The concept of the liquidity trap is the keystone of Krugman’s thesis, according to which the rules of the game change when there is a lack of private investment. FULL ARTICLE by Jonathan M. Finegold Catalan
Source link: http://archive.mises.org/13421/krugman-contra-hayek/
Krugman contra Hayek
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JFC: Thanks for an even-handed article. And BTW I always enjoy an author here who’s willing to get into the mosh pit with the plebes, and get a little dirty.
In the Krugman article you refer us to, he quotes one Richard Serlin as saying:
“I think the thinking of the libertarians and freshwater believers is that if there’s a recession, then the free market has a good reason for it. It’s a “real” business cycle phenomenon, and the best thing to do is let the free market have its recession or depression for as long as the free market wants (and we had some doozys before Keynes, and often). The Fed shouldn’t tamper with the free market, just like the fiscal branch of government shouldn’t. The Fed should just maintain zero inflation, or go on the gold standard. It shouldn’t try to manipulate the interest rates of the free market, or get involved in business cycles at all.”
I think such a comment is worth putting into perspective. The proximal cause for the banking collapse that precipitated this latest crisis was the issuing of fraudulent instruments of debt. That is, instruments based on a perceived value (mortages and other debt issues) that were represented as being less risky than the issuers knew they were, and that investors didn’t understand because they were misled by ratings agencies and by the banks that both (a) assured them the issues were sound and (b) sold them the issues.
The laws were complicit in this crime. But the principals were mortgage originators who knowingly issued loans to unqualified borrowers and then offered the bundled loans to investment houses, for resale to the public. It was a scam, albeit one in which indictments have been slow to surface. And it was a scam with a few very big winners and a great many losers.
In such a situation, what is the proper response? Should the laws be changed? Most certainly, IMO. It’s in the best interest of all of us to see that such things can’t keep occuring. If they were to be allowed to continue unchecked it would have a chilling effect on the entire world of credit and debt. And we would be in a perpetual recession, induced by a well grounded fear of all financial markets.
This, in a nutshell, is the argument for well written and fully enforced federal regulation of financial transactions. I know there is a counter-argument, that the market must always be free from constraint, and that the buyer should beware such pitfalls by always arming himself with sufficient knowledge. But by what yardstick is such a market “better”? Doesn’t fear inhibit this market from ever becoming dynamic, or from ever enabling the economy to expand?
Put more simply, let’s use a medieval marketplace as our example. Should the sheriff place enforcers in this marketplace to apprehend fraudulent vendors, those who adulterate their grain with sawdust or cheat with false weights and measures? Or should these behaviors just be a part of the game, and the savvy shopper be alert to such pitfalls?
The libertarian might say yes, in time the wiles of the bad vendor will become known and shoppers will choose not to shop with that person. That is, superior knowledge will make the market perform more efficiently. But that will only work in a small market. We have a global one now, with nearly seven billion participants. In such a large market, where we can never know the entirety of the game, we must then assume that EVERY vendor is crooked, and that no wares are to be trusted.
“Within the Misesian-Hayekian framework, the only permanent solution to existing malinvestment is to allow its liquidation and the readaptation of the structure of production.” That is, the many losers must be allowed to lose painfully, and the few winners to gain inordinately. And all the players in the round that follows are to understand that the wiliest, least principled players in the game will again be the ones most likely to come out winners.
I don’t make any appeal to ethics or to morality here, just to offer the thought that in the next round, the number of buyers is likely to be quite a bit smaller than in the preceding round. Or, put another way, that the total size of the market will shrink for so long as this model is employed.
So then, Mr Catalan, will you or one of our readers please strengthen the case for an untrammeled free market’s ability to work better than one that’s well regulated? Thanks in advance for your reply.
“the total size of the market will shrink for so long as this model is employed.”
As it did throughout the Industrial Revolution.
“But the principals were mortgage originators who knowingly issued loans to unqualified borrowers and then offered the bundled loans to investment houses, for resale to the public.”
The original loans were often made because they were required by the Community Reinvestment Act. The rebundling was often effected by Fannie Mae, which is a quasi-governmental entity that was started by the government and is supported by the government. Evil capitalists and the free market were not the cause of the problem here. Government intervention into the free market was.
That’s a well-worn canard, Russ. The CRA’s been around I think since 1978. And from then to something like 2003, the rate of default for CRA-supported loans is little worse than that for any other loan category for low-income borrowers. That is, less than four percent of all loans.
What changed was the plan hatched by certain originators to issue loans to persons who were clearly unqualified to service them, and then to get rid of these hot potatos on the open market. By 2004 we see a clear trend upward in the loan default category.
Complicit in this plan were a number of bad actors, which category does include the heads of the insurors, Fannie and Freddie. But as well it includes the large investment banks who unquestioningly accepted those bundled loans, using them as a foundation from which to carefully package huge amounts of mispriced risk, and the ratings agencies who, certainly with full knowledge, labeled those dog turds as being of AAA quality.
So I would differ with your statement here: “Evil capitalists and the free market were not the cause of the problem here. Government intervention into the free market was.”
Instead let’s say that evil scam artists acting in a capitalist context knowingly defrauded their targets (purchasers of mortgage-backed securities) with the complicity of co-opted bad actors within the government sphere… and that deregulation removed the tools necessary to have prevented the crime. Guilty parties abound on every side of this hustle.
something called “legislative changes of 1999″
you fuckin idiot
Besides being rude, your comments are lazy and uninformative. You really should go to the trouble of forming an observation.
Here’s what we find under “legislative changes of 1999″, specifically, a discussion of Gramm-Leach-Bliley:
“In the fall of 1999, Senators Christopher Dodd and Charles E. Schumer prevented another impasse by securing a compromise between Sen. Gramm and the Clinton Administration by agreeing to amend the “Federal Deposit Insurance Act” (12 U.S.C. ch.16) to allow banks to merge or expand into other types of financial institutions.” (That is, to be at the same time an investment bank, a commercial bank, and an insurance company.)
This means that the same parties originating loans could then blend with financial services firms putting together novel risk packages for sale to the public. This step was essential to creating a way to sell off the risk resulting from the bad loans they made.
