The Third Depression
nytimes.com
nytimes.com
He ignored some pretty serious depressions in his analysis as well. The panic of 1819 comes to mind as a pretty serious one. People ignored the desires of those long on stocks and real estate to bail them out. They realized the problem was too much debt and just let it work itself out despite the pain it caused them in the short run.
Then there is the depression of 1920-21. This depression probably highlights most clearly the Austrian theory of the business cycle and why the Austrian response to the bust is the correct one. There were no interventions in the economy following the bust. It was a very serious contraction by any definition.
We live in a world that's consumed by debt. We're taught that debt is good despite our instincts to the contrary. We're taught that being irresponsible is the way to get yourself out of short term pain. Listening to these people seems like madness at this point. The real reason that budget cuts are on the table is that everyone knows we're all broke. After 10 years of this I imagine people are going to get fed up with bailouts and inflation. Krugman will still be crying for more stimulus while a few people might get serious enough to let the banks fail and start over.
Our fear of short term pain might be the worst part of the modern political system. We'd rather avoid some of the short term pain even if that means dragging things out for decades.
When people realize that they can vote themselves more money, they will. Government will then promise more than it can deliver and proceed to spend money like no tomorrow just like what happens to Greece and California.
But it's heresy to suggest that democratic institutions should be scrapped altogether. Everyone thinks democracy equal freedom, but it's really just majority rules.
I would agree had you said "When people think that they can vote themselves..." because who are they kidding? There is no "Obama Money." The government's money comes from the people, as the residents of Greece and California are discovering.
I suppose you can vote yourself more money if you can vote and yet pay no taxes, which might be the true problem. Perhaps in order to have a say in the direction of the country, you need to have skin in the game.
I don't think that chucking democracy is really the right reaction. I stand with Winston Churchill: "Democracy is the worst form of government, except for all those other forms that have been tried from time to time."
One of the original thoughts behind establishing a bi-cameral legislature was that only (real-estate) property holders could participate in the senate. The idea being to prevent the masses from voting the property to themselves. Eventually, it was settled to give the senate to those who were competent enough to organize themselves into local governments/states. Still, it would be interesting to have a house where one man == one vote and a senate where one dollar == one vote. I'm not sure human nature would allow the government to be primarily funded by power-mongering but it'd be a fun experiment to try.
Cut that back (yes, I know, beyond hard), maybe limit it to a new class of Taxpayers, and things could change real fast.
Of course the Social Justice types would be ... unhappy.
Used to be in many states you had to own some land (one guy owned a doghouse sized plot of land to make a point) or pay a poll tax to vote. The latter's corruption by the Southern segregationists makes that right out for the time being, but ... well, republics tend to last only as long as they have the moral fiber to not vote themselves the treasury. We're obviously way beyond that point, but the game will run out at some point. And with so much of our debt in bonds (1 year or less maturity) is could have very quickly. Probably would already be happening if not for the Eurozone crisis.
He advocates spending and stimulus to get out of the this. He says "And both the United States and Europe are well on their way toward Japan-style deflationary traps".
But didn't Japan spend a shitload of money during the 90ies (making their debt 200% of GDP)? Don't they now sit with that debt, a declining population and still no growth?
I'm not an economic expert and maybe I just have a biased for government/personal austerity and saving.
You may not be an economic expert and maybe have a bias against this sort of thing, but most anybody should be able to see that this was a horrible mistake.
Almost certainly a terminal one for the Japanese people, or as Kenshiro of Fist of the North Star would say, "omae wa mō shindeiru" ("you are already dead").
I think only long term way to get out of chronic high levels of unemployment is to either accept we are going to live in a welfare state, or remove the minimum wage.
Maybe the answer is part welfare state, except that the government assign positions to people collecting welfare.
Over time remove Social Security, Medicare, Unemployment assistance etc and set all taxes at a flat rate then give everyone say ~700 to 1000$ per month inflation adjusted + heath care. The problem is we live in a democracy so that number can and will be fucked with. Also, handling money for young children to avoid "professional welfare mothers".
