"RIP Good Times": Silicon Valley's Cuban Missile Crisis
daltoncaldwell.com
daltoncaldwell.com
What the slide deck didn't account for is that there was nowhere for big money to put their money - everything was in trouble. So, people started to look for new opportunities, and Silicon Valley suddenly looked mighty attractive as a place for investment.
On Main Street, there are people who have been out of work for years now. It really was that bad, is that bad. We just happened to be under one of the few umbrellas in a storm.
>"We just happened to be under one of the few umbrellas in a storm."
It's not different there. It never is.
Further, an umbrella (sorry to extend a potentially leaky abstraction here) doesn't mean that you are immune to the storm. It just means that you deflect most of the rain around you.
But it's different for IT, much different. I was let go from multiple contracts, but the time I spent out of work was by choice, and I had two interviews a week the moment I put my resume out while friends in other sectors would have killed for even an interview. I was able to choose the job I wanted once I was willing to move out of my home city.
I don't have a star studded resume either, and I've seen mediocre and worse developers stay on because replacements couldn't be found.
It's different for IT, and programmers more specifically.
Then days later, I saw the "RIP Good Times" presentation & I was told that the job offer was put on hold indefinitely. Weeks later, I read about the layoffs & the job was gone for good.
It was a blessing in disguise for me since I realized that I should learn a new language & framework (Python/Django) aside from .Net. Turned out well for me since there are more Python jobs than .Net in the area.
Incidentally, all of the work I do now is Python/Django. The story of why we had a massive .NET codebase is a long story.
A morass is certainly preferable to a calamity.
What the actions of world leaders have effectively said is that we will sacrifice our economic growth in exchange for the ability to ensure that current debt can continue to be serviced.
What the actions of world leaders have effectively said -- loud, clear, underlined and bolded -- is that the protection of existing wealth is of paramount importance and the generation of new wealth is secondary-to-incidental.
That said, one needs to know the breadth and depth of the impact of famine vs a typhoon to know which would be worse.
4 decades of famine that negatively affects half the population may be the lesser evil compared to 1 typhoon that outright destroys half the population and thus future economic potential.
A lot of people are living above their means or on a economy with no breathing room => I think this is a very bad strategy going forward.
Regarding my startup I am trying to build a profitable and sound business that targets the global market.
As for investments, pick your index, close your eyes to the ups and downs and pray someone in government realizes that when people are willing to give you a negative real interest rate you should take their money and do something productive with it.
The only way I'm able to interpret this as practical advice is "invest in the mafia". Unless you're talking about building up your personal skills - which, while good advice (if you can do something other people want then you'll never go hungry, no matter how bad the economy), doesn't really scale.
Anyhow, I ended up becoming employee #2 at Ustream. So I was at that presentation, doing them a favor running a private live stream for the CEOs that couldn't make it. Not to sound creepy, but I observed for your reactions quite a bit at that Seqouia meeting, and I even introduced myself to you after the presentation. It's true, your mind seemed to be elsewhere, but you were still very kind.
And if that many full circles aren't enough for ya, today we're both trending on front page of Hacker News :-). This one's mine: http://news.ycombinator.com/item?id=4080074
There is no reason the world cannot produce the same amount of goods as it was producing in 2007 - there are more rather than less people willing to work and the cost of borrowing money is very low. The only big outside constraint is energy costs, which are being offset by some fairly amazing reductions in the prices of alternative energy, including solar power.
So why the mess? The problem is a classic liquidity trap, a preference of investors for highly-liquid and safe assets that results in less money being spent in the private sector. This is visible in the way the borrowing rates of the Federal Government have fallen despite the best efforts of the Republican Party to drum up a debt scare the moment it fell from power and stopped spending the money itself.
Bailing out the banks did somewhat stabilize the banking system and probably prevented catastrophe. What remains necessary is getting out of the liquidity trap, which means increasing the amount of spending in the private sector. One way to do this would be having the government borrow at essentially zero cost and invest that money in public infrastructure projects which offer a return on investment. Another approach would be having the Federal Reserve declare an inflation target of 4% until the economic crisis is over. This would reduce the expected ROI from parking money in Treasuries and provide a greater incentive for firms to make private sector investments instead of just parking cash in the bank.
And it's only 70 cents only because the suppliers of new debt, the US authorities, are sensitive to interest rates too. Investors can, net, only buy as much debt as the government is issuing, right? So if the Federal authorities are so worried about a liquidity trap, let them limit their debt issuance! If they do that, then your dollar put into Treasury securities means a dollar worth of other investors' leaving. No more liquidity trap. (At least as far as "highly-liquid and safe assets" == US govt debt. They could find other safe and liquid harbors, perhaps Japanese govt debt.) But the Feds aren't doing that, thus, I think that "having the government borrow at essentially zero cost and invest that money in public infrastructure projects" would in fact be bad for real wealth and prosperity because that borrowing brings some more money to T-bills and away from other investments, some of which would be private investments, for example. Of course if those projects are needed on their merits, not as make-work, then great, do them.
The same is true of your example of "parking cash in the bank". Parking cash in the bank means making investments. Where does the bank put it? They invest it. A bank is not a destination for money, it's a conduit.
This is why we have a new tech bubble: everyone is scrambling for somewhere to put their money, but none of them are willing to put it in the hands of consumers, which is the only place it will do any good.
This is why people are buying Treasuries like they're crack. Elasticity approaches zero when there is no substitute good.
(1) Limiting debt issuance would only be expansionary if it didn't imply a reduction in government spending. And financing growth by expanding the money supply is a perfectly acceptable Keynesian solution. If this led to inflation and rising interest rates that would suggest the economy is no longer in a liquidity trap and the Fed could step in to rein in inflation while the government could go back to raising money on the bond markets.