“At the same time the G-L-B Act’s changes to the “Federal Deposit Insurance Act” would now allow for bank expansions into new lines of business, non-affiliated groups entering into agreements with these bank or financial institutions would also have to be reported as outlined under the newly added section to Title 12, § 1831y.” etc.
http://en.wikipedia.org/wiki/Community_Reinvestment_Act#Legislative_changes_1999
This article specifically addresses the changes made to Glass-Steagall, which would have prevented the scam from occurring:
http://en.wikipedia.org/wiki/Gramm-Leach-Bliley_Act
If you can trouble yourself to communicate in complete sentences, feel free to comment. Otherwise don’t bother.
There are already laws against fraud. It’s not a capitalist context if the gov’t has perverted the pricing mechanism with easy money from the FED, keeping interest rates at 0% (next to impossible in a free market), and perverted the market with acts of Congress (CRA, Clinton’s amendments, Bush’s push to get everyone in a home, not to mention the hands of both parties in the honey pot that was the housing market in those years). Even still, if you make the argument that deregulation caused this, as absurd as that is (why on earth would a greedy, evil capitalist loan money to a person she – political correctness, sorry – couldn’t pay them back?), then our overlords are not very good at their job. Your only real position is that we need a better king. I think thousands of years of experience under such delusions is enough. This golden middle with wise bureaucrats chosen by an idiotic populace (the assumption of the left is that the populace is dumb and the right that the populace is immoral) is the ultimate utopia.What always amazes me about such views is that there is a tendency on the conservative side to blame only gov’t and on the liberal side to blame only business, but the truth is that these entities are working together to screw us. They use the power of gov’t to line their own pockets, while destroying competition through legislation. This is not capitalism. It is crony corporatism. Open your eyes, mensch.
“Even still, if you make the argument that deregulation caused this, as absurd as that is (why on earth would a greedy, evil capitalist loan money to a person she – political correctness, sorry – couldn’t pay them back?), then our overlords are not very good at their job.”
Either that, or there are no overlords.
Today business and government are intertwined in a partnership– one in which business gets its regulatory needs met by bribing government to slightly tip the playing field in its favor. And against the competitors. Naturally those competitors bribe Congress members to tip the playing field in THEIR favor. And so the world goes ’round.
That’s what we see in the eternal waltz, back and forth, on the regulatory front. Business and government are not in any kind of opposition, they’re DANCING PARTNERS. Each scratches the other’s back, trading votes for influence and moolah for legislation.
Let’s zero in on the pithy core of your comment: “why on earth would a greedy, evil capitalist loan money to a person she – political correctness, sorry – couldn’t pay them back?”
I’ve already described how the scam operates. First, you have money to lend and you lend it out, to qualified purchasers who can afford to repay debt. And you create genuine AAA mortgages.
But then that market becomes saturated– there just aren’t any more qualified buyers. Yet you still have more money to be lent. Maybe it’s from investor pools, maybe it’s from the pockets of depositors. But either way, all this cash in the drawer is burning a hole in your pocket. So you begin to devise ways…
And you come up with the logical one: you lend out the cash to UNqualified buyers and quickly dump the rotten loans onto the resale market, as fancy new asset-based equities. Only you appear to know that these loans, individually, are all lemons. At the time of transfer, all your customers see is that they’re being paid current. They fail to notice that they’re still in their initial period, with ultra-low introductory rates that mask the fact that when the rates reset upwards, the mortgage holders won’t be able to afford the increase in their monthly payment.
And the beauty of the scheme is this: you get to sell them off at a premium price, based on the anticipation of future returns when they reset!
Is that nifty, or what?
In addition to the other replies, I would like to add that I don’t think that the rating agencies knew that the risk was as bad as it was, because there had never been a situation quite like that one before. That being the case, it was hard to accurately assess risk.
The rating agencies always seemed a little strange to me. Not to mention, why do we need rating agencies, anyway? If nearly all loans were sound in the beginning…. The other issue is the ratings systems for the banks. One quarter, all is well (I think that’s a 5?), and next quarter, all is terrible (maybe a 2). Is there no good way to know if your bank suddenly became a social services organization? You should be able to know how well your bank is doing (maybe weekly or monthly) and yank your money out when they start doing stupid things (like make a bunch of bad loans). Is there some way to do this?
Why do we need ratings agencies? We don’t. I’ve just loaned a bunch of people $100 million dollars. Want to buy in, Dave? I guarantee the deal is solid.
It used to be that lenders would go to a great degree of trouble in qualifying loan applicants… because they knew they would be on the hook with their backers or depositors if those loans went south.
Then things changed. Obscure mountains of legislative changes got passed, and it became possible for lenders to offload risk from the bad debts they created and sell it on the open market. People bought it because ratings agencies certified it as being AAA. The whole process was shot through with corrupting rule changes, loopholes and newly created moral hazards resulting from federal guarantees and seeming insurance agencies (AIG) that were really just hedge funds operating in a new world of deregulation, no longer subject to reserve requirements sufficient to repay losses they claimed to cover.
So in a sense, it’s all the government’s fault. The government allowed itself to be swayed by the desires of financial interests who wanted the rules to be rewritten to suit them. And fundamental change needs to come, if the financial markets are ever to be trusted again.
That’s the reason why credit is still in large degree frozen, why small businesses can’t get the loans they need to hire new people and why we’re still afraid of a ‘double dip’ recession. The root problems have not been solved, not even in the new financial regulatory reform bill. As always happens now, real reform efforts have been co-opted.
So what’s the cure? Just let the buyer beware, and let ratings agencies go out of use? Announce to the world that we longer believed in or supported any federal protections, and that the investor was now officially on his own? If we did that, deposits in major institutions would shrink to a small fraction of their current size, and we’d no longer have any banks “too big to fail”. Each one could fit inside a shoe box.
If you wanted to invest in a mortgage you’d have to take time off from your day job to talk with individual lenders and mortgage holders, to see whether a single mortgage was worth buying. Then you’d have to find another one, and so forth. The volume of money being lent would shrink dramatically, as no one would ever have any basis to trust anyone else to handle his money.