PS: The odd things the actual numbers don't change much from the current system, but the advantage is it removes perverse incentives. There is no threshold where earning more money is taxed at insane levels (sometimes over 100%) as public assistance is removed.
Regardless of policy, it is very important to get as many people in the mode "I am paying for this government" so that fiscal responsibility is desired by most as opposed to a handout mentality.
what are the criteria for this future?
do you think all those unemployed now are just lazy?
No, I don't think unemployed people are all lazy. Where the heck did I even come close to saying that? I believe the "basic income" as described in your link is wrong for right now and has more of a basis in some future.
People are unemployed because we are in an economic downturn and people are not spending and capital has also dried up. Companies are going without more than automating. This isn't the consequence of some tech revolution, it is the consequence of poor decision making on Wall Street and in Government.
This question even ignores logistical difficulties like what the definition of a wage "to meet all their needs" would be, or where the money to fund such a program would come from.
can you clarify this? their needs aren't met because they have no ability to contribute to the labor market..
I guess pretty much every job would serve a basic human need (to be employed) to someone who needs to be employed in order to make ends meet.
I guess what I'm trying to get at it is that your post read like someone trying to apply what they thought the world should be like and not how it actually is.
For example, if we have an excess of farmers that would be cleared up in the market as those not making enough income to continue being farmers would pack up and leave the occupation or try to get loans to maintain their employment long enough to weather the current conditions. The only time I see problems in employment is when an entity steps in to maintain a job when the market is already dismissing it.
A) Jobs which meet a basic human need are more stable than jobs that fill a want. They also come back vary quickly vs jobs that fill wants.
B) Jobs that invest in the future are somewhat more stable than jobs that fill wants and they come back quickly as the economy improves.
C) Jobs that fill wants are the least stable because people need to feel that their future is very secure before they spend much in this category.
Government spending to prop up A or B can be cost effective, but to prop up C tends to be extremely costly. In some ways money is less useful than confidence. Consider the state of mind someone needs to be in to spend a weekend at a spa, get married in Hawaii, or buy an Accura vs. a Honda.
For example, if we have an excess of farmers that would be cleared up in the market as those not making enough income to continue being farmers would pack up and leave the occupation or try to get loans to maintain their employment long enough to weather the current conditions. The only time I see problems in employment is when an entity steps in to maintain a job when the market is already dismissing it
I was expressly commenting on farm subsidies. There is an idea that giving welfare to people is worse than giving it to industries however from an economic standpoint there is little difference when the output of said job does not create long term value.
> ...governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending.
That's Krugman's answer for everything. Dot-com crash? Create more money:
2001 Krugman: “During phases of weak growth there are always those who say that lower interest rates will not help. They overlook the fact that low interest rates act through several channels. For instance, more housing is built, which expands the building sector. You must ask the opposite question: why in the world shouldn’t you lower interest rates?”
Oh, wait, they did that and that created the housing bubble that he's now suggesting we prop up by... creating more money.
This quote from the article is even crazier:
> But no: over the last few months there has been a stunning resurgence of hard-money and balanced-budget orthodoxy.
Balanced-budget orthodoxy? Man, the guy's got huge cojones, at least. When your policy causes problems, insist it on even louder as the solution, and point to classical common sense ("balance revenues and spending") as orthodoxy. Good economics, not so much, but huge cojones definitely. Startup founders could do worse than emulating his confidence when pitching investors.
In particular, there's a reason interest rates are adjusted regularly: in different economic situations, you need different interest rates. Were interest rates too low before the current crisis? Probably. That's mostly academic now though. What matters is what interest rates should be at now. And our economy is in totally different shape since before the crisis. What made sense then isn't necessarily good policy now.
The Keynesian prescription, basically, is for the government to run deficits during recessions and to pay back those loans when the economy recovered. During the 2000 Presidential campaign and the first three-quarters of Bush 44’s Administration, Krugman excoriated Bush’s economic policies, because those policies were running up the national debt to unprecedented levels while the economy was going well and the country could have afforded to pay down the debt.