(2) I'm under the impression that US banks reduced lending following the 2008 bailout. I seem to remember Andrew Ross Sorkin making this case, but either way - I don't think the best solution to the present crisis is a 20 year process of watching the banking sector delever as in Japan! Better to have controlled failures to wipe out debt and reduce moral hazard while making sure the economy is primed with the demand to deal with the fallout. How exactly to do that is a good question.
Regarding your point #2, yes I agree. But bailing banks out is exactly what Japan did. The certainty of regulatory capture by banks makes it better to just remove the government ability to bail them out. Let them fail. A moderate approach would be to limit bank mergers - too big to fail is too big.
I don't think it makes sense to argue that this situation is not theoretically possible since it appears to describe reality quite well. That said, the policy commitment that comes out of accepting even the possibility that we may be in a liquidity trap should be uncontroversial regardless of whether you believe the model is a close approximation of reality or not: push aggregate demand until there is some evidence it is driving up inflation and interest rates, at which point the theory says to stop because more of the same won't do any better.
Do you have evidence that people are leaving T-bills in disgust and investing in other assets?
So the timeline for your analysis is ~30 years? That is not convincing to me, this current recession is already going on 4 years and shows no signs of stopping. The extreme cherry picking of data and reasoning like yours is exactly why I stopped studying economics in college, but hey at least you were able to throw in some partisan politics in your post right?
On your second point, it's hardly partisan to point out that Republicans have consistently raised the specter of a debt crisis and soaring interest rates to attack the feasibility of further monetary or fiscal stimulus directed at anything but the banking sector. Or even at the banking sector (it wasn't Democrats who derailed the first bailout vote). And yet during this time US borrowing costs have fallen to the point where the ten year rate is now basically below expected inflation and everything points to the United States being caught in a liquidity trap. People are even paying the US government to hold money at a loss!
http://www.marketwatch.com/investing/bond/10_year/charts
I don't know why someone pointing this out should hurt your feelings, since your complaint is with reality. It might feel nice to think that this is a partisan instead of a policy critique, but harping at me isn't going to make Republican economic policy less destructive or make the bond market change direction.
Really? The financial system was becoming a pool of molten goo, possibly spreading radiation all over its vacinity?
1: in a literal sense or manner : actually <took the remark literally> <was literally insane>
2: in effect : virtually <will literally turn the world upside down to combat cruelty or injustice — Norman Cousins>
1: almost entirely : nearly
2: for all practical purposes <virtually unknown>
Academics, scientists, and engineers generally understand these details (indeed, Dalton Caldwell almost certainly _does_ know the distinction, being as he was, I gather, a 'Founder/CEO of a Sequoia portfolio company'). Complicated, careful work (in nuclear physics or space launches, for instance) generally depends on this, no doubt.
But outside those domains -- in a personal blog, for instance, or when noodling catfish in the bayou, say -- splitting infinitives might be ok, or even a shibboleth. See Dave Chappelle's analysis on Inside The Actors Studio regarding speaking as a black American.
And, while I don't care to hurtle ad-hominems ad-hoc, if you _are_ going to be pedantic about the minutiae of someone else's considered work, it's possibly worth knowing that the word is 'vicinity'.
In which case, please kill me.
http://www.slate.com/articles/life/the_good_word/2005/11/the...
Relevant excerpt:
'As is often the case, though, such "abuses" have a long and esteemed history in English. The ground was not especially sticky in Little Women when Louisa May Alcott wrote that "the land literally flowed with milk and honey," nor was Tom Sawyer turning somersaults on piles of money when Twain described him as "literally rolling in wealth," [...more...] Such examples are easily come by, even in the works of the authors we are often told to emulate.'
Given the caliber of authors that have used "literally" for emphasis, I have a hard time standing behind the concept that it's even poor style. We can decide that, moving forward, we'd like to clean up English and use "literally" differently, but calling it a mistake rather than a offense to modern style is inaccurate.
REGARDLESS, I thought this was exactly the kind of thread that Hacker News hated. :|
"...the US financial system was literally melting down."
"...the US financial system was seriously melting down."
"...the US financial system was melting down."Metaphorically, I'd say that was fairly accurate if you consider the molten goo to be defaults and the radiation to be bank malaise and bad assets; it also managed to start the same reaction in the EU, which continues to this day.
If you'd say, "the financial system was melting down", that is such a stale metaphor that it might not even trigger any associations with nuclear reactors. "Literally" forces you to stop and think about molten goo and radiation.
And as such, I approve of it (although it is much preferred to use fresh metaphors than to resurrect stale ones.)
1. In a literal manner or sense; exactly: "the driver took it literally when asked to go straight over the traffic circle".
2. Used to acknowledge that something is not literally true but is used for emphasis or to express strong feeling.
By what mechanism can an investor in a firm, presumably an investor with less than 50% equity, make attendance at a meeting mandatory for the CEO of said firm?
The presentation wasn't wrong it was dead on. It's just that the massive Federal Reserve intervention and US Government stimulus prevented the worst.
Similar to Y2K - lots of noise was made about it, while thousands of engineers worked around the clock fixing it, so that when it finally happened it was a nonevent.
In both cases, people who accuse the warners of crying wolf after the fact seem oblivious to the scope and nature of the problem and the effort it took to fix.
Though in the case of the financial crisis, it's not fixed. The trillions of non-performing debt has simply been shifted from private to sovereign balance sheets, and the crisis continues.
Some or all of it will default eventually, there's no way around that. It's only a question of whether it's a managed, orderly, gradual default, or an acute chain reaction collapse.
"That all sounds like bullshit to me. I was there, I looked in the partners' eyes, they weren't bluffing. They were trying to help us"
Really rings hollow with me. You may have believed you could stare into their soul to know their being, but these guys eat people like you for breakfast. You wouldn't see a knife to the back coming, so don't think you could look in their eyes and know they weren't bluffing.
What are you implying?
BTW, whoever invested in or started social gaming and iOS companies during that time is golden now...