Would this be better than what we have now? I know this: it would be one hell of a lot smaller.
“I don’t think that the rating agencies knew that the risk was as bad as it was, because there had never been a situation quite like that one before. That being the case, it was hard to accurately assess risk.”
Russ, I’m fairly familiar with buying mortgages. And if I were to consider buying even one, I’d ask questions like “Did the prospect ever fill out an application and submit documentary evidence of income?” If the answer was no, that’s all the verification I’d need. And I’d perform that due diligence even if I was only talking about twenty thousand of my own money, invested in some penny ante second trust.
I would expect the same of some agency that issued, for payment, a professional opinion to the effect that a bundle of 20,000 mortgages was a sound investment.
I liked a lot about your comments above – except when you called it “deregulation”. Would we be better off back in the days when you had to put down 40% and pay off the loan in 10 years – probably. Anything that lessens the risk and makes people act with caution would be better than the way things are now. A bunch of phony regulatory (note I said increased regulation) guarantees only encourages malinvestment and poor risk taking.
What about my point (question, really) about rating the banks – I really don’t understand it. Is there some way (a quick, reliable way) to know if your bank has made a bunch of bad loans?
“Would we be better off back in the days when you had to put down 40% and pay off the loan in 10 years [?]”
Dave: I was in the business– at the time when it worked best. So I think I can give you an informed opinion. It was working just fine when down payments required were in the 10-15% range, where solid earners could afford them, when interest rates were below around 8% (more about that below) and when buyers, to qualify, were limited to paying no more than 25-30% of their gross income toward PITI– that’s principle, interest, (property) taxes and insurance.
Appreciation rates stayed below around 10% annually. So there was good asset appreciation, leading to a strong and steady demand for homes, but it was not so exorbitant as to be unsustainable. That is, it did not greatly exceed the inflation rate of other categories of prices.
One thing most people fail to appreciate is the correlation between interest rates and sale prices. When you’re trying to qualify to purchase a home, here’s what doesn’t matter: the sale price. Here’s what DOES matter: the interest rate. Because the lower the rate, the lower your monthly payment. And the amount you can afford to pay per month is what determines your eligibility to buy the home.
Thus when interest rates go up, sale prices go down. Or they hold steady and sales volume goes down. THEN, due to supply and demand, they still get forced down, in a down market. And when rates go down, as has been the case for the past ten years, the RE market is stimulated– by more qualified purchasers buying more expensive houses. Appreciation increases, home start increase and employment increases in the building and RE trades. The country is literally doing a “land office” business.
But we went way too far. The market overheated, many more homes got built than should have been, they were offered at higher prices than the actual market would allow, and widespread fraud occurred in the marketing of these excess homes to unqualified buyers. So before long the whole shooting match collapsed, into a heap of half-finished subdivisions.
At a seminar, RE investors would pay big bucks for these words of wisdom. Yet you’re getting them for free!
>evil scam artists acting in a capitalist context knowingly defrauded their targets (purchasers of mortgage-backed securities) with the complicity of co-opted bad actors within the government sphere
YOURE A SCIENTIFIC FRAUD. YOURE A QUACK, A MERE SOCIALIST APOLOGIST WHO CLAIMS A CAPITALIST CONTEXT IN THE SAME SENTENCE IN WHICH YOU IDENTIFY THE GOVT CAUSE (WHICH YOU THEN EVADE BY SLEAZILY SUGGESTING THAT THE PROBLEM WITH SOCIALISM IS THE PARTICULAR BUREAUCRATS OR PARTICULAR REGS RATHER THAN SOCIALISM ITSELF). WE HAVE A VICIOUSLY CORRUPT CULTURE WHICH INTELLECTUALLY AND PROFESSIONALLY REWARDS CORRUPT ECONOMISTS.
>deregulation
THIS IS PRAGMATIST INTELLECTUAL CORRUPTION, FOCUSING MERELY ON ONE PART OF A WHOLE SYSTEM OF SOCIALISM. THE VAST, BOOM-AND-BUST, TIDAL WAVE OF THE GOVT COUNTERFEITING OF MONEY AND BANK CREDIT WILL NOT BE STOPPED BY ANY REGULATION.
YOU CAN PINCH AN EXPANDING BALLOON IN A MILLION PLACES BUT IT WILL EVENTUALLY POP.
THE CORRUPTION OF PRAGMATISM IMPORTANTLY INCLUDES AN EVASION OF THE LONG-RUN. AMERICAN SOCIALISTS ARE, WITH COMPLEX, PSEUDO-SCIENTIFIC METHODS, SUPPORTING THEIR THEFT WITH EVER WIDER AND MORE COMPLEX METHODS, EG ,STEALING FROM THE CAPITALISTS IN CHINA. WE NEED A SCIENTIFIC ORGANIZATION OF FACTS, WITH A HIERARCHY OF CAUSES, NOT AN EMPIRICIST CHAOS WITH EVER SMALLER AND OUT-OF-C0NTEXT DETAILS AS THE REAL INSANITY WHICH RESULTS FROM CONCEPTUAL DISINTEGRATION. WE MUST NOT GIVE SOCIALISTS ANY INTELLECTUAL RESPECT. THEY ARE INTENTIONAL DESTROYERS. THEY INTEND TO SACRIFICE. THEY INTEND TO DESTROY PROFIT.
7/16 of an inch. That’s how far it is to the caps lock, and for people to take you more seriously.
Michael,
I think you and I agree that no bank is interested in issuing loans with a low probability of being repaid, and so the question is why so many banks did issue these loans and why did so many people default on them? It is also worth mentioning, at this point, that most people defaulted on their loans after the crash, not before, and as such I think it can be concluded that the large rate of housing-oriented loan defaults was a result of the recession, not a cause (otherwise, there should have been an equal amount of defaults throughout the entirety of the post-2002 boom period). Banks like Lehman Brothers collapsed only after their credit rating had been lowered — only after the recession began — and only after the demand for loans (and thus the demand for housing) fell.