Sure, in theory, it might work to smooth out the normal business cycle (although I have serious doubts about its applicability to catastrophes, e.g. pushing on a string), but in normal circumstances it's a recipe for ever increasing sovereign government debt in the hands of mortal humans.
So it looks to me like politicians are frequently resisting the temptation to borrow as much money as they can throw at their constituents.
At the worst reasonable end, what about Argentina? They were epsilon from becoming a developed country ... when Peron gained power.
Or Japan. Do you really expect them to pay back their debt, with a rapidly aging population that's actually been decreasing in absolute and accelerating terms since 2007 (http://en.wikipedia.org/wiki/Demographics_of_Japan#Populatio...)?
Krugman complained bitterly.
The first Bush+Dem Congress deficit, before the current crisis, was significantly larger than $100B.
Krugman didn't make a peep.
Just like articles from reason.org or cato or mises invariably decide the problem is too much government.
Which is why articles like this are best left to other sites.
Now, I am not against regulations per se(at least in the broad sense), but the kind of regulations that corporations brought and pay for. Government regulators can be brought, or sometime the regulatory framework cause a lot of economic distortion, often to the benefit of oligopolies or monopolies. Sometime, the regulators comes from the industry that they're trying to regulate themselves.
We seen regulatory capture happens with the trains, the ACTA fiasco, and easy treatment of BP by US inspectors.
Sometime, I think people are too naive about the regulators and the regulatory framework. Libertarians got a lot more going for them than "too much bureaucracy".
It doesn't seem obvious that anyone is "always right", and the discussions tend to go 'round and 'round...
The easy copout is printing money.
There's precedent: look at GBP as the UK dismantled its empire.
You might also be really upset if the US returns to a pre-WWII isolationist mode (you do remember one of the things that happened as a result...). We keep the peace in large parts of the world and e.g. implicitly prevent a lot of those we're protecting from going nuclear.
The only thing less brutal than a Pax Romana, Britannia or America is its absence.
The Us involvement in WW2 is due to escapades in China and the Philippines - the reason Japan attacked the US.
The fact (well, I agree) that the US badly screwed up its first really major intervention in world affairs has little to do with the present day, unless you contend that we learned nothing from it (e.g. for WWII Unconditional Surrender and the occupation and nation building we did in Japan and West Germany).
I think that it is far from given that the US should be the world police, or that anyone should be the world police.
That will either happen chaotically, orderly, or governments will bankrupt themselves trying to prop it up and avoid it. Looks like the US is hell-bent on the latter, in no small part because most large creditors have deep captured the government itself.
Seriously? What you propose would be the economic equivalent of a nuclear winter. You can't cure a disease by killing the patient.
Besides that, it could even come back to bite us. Think of how many other countries are indebted to us. If we can default on our debts, why can't they?
If the government were a person, economics might agree with you, but it's not. This is what fiscal conservatives fail to see. The government can hold debt so long, that, due to inflation, it's value will fall to the point where paying it off is trivial. This is not practical for persons that have a finite lifespan. Corporations also fall in this category, albeit to somewhat less of a degree. Investors often do not see justifiable corporate debt as a problem, but an indication that the executive team understands opportunity cost.
Reread what he actually wrote instead of responding to a strawman. Pay particular attention to the words after "debts".
>>> We're going to do default the hard way by not paying our debts or we're going to default by inflation.
Note that inflation isn't free - it has huge costs that play out over a long time. Default's costs are suffered over a shorter period of time.
I favor default because one of two things happens afterwards - folks don't loan money when govt is borrwing dumb or folks donate money to govt (via providing loands that aren't paid back). Both are an improvement over the status quo, which the "inflation default", perpetuates.
Argentina has defaulted at least once in the last 100 years and folks still loan it money.
The purpose of this whole economic and central banking system is to smooth out the economic peaks and valleys, not to be perfectly efficient and/or "morally" correct. It's far more important that people continue to have food on their tables than the economy and government operate at peak efficiency.