In statistics there are 2 types of errors that one can make.
A Type 1 error is when you aggressively reject the status quo for change, even if the status quo was just fine (crying wolf!). A Type 2 error is aggressive rejection of change for the status quo, even though the status quo isn't right any longer (not crying wolf!).
There is no way to escape these errors, and depending on evidence, you'll sway one way or another (these errors always exist and are complementary in nature). The financial crisis looked like it could blow up the world (there might be a wolf in the flock!). Assuming status quo - that nothing is happening (no wolf) - you might not prepare for it (a wolf), and if the world blew up you'd lose everything (wolf eats you!). Assuming change (hello wolf!), you prepare and adapt for the crisis where you have to lose a bit (growth/funding/employees sadly), but if it all goes down - you are prepared (wolf meet gun!).
This is an example of the precautionary principle at work, and based on my understanding, Sequoia did an outstanding job. The Federal Reserve also did a great job (during the crisis). I have no opinion about the lax rates in the lead up to the bubble - but I presume that was highly detrimental to our collective financial health! :D
Sequoia are the best in the business, they've been around the block a couple of times, and all they care about is making sure their companies survive. RIP Good Times was prudent.
Better to cry wolf, than to not do so, and be eaten while you sleep.
When the cost/benefit balance changes, assume catastrophe, minimise chances of a Type 2 error (bias yourself towards change - a Type 1 error), and plan for the worst thing that you can possibly imagine - think of it like paying for insurance against storm damage if the data shows a few too many clouds over the Atlantic.
A false positive error, commonly called a "false alarm" is a result that indicates a given condition has been fulfilled, when it actually has not been fulfilled. In the case of "crying wolf" - the condition tested for was "is there a wolf near the herd?", the actual result was that there had not been a wolf near the herd. The shepherd wrongly indicated there was one, by calling "Wolf, wolf!".
In terms of folk tales, an investigator may be "crying wolf" without a wolf in sight (raising a false alarm) (H0: no wolf).
A false positive (with null hypothesis of health) in medicine causes unnecessary worry or treatment, while a false negative gives the patient the dangerous illusion of good health and the patient might not get an available treatment. [1]
The future is very uncertain. Act accordingly.
Or as our ancestors would say:
If you hear any type of rustling in the bushes; always assume that it's a tiger trying to kill you. Temporary fear/worry is a good deal better than a permanent and painful death.
[1] - http://en.wikipedia.org/wiki/Type_I_and_type_II_errors
I agree strongly with another comment: Sequoia was right, and then some.
Nothing actually got better, it's just that people think it did. A moment of respite from the turmoil is all the last two or three years represents. That moment of respite cost between $8 and $15 trillion depending on what you're counting (total deficits + Fed bailouts).
In fact, things are far worse today than they were at the height of the crisis, as we've loaded up on $6 or so trillion more in public debt we can never pay back. We've added about $400 to $500 billion more in student loan debt, and a few million college graduates are sitting on the sidelines without jobs and experience, and we've got millions more living on food stamps without jobs.
The only thing separating our system from absolute implosion is the global reserve currency that we're currently massively abusing at our leisure. If mortgage rates had to rise to their natural rates (absent Fed manipulation holding down both long term and short term rates), housing would quickly plunge another 1/3, and that alone would rupture the entire financial system and bring it to its knees.
The truth is, we look a lot like the imploding EU zone across the Federal and State levels. Except we've got the dollar, for now.
I always cringe when somebody calls the Fed's actions bailouts. These are asset purchases by the Fed versus injecting cash into the monetary system. The Fed will have to unwind these at some point in the future. But essentially, what the Fed has done is that it has made a market for securities nobody was willing to make a market for.
Net "bailout" performed by the Fed: zero. Actually that's wrong - the Fed added around $78 billion worth of profit via its open market operations to the Treasury last year (it's obliged to do so after deducting servicing costs/salaries etc.)
Pray, what are the "natural" mortgage rates you're talking about - ie you mean rates absent Fed intervention (via Operation Twist)? There wouldn't be a mortgage rates market in existence if the Fed were not there to make one!
And no, you're not imploding like the EU. Their banks are woefully undercapitalized and can't lend to the corporate sector. Plus, they have one monetary policy and 17 different fiscal policies - that simply doesn't work!
Your banks and your corporate sector are flush with money. It's your consumers who are broke. Even then, they aren't broke - they are just not making long-term investments(ie purchasing durable goods) as credit has dried up and there is no good quality collateral left in the market against which people are willing to lend. Homes used to be the collateral earlier on - but that's no longer the case.
That's what the Fed is trying to do - lower mortgage rates (ie assume credit risk on your behalf - it can do so because it can print money - inflation is not a risk in this economy) to enable credit to flow in the economy so that the consumer can start becoming active again.
Deleveraging is painful - but it's not the end of the world as you've portrayed it.
Edit: fixed typos
The former involves recapitalization of the bank with an equity stake transfer to the Treasury while the latter is just a credit/repo line which allows for potentially "bad" or illiquid assets to be pledged as collateral for a loan.
Again, this is a credit-risk transfer to the Fed rather than a bailout. Exactly in the same way as the banks took on credit-risk by lending to people with poor credit histories (although the intentions of the lenders were totally different in this case - greed being the dominant factor).
Also, the portion of the cash that is not used by the bank is usually deposited back at the Fed in the bank's excess reserve account (on which the Fed has now begun paying a small interest - in order to avoid capital destruction).
The portion that is used forms part of the liquidity injected into the overall system - which is the Fed's original intention anyway.
The Fed has a mandate to ensure financial stability by providing such a loan facility (why it didn't do so for Lehman - and whether it neglected its duty - is still a very controversial topic) - so I wouldn't consider a statutory duty to be a discretionary bailout.