The question remains, why were so many bad loans extended? Was it because greedy bankers were looking for profits? Bankers, like everyone else, are subject to “thinking on the margin” (rational thought), where they weigh the potential costs versus the potential benefits. It strikes me as a bit naïve to believe that all bankers, or so-called “loan-sharks”, suddenly lost this ability to rationalize, or simply clouded their rationality. Was it because of the CRA? I, admittedly, have not kept up research on the current recession, but IIRC the CRA played only a minor role in the current crisis.
Notable is that a housing boom and bust is not unique to the current recession. I can’t remember which depressions/recessions were also followed by housing busts, but I believe that the Depression of 1920-21 is one such example. The point is that the housing bubble is not new and is not unique historically speaking. It also occurred in much of the world, and is arguably occurring in China. Obviously, there is more at work here than simple “animal spirits”.
It the problem as clear-cut as the idea that the Federal Reserve lowered interest rates? Outside the theoretical,probably not. What I mean is that obviously there was more at work in the housing bubble than lower interest rates. Of course, lower interest rates set the boom off, but the actual events which took place could be said to be more complicated than that (i.e. lower interest rates led to higher reserves, or a larger stock of loanable funds -> more loanable funds means larger or more loans -> more loans decrease loaning standards). Not only was a larger volume of money lent out, but many of these loans were later purchased by GSE’s (Fannie and Freddie) and some private investment banks (i.e. Lehman), allowing banks to loan out money based on those sales.
With that said, the most damaged sector was the construction sector, or the capital-goods sector of the housing market. The damage of the financial sector came as a consequence of malinvestment in the construction sector. I think when one shifts his view to the construction sector one sees the Austrian case more clearly.
Hopefully, I will finish an article on regulation soon (although, it focuses on the oil industry, although it is applicable to all industries). Until then, I will make two points:
1. It is in the best interests of bankers that this does not reoccur, as well. I think, at this point, it is obvious that the fault does not lie necessarily with the bankers, because no banker is interested in going bankrupt (and, if it’s an issue with the bail outs, then obviously it’s not the private financial sector really at fault).
2. The natural check to this malinvestment was the recession.
I’m not actually sure that this view has come out to be true. Those who played dirty were rewarded not by the market, but by the government. I can assure you that Lehman Brothers lost out heavily, even if some of their leadership remains wealthy (due to savings) — not everything Lehman Brothers did was bad, in any case.
I think this view of the market is the stereotypical market-critic view, and I’m not sure that any amount of evidence will persuade you to the contrary. I don’t mean to insult or be impatient, but knowing that this debate in the comments section will probably conclude in agreeing to disagree my responses will probably be sparse (as to avoid spending too much time responding to comments).
OK I’ll bite too.Because in a free market, credit would not extend beyond the pool of real savings. There would be no such thing as “too big to fail” and housing prices would not be at ridiculous multiples of median income, eliminating the need for mortgages in many cases–people could actually save for a house!
When any bust happened, it would be micro instead of macro. The fraudulent vendors would be floating belly-up in bankruptcy court, and their assets would be seized and liquidated along with the personal assets of their principals. But enough digression … excellent, succinct article Jonathan.
>in a free market, credit would not extend beyond the pool of real savings.
Fascist! [For the humor-challenged, I'm being sarcastic]
Re: Michael,
If the issuers knew the instruments were riskier than they lead their customers to believe, they would certainly be committing fraud – but all of them, at the same time? Either all these issuers were in perfect collusion with the credit rating companies, or they themselves were lead to believe that these instruments were safer. Somebody had to offer to underwrite these instruments, somebody had to tell the sellers of these instruments that they represented a safe offer, somebody with such clout that it would create this ever increasing moral hazard and the subsequent crisis.
Well, you haven’t given this much thought. What makes you think that new laws will stop another crisis, if this big set of laws did not stop this one?
But again, if the previous set of laws did not stop this crisis, what justifies the new set of laws? What justifies the “NOW it will be better” mentality?
So you want fear to be mitigated?
This is a strawman argument, Michael. “Free market” does not mean “free to commit fraud”. EVEN if no sheriff is present, people still TALK TO EACH OTHER, and the cheats would be run out of business pretty quickly.
You are ignoring the fact that in order to have this big a market, instant or nearly instant communications needed to exist first, to make information flow with the same level of efficiency as in a small market. This means that one CAN know who’s the crook and the cheat, as quickly as in the swap meet. Your thinking about this matter is extremely narrow, or you’re indulging in special pleading.
By putting your own spin, Michael, you make your point ineffective. What is it to win “inordinately”? What is that supposed to mean? You did not understand the Misean point, instead trying to mock it.
Again, you totally misrepresent the point, by relying now on innuendo. Who told you that the winners in a crisis have to be the “least principled”? What makes you think that? Not only is it specious, it is not even accurate. Are you seriously saying that the companies and entrepreneurs that survive a crisis HAVE to be the “least principled”?
You ARE putting a moralistic spin on things, using an Argument from Envy.
A pretty good rebuttal, Old Mex.
“If the issuers knew the instruments were riskier than they lead their customers to believe, they would certainly be committing fraud – but all of them, at the same time? Either all these issuers were in perfect collusion with the credit rating companies, or they themselves were lead to believe that these instruments were safer.”
They certainly knew that no-doc, liars’ loans were unsafe. They were in the business! But their problem was, all the loans to solid home buyers had already been originated, at the pinnacle of a boom market in homes… and they still had lots more money left to loan out. The temptation was there to indulge in a bit of chicanery.
They made themselves safe from indemnity by selling off those bad loans just as quickly as they could, figuring out a way to transfer the risk onto unsuspecting others.
“Somebody had to offer to underwrite these instruments, somebody had to tell the sellers of these instruments that they represented a safe offer, somebody with such clout that it would create this ever increasing moral hazard and the subsequent crisis.”
That role was played by Fannie and Freddie, the underwriters. They created the moral hazard. And the crime was perfected by ratings agencies, whose corrupting influence has been well described.