Actually, I'm not. I'm assuming that the US govt can enact policies that cause inflation, which is pretty much agreed on. (And, while the Fed is formally separate from the formal US govt, it's part of govt monetary policy. That goes beyond the US govt's power to replace the Fed leadership....)
> While I might agree that default and inflation both have costs,
Do you really think that there's some possibility that either one is free, especially at the levels required to deal with current debt levels?
> with inflation perhaps costing more, you're ignoring the time value of money and elasticity of supply/demand.
How do you know that I'm ignoring the time value of money or elasticity?
I never said that default would be pain free. My claim is that the pain is likely to be less than inflation.
Note that neither of us are providing any numbers.
> The purpose of this whole economic and central banking system is to smooth out the economic peaks and valleys, not to be perfectly efficient and/or "morally" correct.
That's nice, but irrelevant because no one is arguing for efficiency or correctness.
Note that inflation can cause serious panic and damage.
Feel free to provide examples of default causing as much pain as inflation wreaked on post-WWI Germany or Zimbabwe.
Nobody would say you're a fool for taking out student loans to get a bachelor's degree. All things being average, the debt service on student loans is cheaper than the cost of not having a bachelor's degree.
Saddling future generations of individuals and businesses with debt inhibits growth, it doesn't promote it. The revenue to pay the interest on that debt has to come from higher taxes down the road, which means higher tax rates for businesses and individuals, which means lower growth.
That's an interesting example about student loans, because that's exactly what's happening right now. For many years people have been blindly borrowing money because they too claimed they were investing in themselves and they too were their own source of revenue. Guess what? Many are now realizing the debt they incurred didn't generate anywhere near the income they needed to pay off said debt. There are threads on HN all the time discussing exactly this about recent graduates.
Do you have anything to back these statements up? One, that deficit spending leads to higher taxes, at least most of the time. Two, that higher taxes directly translate to lower growth, at least most of the time. It would be nice to think of the economy in such black and white terms, but it's often orders of magnitude more complex.
The revenue to pay the interest comes from a stimulated economy, which is what we're trying to do. I am not arguing against paying down debt at all, I am arguing against paying down debt during economic crisis. There are periods in which the government has excess cash and pays down it's debts. It's ignorant to assume that it's more burdening on our children to saddle them with debt than it is to saddle them with a depressed and stagnant economy. Ultimately, this is a gamble, but one history has shown to pay off. Economic stimulus through deficit spending is a long-term solution, not a short-term fix. You are essentially saying it's alright to starve and suffer the deleterious effects of malnutrition, just to save some interest payments.
My example about student loans still holds true. The average person makes more money with a bachelors degree than without, by far. This is indisputable fact. While some may find out that they have to actually learn and work hard and perhaps some fall through the cracks, it does not discount the excellent investment that education is.
(Granted, a lot of US debt is held by foreign central banks that are not purely driven by return on investment, but presumably if the Bank of China really thought the US was close to default, they would not be so inclined to throw their assets in our direction.)
I'd read this has happened several times before (Japan may be doing a form of it), we seem to be doing it now, it's the best practical outcome of the current Eurozone crisis, but it does really mess things up during the "recovery" period.
We're Japan in the 90s all over again. Either force the banks to mark it all to market (require them to sell 5% of it for a market price), do capital structure cramdowns to preserve the banks that can be preserved, let the others go out of business, then continue economic growth, or suffer a 'lost decade' or worse.
It is definitely incorrect to say that more stimulus necessarily must lead to hyperinflation or other things predicted by the Austrian view of economics. WWII is a counterexample. This does not mean that more stimulus must necessarily make the economy better. Spending money paying for millions to go to college for free (essentially), as in the GI Bill after WWII had a tremendous benefit to the country. There are wise expenditures and unwise expenditures.
The fact right now is that millions are out of work and even more or underemployed. People are suffering. It is sound and humane to take steps to help such people. During bad economic times it is generally wise to make major structural investments in society. During good economic times it is wise for government to pull back.