Perhaps. But when you leverage 100 to 1, fail, and the feds swoop in to avert disaster (the jury, of course, is still out on this), it's hard to say that it's just a normal day at the office. They spent/created huge amounts of capital that was necessary only because of the excessive (and stupid, even at the time) leverage of the financial industry.
Now don't get me wrong. I have a strong suspicion that Paulson is the most under-appreciated man in the world right now, literally. But we are all paying for an unnecessary excess, to keep failed institutions alive (save for poor Lehman. If it were only so easy as to just let them all fail). So I think the word "bailout" is apt.
The trouble is - the economy needs liquidity at the consumer level and it's the banks who should provide that. If the Fed had the authority to knock on everyone's door and lend them money at 0-0.25%, it would do that. But sadly, the political class never creates regulations which force the banks to pass on the liquidity provided by the Fed - after all, that would leave the banks with less profits and lesser money still to donate to political campaigns.
As far as your comment on "let them all fail" - I disagree. For all the undeserved liquidity that the banks are currently enjoying, it is a far more benign evil than having all the banks fail - US Inc would probably still be firing 200,000 people every month instead of adding 100,000 (as it is doing now).
Unfortunately we've gone the other way.
The Fed's loans are backed by taxpayer money, right? (Or by its ability to print money, which is a stealth tax on everyone who holds dollars). Put it another way, it's giving these companies for free something (a loan on generous terms) that would be worth quite a bit on the open market, and that belongs to us.
>The Fed has a mandate to ensure financial stability by providing such a loan facility (why it didn't do so for Lehman - and whether it neglected its duty - is still a very controversial topic) - so I wouldn't consider a statutory duty to be a discretionary bailout.
That sounds to me like there is a statutory requirement for the Fed to perform bailouts under certain circumstances. It doesn't make them any less of a bailout.
But remember, all the MBSes in the pre-crisis market, they were liquid instruments being used as money by the industry. Suddenly that pool dries up. The Fed's job then was to keep that pool constant (the M0, M1, M2 and M3 supplies go up - but then MBSes and commercial paper are not included in any of those measures).
It's not a bailout in the manner of a Treasury bailout of Freddie Mac/Fannie Mae. First of all, it's not your (ie the taxpayer's) money to begin with. You have no right to be concerned about money that doesn't belong to you. Secondly, say I "bailed" out a company by taking an equity stake and the Fed loaned the same company some money. If the company goes bankrupt - I should have zero expectations of recovering my money. The Fed, on the other hand, would have first dibs on the recovery value of the assets.
So it's OK for the fed to devalue my dollars because other market events have increased the value of my dollars? If I chose to hold dollars rather than the MBSes that other people were treating as dollar-equivalent, and the value of MBSes goes down, I've earned that increase in value. Imagine I'd bought shares in a company, and then shares in that company become scarce due to market events (maybe there's a takeover bid) - I'd have every right to be pissed if that company then issued more shares to someone else, to keep the supply constant.
If the feds bust someone with 6 million counterfeit dollars, do they then immediately print 6 million real dollars to keep the money supply constant? That sounds like what you're advocating.
What the Fed tried to do after the crisis was to avoid deflation (which is as bad and as self-fulfilling a prophecy as inflation). Say I am a highly creditworthy homebuyer. If I had $175,000 (continuing with the example above) in my bank account, I would buy that house right out of the market. But most people don't make a downpayment of 100% (liquidity is precious to everyone).
I would take out a 30-yr mortgage at, say, 5%. Say, home prices are falling every year by 2%. So, if I make a purchase now - I end up paying 7% - 5% interest and a 2% loss in my home's value - that's the concept of a a real interest rate = (nominal rate - inflation), deflation being negative inflation). Now I am not protected by this capital destruction from my bank (they aren't paying me 7% on my equivalent-term deposits - they would be paying me something like 5% - similar to what I am paying for the mortgage).
So I would delay my home-purchase. That causes a further fall in home prices and so on - a deflation death spiral (something which happened in the 30's). As a corollary, in an inflationary scenario, people bring their purchasing decision forward ("it's cheap now, it'll be expensive later") which causes a rise in asset prices - which is again bad if not controlled (we know what happened, right?).
What would break this loop, though? Well, if the mortgage rate went down to 3%. That's exactly what the Fed did in QE1 (and in part, in QE2 and Operation Twist) - it stepped in to buy long-tenor MBSes directly, inflating their price and lowering their yield - causing mortgage rates to fall. Now you'd say, wouldn't depo-rates fall as well to 3%. Yes, they would - but they are more "sticky" than mortgage rates. That delay in money-market/depo-rate cut allows asset prices to recover - opening up non-money market avanues for investment - bonds/stocks etc. Also, the economy's "natural" growth-rate gets a chance to show its effect (which in the US's case was led by the tech and manufacturing sector).
There's another reason mortgage rates couldn't go down - the whole US MBS system is screwed up with stupid servicing, refinancing and foreclosure mechanisms - making it difficult to assess true recovery in case of default. While the government and the legislature kept on debating about HARP/HAMP/TARP/ARRA what-not, this deflationary spiral had to be stopped - the Fed did so. To get an idea of how a non-Freddie/Fannie system can work, look at the world's second largest MBS market - Denmark - not a single MBS default in 200 years! - http://www.coveredbondinvestor.com/sites/default/files/Danis...
Net bailouts performed by the Fed: trillions
http://www.bloomberg.com/news/2011-11-28/secret-fed-loans-un...
They gave banks and others at least $7.7 trillion and there is zero proof that it was paid back. Citi had at least a $1 trillion blackhole on their balance sheet, and there is no possibility they were able to fill it. Bank of America was in the same situation, and their profits could never fill that. The Fed took over trillions in toxic waste mortgages to bail out the banks, and most of those 'assets' still sit on the Fed's balance sheet.