Your next several sections (” Well, you haven’t given this much thought. What makes you think that new laws will stop another crisis, if this big set of laws did not stop this one?”) presume the argument that the laws didn’t help, therefore more laws won’t help. This is a persistent refusal to understand the distinction between laws designed to restrain behavior and those designed to deter bad behavior.
Since 1978 the original CRA has been rewritten innumerable times. Each time it has been weakened. One can point equally to other deregulatory moves that did away with laws restraining bad behavior. So there are laws and then there are laws.
“Free market” does not mean “free to commit fraud”. EVEN if no sheriff is present, people still TALK TO EACH OTHER, and the cheats would be run out of business pretty quickly.”
Free markets are exactly that. One is as free to commit fraud as he is to engage in honorable conduct. My medieval marketplace is an apt comparison.
And again, people don’t talk to each other efficiently enough to avoid grievous harm. Did they do so during the 2004-07 period, when mortgage fraud both widespread and blatant was occurring, and credit markets around the globe, all consisting of knowledgable players, were plunging in with chips worth billions? They had three years to figure this out. But rather than merely buying in themselves, they were bundling and selling, to the bigger fool. The sellers knew they were safe, while the buyers merely thought they were.
So I say “And all the players in the round that follows are to understand that the wiliest, least principled players in the game will again be the ones most likely to come out winners.”
And you reply “Again, you totally misrepresent the point, by relying now on innuendo. Who told you that the winners in a crisis have to be the “least principled”? What makes you think that?”
In this affair, it did happen to be the case that the least principled players originated the scheme and profited greatly from it. While the purchasers, less than totally knowledgeable, got taken.
“You ARE putting a moralistic spin on things, using an Argument from Envy.”
Am I just displaying envy? That is, do I wish I had gotten there first? You misuse the word.
Michael,
I would suggest spending time debating with someone who knows the laws which were in effect at the time. I’m not sure anybody here has researched the topic enough, apart from reading the popular free-market responses to the crisis (i.e. Tom Woods’s Meltdown). I think, in any case, that blaming the crisis on the unregulated market is just as bad as putting the blame solely on the CRA (and, in any case, as I mentioned before, I believe it has been established that the CRA was only a minor influence).
Some other comments,
Fannie and Freddie were Government Sponsored Enterprises. Not necessarily directed by the government, but supported and that was enough to elevate the moral hazard in regard to the two big and most well-known GSEs to perpetuate the issuance of loans (as well as other GSEs). Furthermore, rating agencies were also heavily regulated and sponsored by governments, and to a large degree were founded by the government. These were not free-market agencies.
One can only commit fraud as far as the other person is willing to believe it. In any case, I am not sure that those who took on the loan bundles were as helpless and as ignorant as you make them out to be. There was simply a number of factors which influenced the estimation of risk. Just because individual B took bad loans from individual A doesn’t necessarily mean that individual B was defrauded by individual A.
But, as I suggested above, I would debate with a free-marketeer you know has conducted a lot of research. Maybe he or she could be more specific than us. Otherwise, I think you know yourself that you are not going to persuade anybody else, and I think you know that you didn’t come here to be persuaded yourself.
JFC: Unfortunately my response to your first comment was moderated out of existence. I won’t try to reproduce it here, but only offer the gist of it. You say:
“I think you and I agree that no bank is interested in issuing loans with a low probability of being repaid, and so the question is why so many banks did issue these loans and why did so many people default on them?”
No, there were many lenders who’d found a way to avoid risk by originating perfectly terrible loans– and then selling them off to unwitting others. Ask Angelo Mozillo how it’s done:
http://www.time.com/time/business/article/0,8599,1903004,00.html
Then you go on: “It is also worth mentioning, at this point, that most people defaulted on their loans after the crash, not before, and as such I think it can be concluded that the large rate of housing-oriented loan defaults was a result of the recession, not a cause (otherwise, there should have been an equal amount of defaults throughout the entirety of the post-2002 boom period).”
There were two waves of defaults, one before, one after. The first was those loans the borrower could not afford to keep up with, the ones being closed after 2002. They had ridiculously low introductory rates that unqualified buyers had no problem paying down, so for the first couple of years they were good as gold.
Then they reset– to rates the buyers had no chance of maintaining. And the reason they reset to higher rates is that they could then be offered on the market as loans that (a) were solid, in that they were mostly all current, and (b) loans with a tremendous potential yield, thus attractive to the market. So when they reset, around 2005-06, they started going south in droves. But by then our Mr Mozillo no longer woned them. They had been offloaded successfully.
That was the first wave. The second was after it all hit the fan, and borrowers in good standing suddenly understood the consequence of a falling RE market: their own homes were upside down. They were no longer worth the balance on their debt.
So these people comprised the second wave of defaults, the one you speak of.
Your closing sentence, of course, says it all:
“I think you know yourself that you are not going to persuade anybody else, and I think you know that you didn’t come here to be persuaded yourself.”
What I’m doing here is just setting the record straight. It offends me to see a crowd of voices telling me their theories when the facts rarely support them. I have this compulsion to mention countervailing facts. But you’re right. I’m not going to convince any of the True Believers with mere factual observation.
Did I come here to be persuaded myself? Yes, in fact I always come to new and interesting sites with an open mind. I just find, so far, few convincing arguments being offered by the hard core Austrians. I think they rely overmuch on an elegantly described Master Theory of how things work (in much the same way Marxist theory once did), and lead people to think that the theory’s so overwhelmingly perfect they don’t need to look for supporting evidence.
I am incredibly interested, though, in the arguments that have surfaced over the past couple of days by the fellow who calls our attention to something called Modern Money Theory. Those arguments are deeply anti-Keynesian– but they make a lot of sense. And that’s how I learn, by listening and then testing.
http://www.newdeal20.org/2010/07/20/deficits-do-matter-but-not-the-way-you-think-15355/
“that’s how I learn, by listening and then testing”
“And then months later I still, like an incredible pighead, stupidly compare ‘Austrians’ to Marxists.”
Well, nobody really believes you are setting the record straight, so perhaps you are just wasting your time.