The borrowing right now is only a problem if there is not enough future discipline by our leaders. They will need to raise taxes on the wealthy in the future to pay for the mess we need to get out of today.
Heard of the broken window fallacy?
In any case, the shift to war productions cause the population some misery. You got rationing of essential foodstuff and the like. You can't buy anything you like. There was almost certainly no R&D money spent on consumer research.
Never mind the fact that all the men went to wars! That's going to cause less employment. When a lot of men die, that make your employment statistics awfully good, doesn't it?
Spending money on education is all well and good, but what about the dead GIs that we can't bring back to life? How many Einsteins, Teslas, and Neumanns die in that war anyway? We probably lost some of them in that war.
Wars are just another case of digging holes and then filling it in again, except you're digging graves for dead soldiers, airmen, and sailors, and a whole perfectly good workforce too.
That is clearly uncharacteristic of the Austrian school. I never heard of an Austrian economist saying that's the reason we got out of the depression. I have heard the Austrians arguing just the opposite.
You will need to produce your claim that Austrian economists believe it to be so.
Beside, nobody can detect sarcasm on the internet. There's no body language to detect.
Addendum: Argument from authority is what you're arguing for getting out of the depression? The Keynesian and Austrians believe that World War 2 got us out of the depression therefore it is true is what you're arguing. That's unconvincing.
Mere assertions is not going help you there. You have to explain why I am wrong.
"Spending money on education is all well and good, but what about the dead GIs that we can't bring back to life? How many Einsteins, Teslas, and Neumanns die in that war anyway? We probably lost some of them in that war."
and
"Heard of the broken window fallacy?"
it's a bit too much to read this latest statement from you. A number of your statements on WWII were not relevant to my comments. You also made a number of unsubstantiated assertions. Also, the third sentence in my previous remark addresses your present question.
I believe a review of logical fallacies would be beneficial to you.
Don't tell me that you don't think a dead soldier is not a capital loss. Don't tell me that economic scarcity in time of wars is economic prosperity.
Many things caused the housing bubble, but printing money (causing low interest rates) was a huge part of it. It works like this: when something becomes cheaper, more people purchase it. Interest payments are a huge part of the cost of buying a house. When they get a lot cheaper...
People forgot that interest rates can't stay cheap forever. And when money gets expensive again, housing prices tank.
This, BTW, is a great insider account by someone who was in the trenches. A confession from a home ownership advocate http://www.ft.com/cms/s/2/f64a9e36-9da3-11de-9f4a-00144feabd...
Yeah, it is a complicated topic. What did you want to know specifically, what were your questions?
> So: low interest rates caused the housing bubble. Could you explain how that happened exactly?
Low interest rates were a big part of the problem - the price of money got below the cost of inflation. That means borrowing as much as you can is profitable. Let's say your interest rate is 4%, but the rate of inflation is 5%. That means that all things being equal, your rents on a commercial property are increasing faster than you're paying in interest! That doesn't seem like a big difference to a layman, but the gap between 4% and 5% is huge. That's 20% on your money.
In that kind of environment, it means if you borrow as much as you can, you turn bigger and bigger profits. This drives housing prices up. It also drives the stock market up. But the assets are artificially high because the money lending rates are artificially low, ie, set by the Federal Reserve. An arbitrage like this would be much less likely to happen over such a long period without the rates being set artificially low for political reasons, to make things look good when they weren't.
And then you know the rest of the story after that.
For the most straightforward, plain English explanations, I'd recommend Peter Schiff - he was correctly predicting the housing crash almost to the letter and getting mocked on news analysis programs for it. Here's a link to some of his clips from 2006 and 2007:
http://www.youtube.com/watch?v=2I0QN-FYkpw
He's got some free videos and wrote some books, check the clips above out - he's consistent with that message - and then check more of him out if you want to understand more.
If you have any specific questions, I'll try to answer to the best of my ability.