I'm sure the money supply continuing to skyrocket means the Fed isn't bailing anybody out. Surely those trillions aren't going toward bailouts for the government, Wall St, big banks, or the housing market.
http://www.shadowstats.com/charts/monetary-base-money-supply
The Fed is currently bailing out the US Government by buying 95% of all long term govt paper. The US Treasury has been bailing out California among other states, by using the Fed money. The US Government is completely insolvent without the Fed bailouts, it would have to slash 1/3 of all spending just to correct the imbalances in the system if the Fed stopped the QE programs.
The Fed is bailing out home owners, investors, realtors 24/7 using trillions in QE to push rates lower to prop up the housing market.
The Fed is pushing risk into equities and out of paper by driving rates down, which is providing a bailout to big institutional investors by keeping the stock market artificially high.
It's a bailout bonanza.
Natural mortgage rates would be the mortgage rates you'd get when you remove all Federal Reserve manipulation of short and long term rates. That is, when they stop all QE / monetization programs that are designed to specifically hold rates down, thus we have sub 4% 30 year mortgage rates.
It would be something closer to a historical norm, 6% to 8% would be a lot closer to normal based on the last 50 years, than 4%, for example. But if you know anything about any of this, you already know that.
http://www.federalreserve.gov/newsevents/files/bernanke-lect...
Edit: The lecture series in full for those who might be interested: http://www.federalreserve.gov/newsevents/lectures/about.htm
It made very insightful viewing/reading even for us who are involved in the financial markets.
Courtiers reply... check.
Dismissive passive aggressive attitude... check.
Good job, you hit 'em all.
http://www.federalreserve.gov/monetarypolicy/bst_recenttrend...
Good luck unwinding that, kids. And that's just what they are telling us.
Edit: I am trying to make a valid clarification in this thread. Your sarcasm is unwarranted.
Again, that's only what they are telling us about. Pulling a couple trillion out of the economy is going to absolutely taco it (that's thousands of those billions you mention) since we are effectively an infinitely leveraged fractional reserve system now, even ignoring derivatives.
I'd be more sympathetic to your pat-us-on-the-head attitude if the mainline economists had been right about anything for the past decade. There's a whole slew of economists who actually got the debt crisis correct and might be worth looking into, starting with Steve Keen.
The federal reserve has been hiding it's destruction of the average person's purchasing power behind academic rhetoric and obfuscation for over 100 years now, with the aid and abetment of the economic mainstream and the financial world. Don't assume that because we don't agree with you we don't understand what you are saying. We just don't believe it.
You're just infusing your comments with what I think is political (possibly Ron Paul-esque) rhetoric without understanding how monetary policy transmission and Fed lending works even when I am trying to explain the thing and providing verifiable facts.
I have nothing to say about schools of macroeconomic thought because then you are very likely to turn this in to a political issue (given that you consider fractional-reserve banking as "infinitely" leveraged) and HN isn't the right forum. I have my views but I'll keep them to myself.
Edit: Also, the Fed isn't "taking out" trillions out of the economy. Neither did it inject trillions into the economy. It is just swapping one sort of asset with another to ensure that liquidity, as a whole, remains constant. During the crisis, it swapped out non-performing assets (illiquid) with plain cash (liquid).
When the economy fares better and appetite for credit-risk returns, the illiquid assets also become liquid with a much fairer valuation. Hence, now the Fed would swap out cash for these assets.
Not sure if your goal is to have an impact on people like me WRT this issue, but if so, you're probably having the opposite impact you intend to.
Which is why this plot is so important:
http://www.intellectualtakeout.org/sites/www.intellectualtak...
If Bernanke and Obama actually knew what they were doing, there would be a close correspondence between theory and reality. There isn't. It's very rare that these folks actually make concrete predictions that are tested in the future. So let's make some predictions. You and photon137 can make some, and then we will make some.
You're welcome to disagree, but I'll be happy to tell you flat out you're wrong.
My point was about the impact of their respective statements, not the content.
That is not the case anymore. The crowd is not against him.
It's too bad that pg has hidden upvote totals, as the bien pensants who support the bailout policies of Bush, Bernanke[1], and Obama would realize that millions of informed people now oppose them. To be an informed person, it is no longer sufficient to parrot what is read in the New York Times or the Wall Street Journal.
[1] Ben Bernanke, Bush appointee.
I'm telling him what he can do to convince people like me of his arguments, assuming that's his goal. If not, well, mea culpa.
You're falling into the same trap. "bien pensants?" Really, help me understand or sod off. Compare this response to photo317's polite, civil, and reasoned reply.
I am only describing the factual and operational mechanisms by which the Fed operates - none of which is "conventional wisdom". Nowhere have I tried to justify the existence of the Fed.
Now since you have brought up the subject of macroeconomics, let me impart some "conventional wisdom" to you:
It is a "testable hypothesis" which has been verified every single time a recession has happened, that the direct cause of a recession is a fall in aggregate demand - and all economists worth their salt ranging from Keynes to Friedman, from Marshall and Samuelson to Karl Marx would agree with that statement.
The reasons for fall in aggregate demand could be numerous: war, famine, change in demographics, inflation shocks, credit reduction.
A recession caused by a bursting of the credit bubble and the result negative credit shock is known as a "balance-sheet" recession where the average consumer has massive liabilities and little equity or high-quality assets left to finance those liabilities. Deleveraging is the natural process by which an economy comes out of such a recession. Lack of credit causes a decrease in puchasing power leading to a decrease in aggregate demand.
Now let's examine the Fed's function in all of this:
(a) During the credit shock: the Fed acts as the lender-of-last-resort injecting massive liquidity into the system to avoid a systemic catastrophe (to which we came very close in 2008). In 2008, banks stopped lending to each other - corporates had their credit lines closed, commercial-paper issuance went bust. Tell me, if you were a corporate in a capital-intensive business (such as GM, Ford) at that time, even an AAA-rated one, how would you find the money to finance your working capital? That's why avoiding systemic failure of the financial system was important - otherwise few corporates would have survived, let alone banks - leading to colossal unemployment.
