. It lends its depositors' money, amplified through fractional reserve banking. They can also borrow from the Fed, making their own bundle on inflation, as a debtor.
FED + Banks is a system of issuing money. As economy grows it needs more money. FED decides how much money is needed and banks determine who needs it and gives it to them (getting healthy profit if they were right).
Banks found a way to circumvent FED limits on making money. They made much more money then the FED intending them to make. That money was pushed mostly to real estate market driving prices of houses up so they became completely disassociated with their real value that they may present to anyone. It was kind of spotlight hyperinflation. Each dollar was worth lower and lower fraction of average home. Money was seeping to the rest of the economy but since due to technical advancements real value of economy was growing probably faster then FED expected that inflation was not noticeable in other markets.
When credit is paid back the money that was created when credit was given is destroyed. When situation is stable and credits are paid back at predictable rate then banks just give new credit in place of old ones if they are needed and allowed by FED and everything goes just fine.
But when credit defaults money all borrowed money not paid back yet is also destroyed. If huge quantity of credit default at once huge quantity of money is destroyed. What is more it's money that belongs to bank is seriously crippled by this. Not only he didn't earned interest rate but also he has less money to give new credits and create more money to profit out of. Defaulting on massive scale is something that current system of issuing money is not protected against.
I'm not entirely sure what happens if bank needs to destroy more money for defaulting credits than it has. Bank obviously goes broke but is the rest of the money still destroyed or not?
Since a lot of money was destroyed there is possibility that there is too little money now. As far as I know there really are no good ways to estimate how much money is needed (FED and equivalents in other countries do it by more or less educated guess). Maybe issuing more money could help, maybe that is not needed. It's not that obvious as post author has stated but it may be worth a try.
Also grudge about wealthy is not very polite but it might be true that they fear inflation more then they should because of their wealth.
Disclaimer: By 'creating money' I don't mean literally printing it, just borrowing many times over the money that bank has (or borrowed). By destroying money I don't mean burning it but just owing people who deposited money in the bank and not having cash to give them back their money.
He's on to vital fundamentals.
It's helpful to look at civilizations as products of 'social energy'... countless decisions by individuals and groups. (A decision is an idea + an action).
Money and credit are very imperfect technologies for the storage and allocation of this 'social energy' with an inherent bias in favor of any with the power to create it.
So, since this 'creator' bias is inevitable the solution has to lie in democratizing (with important checks and balances) the process. This inherent bias also makes the Fed’s claim of independence ridiculous on its face and is a core problem with the monopoly of central banking. (This doesn’t suggest its elimination, only elimination of its monopoly).
After all… who has the right to create and than allocate YOUR ’social energy’ without your input?
That’s worse than taxation without representation… that’s potentially multi-generational enslavement without having an ounce of input into that allocation of your life’s energy.
The thought process that rationalizes it for the ‘credit creator’ and those most closely benefitting is tied to a problem of scaling biological altruism but that’s a separate essay.
I believe this inherent bias may suggest that more than one type of credit creation may be desirable. For example local currencies geared to local products and services to function alongside one or more global currencies… in an attempt to overcome a ‘proximity’ bias which goes along with a social bias.
This approach can encourage asset-based-community-development and economic and financial resiliency while preserving the advantages of global trade and markets as well.
Again, I’m not an economist but it seems to me these are ideas worth investigating.
A brief post on some of this here:
On Social Energy, Enterprise & Expanding the Technology of Money
http://culturalengineer.blogspot.com/2010/01/on-social-energ...
I also believe the Individually-controlled / Commons-dedicated Account facilitating the microtransaction in Commons focussed activities (politics and charity) is an essential piece of this puzzle.
Opinion and influence are also aspects of ’social energy’ which money powerfully conveys(though we might wish it weren’t so). Current money technology inhibits the free flow and networking of this energy which distorts opinion markets.
And, in fact, tends to further entrench the problem.