When people talk about causes, they can mean a few different things. For example, if someone is crossing the street at a walk signal, and is hit by a drunk driver, we tend to say that the drunk driver caused the accident. The accident could have been prevented if the pedestrian had been more careful, perhaps, but he was generally justified in crossing at a walk signal. The driver, on the other hand, was doing something unexpected and dangerous. So in this sort of situation, we can point to a cause.
Then again, there are other accidents where there is no single cause. If you ask what caused Chernobyl, you could answer that it was caused by bad reactor design; or by failing to follow safety protocols; or by running a dangerous experiment; and, from what I've read about the accident, all of these explanations would be somewhat correct. All of these actions were reckless, and the absence of any one of them could have prevented the accident. So with Chernobyl, there are many independent factors which collide in an unpredictable way to create a catastrophe.
Yet again, there are systems like the weather. If you want to know why it's raining, you can point to particular things that happened recently - like moisture moving in from the pacific or what have you. Each event that occurs has some proximate causes. But overall, the weather is chaotic and unpredictable. There's not really any way to analyze it into overall causes - the best we can do, long term, is the ultimate forecase of the 'hippy dippy weatherman': 'the weather will continue to change, on and off, for a long, long time'
So, for me, right now, the economy is pretty much like the weather. There are highs and lows, and each one has its particular characteristics, but I can't see an overall system to it. I'd love to have a level of understanding where it is more like the driving accident: I could point to the particular asshole who caused the mess. If that's not possible, I'd at least like to have a Chernobyl level of understanding, where I have some sense of what mistakes were made.
So anyway, I guess I've read some pieces of the story from a few different sources, and they all give a fairly plausible story of how A preceded B, and ~A would have prevented B. Some of these are: deregulation, low interest rates, government interference in the housing market, bad modeling of risk on the part of finance firms and credit agencies, capitalism itself. I have a little bit of an understanding of each of these stories. But I'm still confused over which of these could be considered independent causes. For example, if the financiers somehow needed to find a place to put their money, then it may have been a consequence that they came up with risk models which drastically underestimated the risk of certain products.
So, what I'd like to know is, how did low interest rates lead specifically to this housing-led finance bubble? Were the other factors coincidental, or forced?
I hadn't ever heard that borrowing was actually below the rate of inflation - so that's very interesting to me. But then, why didn't the bankers just borrow money and put it into treasury bonds or the stock market? Why build up this house of cards with subprime mortgages and mortgage-backed securities and whatever else?
Thanks for taking the time to answer my questions. I'll also look into Schiff later (I don't really like video, but I'll see if my library has one of his books).
Let's rewind the clock. IIRC, in 2000-2001 we had the dot-com crash and its various effects on the economy, but there was a relatively fast recovery, partly due to low interest rates. Low interest rates in and of themselves didn't directly affect consumers' habits, but they did have a powerful indirect effect in the form of easy credit.
This easy credit prompted the poor and lower middle classes to overextend themselves. They took the opportunity to buy consumer products they couldn't technically afford, in the form of new cars, electronics, furnishings, etc., and that in turn caused a brief period of economic boom.
But, one of the interesting things about the poor and lower middle classes is -- despite another article on HN this morning -- they're always on the lookout for a way out of their situation. Especially anything that looks like a "cheap" solution.
The housing market. The combination of cheap credit -- with lenders practically falling over themselves to hand out loans to individuals that didn't qualify on paper for the loans -- along with the mentality of the lower socio-economic classes that housing was suddenly "a good investment" -- because prices were going up, up, up and nobody at the time believed they could ever fall -- caused a housing gold rush.
In places like the Bay Area, a lot of the available land for new housing is party far removed from everything else. This is the classic suburban housing model, and it's also going to be factor.
Because, things actually were going pretty great for about a year or two. If your credit was shaky for any reason, you couldn't afford to move or buy a house, but hey, everyone else is happy. And, remarkably, the price of basic goods and services didn't seem to change much during that period -- just the price of housing, which exploded.
And then, in a perceptibly short period of about a year or so, gas prices went through the roof. (I still don't understand why that happened, but it was timed nicely with the war in Iraq.)