(b) Post credit shock: So now corporate credit and interbank credit have been restored. But the end-consumer is still highly leveraged - paying interest on loans amidst an increasingly uncertain wage and unemployment backdrop. It is dangerous to provide credit to consumer when the cost of financing that credit is too high. So, the Fed tries to lower the cost of financing by lowering interest rates (to near zero) and by making a market for assets which were pulled out of the financing chain due to the market panic - namely, mortgages. However, do note that there is no net capital creation, the Fed's balance sheet has assets (mortgages, treasuries) and liabilites (cash) in equal amounts.
(c) Now the situation becomes murky. The Fed has an accommodative policy but the transmission mechanism is not working. Banks are not lending to consumers. Why? Because the recssion has started and consumer expectations for future purchases have gone down - leading to (i) a decrease in demand for credit and (ii) overall lower sales of goods and services - recession and deleveraging are now in full flow - people are starting to have to learn to live within their means.
(d) The Fed, weirdly enough, has a mandate to keep the unemployment-rate "low". Here's where I disagree with the fact that the Fed can be effective in achieving this target. Even the Fed thinks that monetary policy alone is too blunt a tool to address unemployment as a whole. Balance sheet recessions cause severe structural dislocations in the labour market limiting worker mobility. These are things that the Fed can't and shouldn't address. Even Milton Friedman concurs [1] (interestingly, Friedman was a great supporter of having a pragmatic monetary policy authority - be it the Fed, a Mickey-Mouse bank, whatever - to attenuate the variability of the natural business cycle. People invoking Friedman seem to forget that).
(e) At this stage, let's look at the chain again: Aggregate Demand <- Consumer Purchasing Power <- Consumer Credit <- Financial Credit. The right side is being taken care of by the monetary policy - but the chain breaks down in the middle. So who steps in from the left side to boost aggregate demand? Voila! - the government (and its stimulus package).
Now, the situation becomes political. The government can (i) do a massive stimulus itself targeting specific sectors it thinks that have structural issues or, (ii) cut taxes giving more purchasing power to the consumer and letting them make the consumption decision. That's all the hoopla is about - nothing more, nothing less. (In general, fiscal stimulus targeting has been done badly by the Obama government [2] )
The Fed, as far as the markets are concerned, is an apolitical observer (Bernanke is a Republican but he's the biggest dove on the FOMC!) - it has to be to maintain market stability (to see an example, a single word out of place uttered by a Central Banker can cause massive market rallies or drops - see Mario Draghi's latest ECB press conference).
Now, if you have anything useful to contribute which is substantiated by facts and logic, please do so - otherwise do not be vitriolic just because you can be so - that's extremely easy.
[1] - http://www.aeaweb.org/aer/top20/58.1.1-17.pdf [2] - http://forums.chicagobooth.edu/faultlines?entry=52
It is a "testable hypothesis" which has been verified every
single time a recession has happened, that the direct cause
of a recession is a fall in aggregate demand and all
economists worth their salt ranging from Keynes to
Friedman, from Marshall and Samuelson to Karl Marx would
agree with that statement.
1. Hayek won a Nobel, so by many definitions is an economist "worth his salt". As you may know (because he is absent from your list), Hayek does not agree with that statement.
2. The definition of "aggregate demand" is voodoo: http://en.wikipedia.org/wiki/Aggregate_demand#Components
What measurements could Keynes base his theory on in a time before computers? Did he really have access to Visa's databases of transactions to compute a measure of "consumer spending"? Did he have access to every VC and PE fund balance sheets to compute the amount of investment? Did he have a command line interface to JP Morgan's chart of accounts?
Only today, when we can reliably measure the activities of millions of people, can we even begin to quantify these kinds of things, let alone reliably attribute direct causes. Cause must precede effect, effects must not occur without causes, cause/effect pairs must occur together many times, and (most importantly) effects must be predictably produced by causes. With real economies, we can't blow them up just to test hypotheses. With virtual economies, we have a chance of testing some of these things.
More generally, the macroeconomy is not some fantastic thing invented out of whole cloth, it can and must be based on direct measurement of individual actors in the economy.
For example: bpp.mit.edu is real economics. It computes macroeconomic quantities (like the rate of inflation) from direct microeconomic measurements on historical prices from the web. If you disagree with their analysis, you can replicate it from their dataset.
I think this is our fundamental disagreement. I do not believe macroeconomics has a firm empirical foundation in the same way that physics does. Economics is best conceptualized as a many-body problem in biology, with highly non-fungible humans (100 Steve Jobs will greatly affect any reasonable simulation). We're just not there or even close in macro, and so the confidence of some of these people (especially Krugman) is just wholly unwarranted relative to the claims of a solid-state physicist.
Indeed, many of them will deny that macro parameters can or should be derived from direct measurement of individual actors in the economy. By contrast, in physics, thermodynamics is firmly based on the microscale discipline of statistical mechanics.
I also agree with you that aggregate demand as a macroeconomic quantity is hard to measure as are many macroeconomic variables. But nowhere does Hayek disprove the existence of aggregate demand (whether business cycles are caused by monetary policy or fiscal policy or some other factor is debatable - their end effect is always on aggregate demand).
But statistical observations of the aggregate often lead to great discoveries and the foundation of a subject. Max Planck's enormous set of highly aggregate experimental data (without him knowing the mechanism by which light operates) led him to formulate the "quantum" hypothesis (ie light is quantized as photons) - which was the founding stone for quantum mechanics and all the great stuff that followed.
We have such numbers in engineering - the Reynold's number, the Nusselt number etc. We don't know how they arise from chaotic microscopic behaviour but we do know these quantities exist. They have a profound effect on the onset of turbulence in fluid flow, onset of convection in heat-transfer and a whole lot more. The effects themselves can be measured and be tallied with a "Reynold's number" of say 3000 (which is again based on conduit dimensions, pressure gradient, viscosity - all measurable quantities but we don't how they tie up together to give rise to turbulence). Never stopped us from making pumps and engines and life better for the world.