There is always stupidity and unnecessary risk involved with human action. The fact is over-promising regulatory assurances, absurdly low interest rates, bleeding-heart politicians, and ignorant people all contributed to the housing mess. The bottom line – none of this would have happened if the loans would have been sound in the beginning! Remove all the assurances, CRA, idiots in public office, Fed, etc., and banks would have been much more careful in loaning out their own money in savings, etc.
Austrians and Marxists are dissimilar in the details of their belief systems. However they are, in my observation, exactly similar in their methods of thought. Because I’ve seen both, close up.
What they believe in is some elegant Grand Theory that purports to explain every detail of economic activity, that relies on a small and selective set of data (to which they refer again and again) and that has at its base a very convincing logical consistency.
It’s only the details of the two theories that differ. The trap into which such True Believers fall is the one that says that we are engaging in a rational activity, one that obeys precise, logical rules akin to those we encounter in mathematics, or philosophic logic.
And as you’ve established a priori that the theory is correct, it must be the evidence that has to be altered. So when I respond to your theoretical comments with actual evidence, it must either be ignored or extended ad absurdum.
That’s how you all collectively resemble the Marxists. Scope “up” and you’ll see it.
No one said that everyone behaves in a rational manner. To the contrary – I said some people engage in illogical and stupid actions. These stupid actions (unnecessary risk taking, poor speculation, etc.) are encouraged by assurances, easy funny money, low interest rates, etc. Those who choose to engage in logical and sound ways should not be forced to bail out those who do not when they crash and burn. I can’t come close to explaining what everyone will do – no one can. When humans are involved, there is no way to predict or control their actions and all of the consequences of them. Spontaneous order, price feedback mechanisms, etc. – this is Austrianism. So, I don’t see your comparison of Austrianism to Marxism in terms of methodology…..
Re: Michael,
Yet they seemingly acted against their own interests. You don’t seem to ask why, just assume they were all reckless crooks.
Ah, the “Bigger Fool” fallacy. Interesting that the buyers of these products were also investment banks who should have known better, but seemingly didn’t. Does that make sense? Or could it have been the assurances of the bigger underwriter (i.e. who else but the US Gov)?
I am going to ignore your obvious non-sequitur and answer the first part: the problem resides with your assumption that the crisis was a result of not enough laws, not my refusal to see the usefulness of laws themselves. There were already laws in the books purported to stop a crisis, yet they did not do such a thing. Why? Because laws that purport to control human behavior cannot account for human purposeful action and adaptability – lawmakers cannot foresee the future. What the laws DID create was instill a false sense of security in many players that made them reduce their risk aversion enough to jump into investments they would normally shy away from.
This is obviously false. A regulation does not deter a bad behavior, it merely restricts A behavior. What “bad” or “good” is does not depend on laws, but on moral or ethical analysis.
Michael, one is free to act, but that does not mean one is free to commit fraud. In your marketplace scenario, you oversimplify matters by saying that the presence of the sheriff deters bad acts, but how could you know this? Is the sheriff prescient? And if he’s an after- the-fact player, then why can’t people simply detect the cheats and obviate his job?
Ah, the “greed did it” explanation.
There are two problems here, Michael:
You assume the sellers had all the information (that is, they knew what was going on), and
You assume the buyers did not have all the information (that is, they were ususpecting fools). Both these assumptions are incorrect.
The “bigger fool” fallacy cannot account for the mortgage-backed securities market, as most buyers of the securities were investment banks. Someone was fooled, all right, but it was not the buyers only.
The reason you misunderstand what was going on and simply conclude “greed” (which is what your argument comes down to in the end) is that you totally absolve the Fed’s monetary policies and government from the equation. The Fed’s easy-money policy fueled the mortgage industry, by giving investors false signals as to the level of postponed consumption. The government guarranteed and underwrote any “bad loan” through its pseudo-private entities Freddy and Fannie.Sellers of mortgage-backed securities were not selling because they expected a “bigger fool” – that’s preposterous. They were selling because they were ASSURED that the securitiews were safe, by a Fed that continued pumping money into the market and by a government that made assurances. Economic reality turned the tables because for the simple fact that money does not mean assets, and there were not enough ASSETS to justify the level of activity (like Mises described in his house builder’s scenario, there were in reality not enough bricks to finish the house.)
It wasn’t a scheme, Michael. There was nothing inherently wrong with selling mortgage-backed securities.
No, you misuse the concept. The Argument from Envy is basically a fallacy that happens when we exaggerate a person’s bad points because we are jealous or envious of them in other ways, in this case, because they were successful. You basically say “They came unscathed out of this, those rich bastards, they must be shysters and thieves!”Just because they made BETTER decisions does not mean they are the “least principled.”
Thanks again for your valuable critiques, Mex. I see no issue between us here:
Me: “One can point equally to other deregulatory moves that did away with laws restraining bad behavior.”
You: “This is obviously false. A regulation does not deter a bad behavior, it merely restricts A behavior. What “bad” or “good” is does not depend on laws, but on moral or ethical analysis.”
We agree. Whether a behavior is considered bad or good depends on moral and ethical analysis.
Let’s say an entrepreneur wants to paint bricks with gold paint and sell them as genuine gold bricks (these gold bricks are exactly analogous to those repackaged mortgage-backed securities). In itself his activities are neither good nor bad, but rather are just designed to gain income. Walter Block could even write a short piece on Defending the Goldbrick Seller.
But most Americans support having a law (a regulation) saying that the practice is fraudulent, as they disapprove of it by their moral reckoning. So it’s the law of the land that you can’t paint a brick and convince a buyer it’s made of gold. That’s misrepresentation of the same sort that ruined the market in mortgage-backed securities.
However you do then perform a service, in finding a hastily constructed sentence where I’ve misstated my case: “This is a persistent refusal to understand the distinction between laws designed to restrain behavior and those designed to deter bad behavior.”
Rather than writing “deter bad behavior” I should have said “facilitate bad behavior”. Thanks for correcting me.