What happens if you're running down a hill as fast as you can, and then you try to make a slight course correction? There's a pretty good chance that you eat pavement, and that's what started to happen.
The over-extended poor and lower middle classes had by this time used much of their available credit, and they were doing fine, unless the day-to-day cost of living changed much. Thing is, many of them had nice homes that were a 30 minute commute from work, and many of them had nice, huge vehicles. Both of those turned into the perfect storm of a price sensitivity on gas.
The first stumble happened in the car market. The distinctly American SUV, which had been considered invincible, suddenly started to see a slow-down in sales. A slow-down of anything in a bubble economy makes people nervous, but there didn't seem to be a very noticeable reaction from any major groups.
But, the price of gas stayed fairly relentlessly high, and significant numbers of people started to fall slightly behind on their credit card payments. This led to effect number 2: a very slight downward change in consumer spending.
The really neat effect though was on housing. Seemingly overnight, nobody wanted to move farther away from work. Houses started to stay on the market longer, but the prices didn't drop, at first. Thing is, too many of the people trying to sell were doing so because they themselves were overextended in credit, and they were trying to get some of that free equity out of their home that everyone had promised them.
Realtors at the time were still naively optimistic though, so they -- nearly to a one -- encouraged their sellers to stick to their price and wait it out.
The net effect was precisely what most people had considered impossible: the housing market stalled, and then crashed.
The lower socio-economic classes by now were really beat up financially, so even when the price of gas fell again, they just weren't spending money anymore. A huge number of people got soaked on their home purchases, seeing decades of savings evaporate seemingly overnight.
The big financiers and creditors then ran into trouble, and we all know the rest.
I think that the price of gas was the metaphorical straw that broke our economy's back, but I also think that the trends at the time were totally unsustainable and doomed to failure eventually. I also see how people are so willing to blame low interest rates and cheap credit (two sides of the same coin), but the thing is, those also resulted in the rapid growth of economy. What few people want to admit is that a healthy modern economy absolutely depends on the lower socio-economic classes spending money; the more they spend, the better off everyone else is. Maybe someday our economy won't work that way, but for now, it does.
Without those low interest rates, it's just as likely that we would have seen a long period of stagnation coming out of the dot-com crash. Whether that would have been intrinsically better or worse for us is way over my head.
Except that they didn't. They did get below the price of housing inflation, but that's in part due to lax lending standards, which were basically forced by regulators.
Fannie and Freddie didn't help by lying about the quality of the loans in the pools that they were selling. Not only did that screw folks who bought those pools, it screwed up everyone's market risk evaluation because their lie hid the fact that a huge fraction of the loans were going to folks who didn't have a prayer of paying back.
Yes, "everyone knew" that there were a lot of those loans, but the statistics, tainted by Fannie and Freddie's lies, said that things were a lot better than they actually were. Some folks thought that the stats were "optimistic", but few thought that they were as wrong as they actually were.
After all, who'd have thought that a GSE would commit fraud....
FWIW, the senior execs at Fannie and Freddie during this time were prominent Dems, some of whom launched Obama.
McCain actually tried to rein in Fannie and Freddie during this time, but got his teeth kicked in by Congressional Dems. (One could argue that McCain's efforts, in 2005/2006 were too little too late, but ....)
> For the most straightforward, plain English explanations, I'd recommend Peter Schiff - he was correctly predicting the housing crash almost to the letter
Yes, but his predictions after that has been rubbish, anyone who would take his investment advice would have lost a ton of money. You say we should take what Krugman says with a grain of salt since he's been wrong before. Doesn't that also apply to Schiff?
That blog in general deals with a lot of these issues.
The tone he takes about other economists is a little scary, really. "We've made all this great Right progress. But here come these people who are trying to destroy all of it, daring to go back to the clearly discredited old ways of Wrong-Think."
I'll say it again, I suspect this man is a paid propagandist.
Have you considered profligate government spending? Using currency swaps to hide deficits with the help of Goldman Sachs? It wasn't speculators who pushed Greece's deficit up to 13%. "Speculators" is the straw man of European politicians, who don't want to admit blame (not something confined to European politicians).