As an aside, Hayek's theory and the whole Austrian school of thought is the least empirical of all such branches. So you contradict yourself.
Even Milton Friedman declared himself "an enormous admirer of Hayek, but not for his economics. I think Prices and Production is a very flawed book. I think his [Pure Theory of Capital] is unreadable. On the other hand, The Road to Serfdom is one of the great books of our time." (copied verbatim from Wikipedia).
There is a difference between normative economics (which the political leaders and Paul Krugman propound - ie the "That's how it should be" class) and positive economics (which, as a subject, deals with discovering mechanisms of the economy and searching for empirically verifiable variables that can validate those mechanisms). I think you're confusing the two.
There is a difference between normative economics (which
the political leaders and Paul Krugman propound - ie the
"That's how it should be" class) and positive economics
"By contrast, in physics, thermodynamics is firmly based on the microscale discipline of statistical mechanics."
Thermodynamics is absolutely the most aggregate branch of physics. delta(E_int) = delta(Q) - Work always works for a system regardless of your microscopic model - statistical mechanics is just one model to explain aggregate quantities that arise ie temperature, pressure etc. - micro-level structure is hardly measurable in thermodynamics.
Thanks for giving me this great example to help disprove you :)
At least with S, even before stat mech there was a precise process to measure S from a P/T phase diagram. And there was a procedure to reproduce a phase diagram for an arbitrary compound.
Yet have you ever seen someone calculate the values of C, I, G, and Y from raw data? Like, a reproducible research document which calculates these from a public database of individual transactions, perhaps from a virtual economy? Everyone starts from government statistics to justify the government's activities.
You can directly measure the macroscopic quantity of inflation on a microscopic basis by simply tracking prices over time. But the other quantities that a lot of macro reasoning seems to be based on do not have simple measurements. That is the fundamental reason for deep skepticism about macro. Where's the raw data and the source?
Because we are making decisions about trillions of dollars by verbal argument rather than open public datasets and source code. Given a database with an anonymized, representative sample of tax returns, credit card transactions, bank account deposites, new company incorporations and the like (many of which would be a matter of public record) you could probably go pretty far with some basic scatterplots. Yet this is not the culture in economics.
S = k ln W is an entropy model for an ideal gas with uncorrelated particle motions and inelastic collisions. It doesn't explain the "entropy" of a real system.
There is no precise way to measure S for any real fluid whatsoever. S, at a microscopic level, isn't even well defined (disorder? - but that's just an interpretation for S, not a definiton). Phase diagrams only allow you to measure changes in S - and that's only because (assuming reversibility), delta(S) can be explained with change in pressure and temperatures (both are aggregate variables). And when a process is irreversible (which most real-world processes are),the only thing you can say is that the change in S would be greater than what you can compute using T, P, heat transferred and work done.
Raw data to calculate C, I, G and Y are freely available for public use at : http://www.nber.org/data/ . The accounting framework on which the above measurements are based is described here: http://unstats.un.org/unsd/nationalaccount/docs/SNA2008.pdf (individual nations implement their accounting frameworks, as the NBER does for the US, according to the guidelines above).
It'd be nice if that article had actual proof, or at least some kind of FOIA-sourced documents to support the $7.7t number. There's nothing there, though, and you're just parroting a number that appears once without any substantiation.
I'm sure the money supply continuing to skyrocket means the Fed isn't bailing anybody out. Surely those trillions aren't going toward bailouts for the government, Wall St, big banks, or the housing market.
Holy CRAP! Look at that long-term M2 chart! It looks like money is growing at a constant logarithmic rate! That's evidence of manipulation. Or, uh, inflation.
The Fed is bailing out home owners, investors, realtors 24/7 using trillions in QE to push rates lower to prop up the housing market.
I know, look at all these QEs we've had! It's been at least zero since 2010! Free money for everyone, all on the Fed's tab!! [0]
[Natural mortgage rates] would be something closer to a historical norm, 6% to 8% would be a lot closer to normal based on the last 50 years, than 4%, for example. But if you know anything about any of this, you already know that.
Or there's just a glut of housing supply -- including foreclosures -- and banks are offering low rates to clear that supply. Also, if "you know anything about any of this" you'd know better than to use past information to analyze this kind of extraordinary economic climate.
Seriously: half of your stuff is unsubstantiated, and the few factually-correct points (money supply, low housing rates) are symptoms of normal economic behavior. Please stop pushing HN's economic discourse further into the earth.
[0] Also, if you "knew anything about any of this" you'd know QE3 has been whispered about since 2010. Two years later...zero additional QE.
Austerity was the first medicine prescribed by president Hoover and it failed. FDR initially provided stimulus but he had to abandon those due to political sentiments similar to the ones you echo. What finally ended the depression is the stimulus from the overwhelming spending on WW2.
Whether stimulus triggered by war or via the fed, its the only way to resolve financial turmoil. The time to address deficit/debt is when the economy is strong, as was done in the mid to late 90s.
The alternative view is that FDR made the Great Depression great, with arbitrary orders like NIRA and attacks on business. He ruled for four terms and the Depression coincidentally lifted after his death. Out of necessity business was given a freeer hand during the war, sort of like Lenin's NEP in the 1920s. With FDR's death that free hand continued. Read "The Forgotten Man" or John T. Flynn if interested in this point of view.
By the middle of his second term, much criticism of
Roosevelt centered on fears that he was heading toward a
dictatorship, by attempting to seize control of the
Supreme Court in the Court-packing incident of 1937,
attempting to eliminate dissent within the Democratic
party in the South during the 1938 elections, and by
breaking the tradition established by George Washington
of not seeking a third term when he again ran for re-
election in 1940. As two historians explain, "In 1940,
with the two-term issue as a weapon, anti-New Dealers...
argued that the time had come to disarm the "dictator"
and to dismantle the machinery."[1] These criticisms
largely ended after the Attack on Pearl Harbor.