It was bad behavior because it destroyed a market, sowing widespread (worldwide) mistrust and ruining around $11 trillion in perceived wealth. The pain the practice caused was horrendous. Millions have defaulted on debt, wrecking credit markets and getting thrown out of their homes, and millions more of us have lost money through collateral damage. In the ensuing contraction, millions more have lost our jobs. That’s damage.
So I offer a value judgement, that this was “bad” for the economy. Feel free to disagree.
Finally, you disagree that the mortgage crisis was a giant con:
“You basically say “They came unscathed out of this, those rich bastards, they must be shysters and thieves!”Just because they made BETTER decisions does not mean they are the “least principled.”
They made money precisely by knowingly initiating bad mortgages, presenting them as being good, and selling them at full price. That’s exactly the way one paints a brick gold and sells it as gold to some sucker. Here’s how one of the players played it:
http://www.time.com/time/business/article/0,8599,1903004,00.html
Put more simply, let’s use a medieval marketplace as our example. Should the sheriff place enforcers in this marketplace to apprehend fraudulent vendors, those who adulterate their grain with sawdust or cheat with false weights and measures? Or should these behaviors just be a part of the game, and the savvy shopper be alert to such pitfalls?
Although this has already been identified as a straw man, I am –this once, anyway — shying away from a loaded term. Permit me to suggest that it is a logical consequence of a mistaken first principle: that the sheriff (State) is needed to enforce the common (natural) law. Under the common law, citizens had broad law enforcement powers, not extending to the initiation of force or the resort to fraud, of course.
Turning responsibility for regulation over to the State guarantees corruption and the Miracle of Selective Enforcement. Absent the state, I may decline to punish a good drinking buddy for fraud, but there is no guarantee someone else won’t. When the State is the sole repository of what it is pleased to call “justice,” its functionaries may do as they like with very little let or hindrance.
Neither state law, co-opted as it was by players anxious to subvert its intent, nor your “natural” law were competent to stop the fraud from being perpetrated.
Are you saying that if this crime had been perped in the context of natural law, where citizens had broad law enforcement powers, the outraged victims could simply have granted themselves recourse by tearing the perps limb from limb?
I guess that’s one approach. The other would have been to make certain we had regulations that allowed us to prosecute such crimes in a court of law.
Do you know what the common law is? This is the problem when people are unaware of history. Historically, law was handled by the courts of customary law, a.k.a. private law based on customs and traditions. There were even competing courts in England. Top-down law is a relatively new phenomenon in Anglo-Saxon law. Even the police were private up until 1830.
Laws never stop crimes; they only provide remedies after the fact.
“Historically, law was handled by the courts of customary law, a.k.a. private law based on customs and traditions.”
Modern society is rather more complicated than it was in those days of yore, when a local magistrate could adjudicate whose fault it was when a cow overstepped a fence, and trampled a garden. We now have global financial markets. They don’t function smoothly without a degree of order being maintained by common consent.
“Even the police were private up until 1830.”
On this side of the water, such forces persisted even later. In New York, for example, the Municipal Police and the Metropolitan Police vied for the bribes hopeful seekers of protection would offer them. That was their business model. They even held pitched battled between the two forces of order, for the lucrative rights to enforce the law in a given neighborhood.
I think New Yorkers were better served once the MPD consolidated its exclusive hold on enforcement, and placed itself at the disposal of the central municipal government.
“Laws never stop crimes; they only provide remedies after the fact.”
Good laws only deter and define crime. It’s good enforcement that catches offenders and prepares cases for prosecution. I’m in favor of both halves of the system.
And when the functionaries of the State decline to prosecute vigorously their drinking buddies/campaign contributors/more equal animals, what good is your vaunted regulatory structure to the less fortunate?
Always and everywhere, turning over the monopoly of force to the State means that one must take some man’s word that the functionary over there with the gun, the badge, and the flag is G_d’s Anointed — honest injun. To hell with that.
There’s an alternative to having a government of laws, Ken. You can just get a gun and take what’s yours.
What you CAN’T do is to assume human cooperation when the means of cooperation (coming together to form a government) has been forcibly destroyed. You can’t go back to the jungle and still expect civilized behavior, in a magic world where all the cowboys wear white hats and treat one another with respect and honor.
There’s another possibility that Micheal ignores. First, let’s summarize his position:
In a big market, there will be cheaters. How do we protect ourselves from cheaters.
Micheal’s answer: Use government force with regulations that require great oversight. By not letting financial actions go full speed, it is believed that cheaters will not be able to get away with their schemes.
Many problems occur with this approach as history has shown. One is that those designing the oversight mechanism do not directly benefit or lose much depending on the success of the mechanism. So there is no way to weed out the bad regulation designers. In addition, regulations will be created by the political process so as to benefit some at the expense of others.
Market answer: Individuals should watch what they are doing so they are not cheated. IF HOWEVER, this is too difficult for an individual, then the market will create an opportunity for investment agents who specialize in rooting out cheaters. Those that are good at this will gain business and eventually they will have a brand name (like Sears Roebuck and CO. Investment advisers) so that the individual investor will likely hear about them.
If the Sears investment agents don’t do a good job, they too will go out of business and eventually someone who is truly able to ferret out cheats will come along.
After all, if this is impossible on the market, then where will government bureaucracies find someone who can do this – let alone lawmakers that understand enough to make good laws.
Only through an evolutionary bottom up process will the investment markets survive. No amount of top down designed regulations will succeed. The cheaters will always be one step ahead of the government. Eventually the government will choke off all investment as it tries to control the markets. Once it stops all investment, then it can tell us how it saved us from investment fraud. Unfortunately for us, that will be when we all starve.
Eric: This is a really good rebuttal of my position. First you describe my position correctly rather than in caricature:
“Use government force with regulations that require great oversight. By not letting financial actions go full speed, it is believed that cheaters will not be able to get away with their schemes.”
The obvious shortcoming of this approach, other than the costs of maintaining a complex system of legislation, enforcement and adjudication, is that the legislative process over time always tends to get co-opted by those being regulated. They spend huge sums in influencing those Congress members who are supposed to be regulating their actions impartially and for the public good.
It’s a core problem with maintaining a democracy. I agree.