Then there is also the fact that when traditionally high interest-rate countries like Spain and Ireland entered the Eurozone, cheap financing was available for the first time. This resulted in a housing/construction boom and then crash. All the taxes from property development and services evaporated, which makes it harder to service debt.
Sure, housing was overpriced for a few different reasons. There's quite a few causes of it, you probably know a lot of them. But - it was definitely overpriced (in a "bubble").
Now, we're having what's called a "correction" - a correction is where housing prices come back into line with where they'd in a more sensible environment. This is where stupid and reckless people get burned, and people who were sensible and saved their money now buy at the correct market prices.
Krugman is saying we should print money, which strips the value of people holding cash via inflation. This transfers money from people holding cash to people holding debt (because during inflation, hard assets like housing increase in price relative to debt - mortgages). That takes money primarily from middle class people who were sensible and cautious, and distributes that money to a mix of middle class people who weren't sensible and to upper class people (who typically have significant debt and hard assets).
Krugman's basically saying - "whoa, whoa, whoa, we can't let this correction happen - instead, we should take money from people who didn't play in this mess and give it to people who did" - that is horrific.
> And since economics is not a science who decides what is good economics?
Economics can have falsifiable hypotheses, so it can be science at times. But you're right, I should have called Krugman's ideas reckless policy instead of economics. It's more policy than economics, yes.
This, besides the fact that a correction has already happened, as evidenced by the drop in house prices and the number of homes in foreclosure.
If there is another "correction" now, beyond what has already happened, and it causes even more bankruptcies, discharged debts, haircuts, bank runs, and the like, then the entire economy will suffer, not just those who played in the mess.
As banks look toward deflationary times, they are holding onto cash reserves. (http://research.stlouisfed.org/fred2/series/EXCRESNS) This may be because they fear making loans that will not be paid back 100%, but the result is deflationary because they are all doing it, and they are all keeping that money from the system. It's a self-fulfilling prophecy.
A deflationary period, while our country has so much private debt, combined with high unemployment, will likely leave us with more and more bankruptcies and the "dynamo problem" of the great depression. If this is what you're looking forward to to punish a few house flippers, well, I can't agree with your sentiment on that.
http://en.wikipedia.org/wiki/Project_Cybersyn
Discussed here:
I respectfully, but completely disagree with you on the fact that free market economics is morally defensible, there isn't really any conscience behind it, just an overriding aim (i.e. profit) ...
as for independently acting agents, I assume you mean various corporations, financial institutions, and government bodies... Again, I disagree, they all have a degree of interdependence and are centrally bound by regulations, and central banks, which exist whether we like it or not ...
As a disclaimer, I consider myself a liberal centrist with both libertarian and social democratic leanings.
Agents in a free market system act independently, pursuing their own benefit; be it corporations or individual consumers. Yes they interact in the sense that it takes two (or more) parties to trade or make contracts, what I mean is that they act for themselves and not coordinate on a mass scale to make the resulting system in a certain direction. Agents exhibit behavior that consists of simple profit-seeking rules, which in turn generates a system dynamic on the macro scale. Their independence lies in their freedom to behave in their own self-interest, in contrast with a centrally planned economy where individuals are told to do or produce as is deemed fit by the central command.
P.S. I find it interesting that the majority of Chinese presidents from 1993 to 2010 have an engineering background.
That's certainly the case right now; since the start of the recession, according to the BLS government jobs have increased by 590,000 and 7,960,000 private sector jobs have been lost (http://www.powerlineblog.com/archives/2010/06/026620.php)
"The Krugman doctrine of perma-deficits is ruinous - and has in fact ruined Japan."
And it's only the beginning. Global austerity is here (except US and Japan is fighting valiantly to steal more honest work from its people via printing). World's biggest consumer, the boomers, are retiring. Automation/Software will keep reducing jobs permanently.
The ancillary point is, boostrap your startup wisely. Hire smartly. Don't spent money on things unless you have to. Don't take money. Keep control of your company.