Because victors write history, we need to be skeptical of presidents surrounded by war propaganda, whether Bush or Obama or FDR. Did a president lead us through war and depression? Or did he get us into war and turn an ordinary recession into a depression?
In other words, what is at least as important as how much. You can't just blindly spend your way out.
As Max Levchin says, the long term question is not whether the US is printing too much or too little - it's whether we (that's us, here, reading Hacker News) can focus on real innovation, which causes real productivity improvements, and thus real growth.
That's the best way out and it rests on us.
The reason a meltdown of the financial system is a danger to the average man or woman is that he or she depends on goods and services whose manufacture or provision are coordinated by the financial system. But unlike the situation in 1929, there is now another powerful way of coordinating activities that most people in the developed world are, uh, plugged in to which could take over a significant fraction of the coordination that used to be done by the financial system (although the transition to new ways of coordination can of course be very painful).
I would also point out that the typical elite journalist is a woman living in NYC married to a financial professional, which will tend to cause the reporting on the consequences of any serious threat to the livelihoods of financial professionals to be exaggerated. (I am indebted to Penelope Trunk, who used to live in NYC, for this insight.)
But even in a worst-case financial crisis, there will still be money! Governments might make mistakes that worsen the crisis, but the governments in control of the important currencies like the dollar and the euro are unlikely to make the mistake of hyperinflating the currency, which is the only thing I can think of that would make dollars and euros almost useless. And in the (very unlikely IMHO) event that dollars and euros and pounds sterling do become useless, such a situation would provide a fertile environment for some alternative like e-gold and bit gold to become widely adopted (even if the alternative have no chance of wide adoption in the present environment) because necessity is the mother of invention and of flexible attitudes.
But that is a bit of a side issue. The main point I wish to make now is that I never said that a financial crisis could not impose massive disruption and massive human costs in the short term. Instead, I gave an argument for why I thought we are unlikely to see a repeat of the Great Depression of the 1930s -- which I will point out lasted about 10 years. And in particular that no matter how misguided the monetary and fiscal policies of the major governments and no matter how greedy and destructive the decisions of the financial professionals, it will take a lot less than 10 years for most of the loss of human prosperity caused by a financial meltdown to be worked around -- because, like I said, one important difference between 1929 and now is that it would take a lot less than 10 years for the people reading this message board to devise services running on the internet tailored to the needs of the captain of the ship, the owner of the goods on the ship and prospective buyers of those goods that allow complicated continent-spanning positive-sum exchanges of value to take place.
In 1931, Republicans in general and Hoover in specific were pushing stimulus and restrictions on production. FDR campaigned against these measures but continued them after he was elected. (And no, congressional Repubs did not oppose Social Security's enactment.)
Real growth comes from technological innovation. That has been equally true in 1929, 1933, 2006, 2008, and 2012. Go read Wealth of Nations (published in 1776). And I invite you to come out here to Silicon Valley.
EDIT: can't reply / too deep. I've never read Ron Paul newsletters, and I'd love to hear you explain how CDOs of highly correlated assets deserve AAA ratings. Love even more to hear how you think macroeconomic policy caused the shock.
Macroeconomics is concerned with things like money, interest, employment, and aggregate supply+demand of whole economies. Macroeconomics became popular once it became clear the the classical theories couldn't remotely explain the Great Depression. You don't get a 25% aggregate shock because people stopped innovating or a production glut or "illusory growth" or whatever the Internet libertarian crowd feels like blaming today. In the classical theory, you don't get people starving because bankers misjudged their balanced sheets because classical theory is not capable of explaining how the two are connected.
I was thinking that we got lucky and TARP ended up not costing much (not counting 2nd order effects pushed into the future). Also, I'm seeing 'only' about $5.3 trillion of new debt from 2008 to now: http://www.usgovernmentdebt.us/federal_deficit_chart.html
It's why we saw incredible funding bubbles in the late 1990s, the mid 2000's, and just recently, all timed very well to the Fed encouraging risk booms through artificially low rates and other similar manipulation.
Understanding how the system functions, helps you understand the funding environment, which benefits anybody trying to work on a startup that has to concern themselves with financing. It's not ideal to overly focus on this of course, but it matters.
This statement makes all your other statements wreak of sensationalist bullshit.
Since when are facts sensationalist bullshit?
From this day four years ago to now, we've added roughly $5.89 trillion to the public debt ($9.869t to $15.765t), and that doesn't count all of our liabilities, that's merely a fraction of it represented by the so called "public debt."
I'd love to see the math on how you propose we ever pay back the $11 trillion in new public debt added from 2008 to 2016/17. Clinton ran the biggest surplus we've had in a very long time ($236b), and it was fake, because it didn't include the money borrowed from inbound Social Security money for the non-existent trust. If we could magically run that Clinton surplus rate from 2017 to 2102 (about 85 years), we'd finally pay off the $20 trillion in public debt we're going to have four years from now. That assumes we never once slip up again, and constantly pay $236 billion per year strictly toward only the public debt.
So, a mere 100 years of record surplus' ought to do the trick.
In fact an annual surplus creates additional government debt because the only place the U.S. federal government can store profit is in U.S. Treasury bonds (see: the Social Security "trust fund"). This is why there was so much interest in refunding the surplus to taxpayers.
Now is a great time for the U.S. to be borrowing, because everyone wants to give us their money. Treasury yields continue to hover well below their historical averages. Even at long-run average rates of economic growth and inflation, we will stay ahead of today's Treasury yields and afford our payments.
So: your numbers might be accurate (I don't have the time to check them), but your assumption that we can never pay our debt is flawed.
Are you sure? The President was just on TV this morning saying "The private sector is doing just fine."