Comment by photon137 | Hacker News Reader

Comment by photon137 | Hacker News Reader

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cost between $8 and $15 trillion depending on what you're counting (total deficits + Fed bailouts)

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

They dumped truckloads of cash on banks who were rather suddenly (??) severely undercapitalized. That's a bailout to most people.

These were loans - albeit on very easy terms, I agree. The difference between a government bailout (which the Treasury did, in fact) and a Fed's "lender-of-last-resort" loan is crucial.

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).

That is a distinction without a difference.

I agree - I didn't explain this very well. The former utilizes taxpayer money, the latter doesn't. The first is an all-out investment, the second, a loan.

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.

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.

Of course - what the banks did back then was plain and simple wrong. Even what they're doing now (dabbling in structured credit products like JP Morgan's ~ $3B loss) is stupid. Plus they're getting cheap cash from the Fed to finance their activities.

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).

Obviously, you can't let them all fail, but if you don't let significant banks go under, how do you address the systematic moral hazard that encourages this behavior? It's a big problem, that, if anything, is worse now than it was in 2008.

Split the banks up. One bank that is too large to fail can become 5 banks that individually can fail.

Unfortunately we've gone the other way.

>I agree - I didn't explain this very well. The former utilizes taxpayer money, the latter doesn't. The first is an all-out investment, the second, a loan.

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.

No - Fed loans are not backed by taxpayer money - they are backed by the faith in Fed to replace those dollars with assets of equivalent value. And no, it's not a stealth tax on anyone who holds dollars. The popular view is that ok, the supply of dollars has gone up and hence the money I hold is worth less.

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.

>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).

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.

But you did earn that increase in value. A home you couldn't afford in 2006 because it cost $300,000 is now affordable at $175,000. The purchasing power of your dollars did go up (actually it didn't "go up" - it is reaching it's fair value - earlier your purchasing power was less). What the Fed did wrong was it didn't stop your purchasing power from decreasing back in the 2002-2006 era because it thought home-based credit supply would support the decrease in your income-based purchasing power (they never knew how interconnected banks with high leverage would soon destroy that fantasy - although they should have known.)

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...

The Fed's actions were extreme bailouts. They've been busy bailing out almost everybody: home owners, Wall Street, Europe, the Treasury, the states.

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.

Bernanke had to do a lecture series (as part of a PR-initiative, I assume - but he's an academician as well) explaining the Fed's actions to those who may not be that well-versed with macroeconomics or how the FOMC works. You should read this before making any "bailout" claims:

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.

Appeals to authority... check.

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.

The various Feds' open market operations and reverse repo operations inject/sterilize billions of dollars every day from the markets. $3 trillion may seem like a big amount on the balance sheet to unwind - but that kind of liquidity can be soaked out of the system pretty easily (if done carefully) once the economy gets going and the Fed is able to raise rates (ie secondary credit markets begin to function well enough - e.g. the traditional GSE-sponsored lending/commercial-paper lending etc).

Edit: I am trying to make a valid clarification in this thread. Your sarcasm is unwarranted.

_shrug_

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.

How on earth do I have a "pat-us-on-the-head" attitude?

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.

As a neutral third party who has no strong opinion about this issue and limited background, photon137 is making the much stronger (and informative) case.

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.

Strongly disagree. photon137 is just copy-pasting the conventional wisdom into a comments thread and calling it a grand insight. Yet the deference afforded these "experts" is vastly disproportionate to the rate at which economics produces testable hypotheses. There is no such thing as a "right-wing" and a "left-wing" Nobelist in physics, but there is in economics. You quote Krugman, we quote Hayek, you quote Stiglitz, we quote Friedman, and so it goes.

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 strongly disagree that photon137 sounds more reasoned and compelling to me?

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.

Fantastic. All I care about is the content. In any case, your comment was no simple personal testimonial, but an attempt to tell carsongross that the "crowd was against him". This is just the conventional wisdom attack again.

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.

My comment wasn't an attempt to tell carsongross the crowd was against him. It was an attempt to tell carsongross that the way he's phrasing his arguments will make people think he's a crank.

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.

First of all, the plot you mention is the projection after the Treasury stimulus - this has absolutely nothing to do with the Fed at all. I have never mentioned the government stimulus at all.

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.

Appreciate the polite discussion. In that vein, there are several issues with your basic premise.

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 agree with you that economics has nowhere near as much predictive power as physics (trained in physics, stuck in the financial-sector as a boring quant - I can testify to both). Nor it has infallible foundations (rational behaviour? game-theory based "utility" maximization? VNM utilities?)

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

Well, sure, but there can be no obligation to do that which cannot be done. Let's say you believe that the Federal Reserve's QE and money printing activities are like monkeying around with the number of shares in the cap table, that this nothing to do with the process of wealth creation, and that they downplay the effects of ruinous inflation on economies (viz. Weimar 1924, Argentina 2001). Then the positive and normative are tightly linked. You should not do X (normative) because X will lead to disaster (positive).

See my comment on this very thread explaining the Fed's action to counter inflation/deflation:

http://news.ycombinator.com/item?id=4087941

I totally missed your last statement:

"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 :)

Hmmm. Didn't Boltzmann put S = k \log \Omega on his grave? I think we are taking different lessons from stat mech. To me, the triumph of stat mech is that macroscopic phenomena (like entropy S) can be explained in terms of microscopic quantities (like Omega).

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.

No, we aren't taking differeent lessons from stat. mech. - your understanding of thermodyanmics is flawed (there are no two views here - this is physics).

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).

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.

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.

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