But let’s look at the alternative, which you also accurately state:
“Market answer: Individuals should watch what they are doing so they are not cheated. IF HOWEVER, this is too difficult for an individual, then the market will create an opportunity for investment agents who specialize in rooting out cheaters.”
I’ll quickly dispense with the last part of your solution, private firms that detect and publicise cheating. We had those, private ratings agencies. And due to the sums of money involved, they were co-opted by the cheaters just as readily as were the agents of government. Their assistance was an essential ingredient of the mortgage scam. The cops had been bought by the thieves.
So that leaves us with the pure private market solution: let the buyer beware. That means he is his own detective, scrutinizing each potential investment for the possible taint of fraud.
How is he to proceed? Every time he considers a stock purchase he must laboriously perform homework, studying the numbers over history to determine whether the stock might not be watered.
And he does this full in the knowledge that the sources he’s using have very likely been compromised by the company issuing that stock. That is, they produce perfect books saying that they have NEVER done such a thing. In fact, all books everywhere are suspect… because there’s no agency, whether federal, state or private, paid by someone to watch over financial activities, that’s immune from the corrupting influence of money. Every page of data in such an environment must be assumed to be tainted.
So there’s no trust in the markets. And trust is the very thing that makes them go. So there’s no investment. And no credit available. And the banks have no depositors.
It’s effective federal activity alone that leads anyone to have confidence in any financial market. And that federal probity itself has come into question, considering how badly the regulatory apparatus has performed in recent years. Why, the FTC couldn’t even indict Bernie Madoff ten years after someone explained his scam in detail to them, for chrissake! Inept, incompetent and occasionally even worse.
So we throw them all out, but at a loss to commerce. Without some effective form of regulation and enforcement we’d be forced back into the age of barter, where you knew a man face to face, and with the passage of years came to trust that man alone. To do such a thing would be to regress to a thousand years ago. No deal larger than one-to-one could ever be trusted.
My vote, and you don’t have to agree, would be to raise such a fuss that we impel voters to elect people who actually care about their track record– and who serve the public well by enacting effective legislation. That way the public interest might win out over the largest moneyed interests, the ones who now purchase and control the process. And the inherent flaws in pure capitalism (that is, its vulnerability to theft through deception) could be controlled at moderate cost and to everyone’s benefit.
“raise such a fuss that we impel voters to elect people who actually care about their track record– and who serve the public well by enacting effective legislation. That way the public interest might win out over the largest moneyed interests, the ones who now purchase and control the process”
Or you could try one of Homer Simpson’s ideas:
http://www.youtube.com/watch?v=PVwCYJj4THQ
“the inherent flaws in pure capitalism (that is, its vulnerability to theft through deception)”
Complete moron or total scum? How about a pole?
“Complete moron or total scum?”
I’ll give him the benefit of the doubt and assume he leans more towards the moron side of the scale. Sure, in a purely capitalist society there would be theft through deception (it’s call “fraud”, BTW). Like governments can’t defraud people? And sure, private watchdogs such as rating agencies would be susceptible to corruption. Like government watchdogs aren’t???
I continue to be amazed at michael’s bizaare psychological need to insert himself into every topic on this blog. But I guess when all you do is cut and paste the same long-winded statist cliches over and over again, it’s not too hard to do.
And I continue to be amazed at how much fun I continue to have sniping this troll.
Wow, that is really something, mpolzkill calling someone else a troll……
What’s the matter?
It’s sorta like Alien Vs. Predator, ain’t it?
Cute guys. Well, if I’m a troll, at least call me a world-class troll.
And what do you think Kinsella considers you to be Russ? What are you, E.T.?
- – - – - – -
Thanks, Inquisitor, I think.
“World-class” ???? I don’t think so
Please direct me to one, Ralph, so that I may study at his feet. Or maybe you’re starting in to show me how it’s really done?
Third thought: Instead of whining about me why don’t you enjoy the drama of a blood free cyber street fight where aristocrats (Michael), burghers (Russ) and peasants (me) can duke it out.
Or, you know, skip my posts. Or if I’m so detrimental IYHO, make a pitch to have me banned. This addiction is killing me anyway.
What’s amazing is responding at all to people who get their by-the-reply pay from government based on how much disruption and distraction they can cause in blogs such as this one.
While I appreciate the academic exercise of debunking Keynesianism, its good to keep an eye on the practical side: Whatever the finer points of counter-cyclical expansion, as a practical matter, it simply provides a fig leaf for governments to loot the national wealth and debase the currency.
While Krugman’s “If my solution isn’t working, its because you need to do more of it” has the advantage of no self-limits, no mechanism for recognizing failure, he is faced with the eloquent counter-argument that Greece represents (as if all the other countries in fiscal meltdown do not suffice). That the end game is pretty common sensical as opposed to his counter-intuitive prescription.
Krugman is the Homer Simpson of economics:
“
BeerEasy money, the cause of, and solution to, all of life’s problems!”Classic. Probably the greatest of the hundreds of great lines on that show. And nice usage, ten points.
[quibble] It was “alcohol”.
[side bar] Greatest line in the history of cinema:
“Gentlemen, you can’t fight in here! This is the War Room!”
Once again mpolzkill declares himself to be the judge and dispenses his “wisdom”.
I love you too, Ralph. It’s tiresome, the “IMO”, or “IMHO”, isn’t it? I thought we were all nearly adults.
Second thought on the troll business. A troll seeks the pleasure of provoking emotional reactions. I accept that you may reasonably interpret what I do as trolling. But the emotional reactions are just an inevitable side effect of a person trying to avoid coming to grips with his compromises to the State (and evil in general).
Nice rationalization.
You would know.
“[quibble] It was “alcohol”.”
Doh! *grin*
Krugman is attempting to hold the moral high ground by claiming to care more about the plight of people who lose jobs when their “bubble” industry runs out of gas. He exaggerates the period of time in which people would be unemployed by calling it “persistent”, apparently without saying a word about why it would be persistent – namely, because of government interference such as minimum wages and price floors.
This statement is completely true and I have no argument with it. But the situation is even worse than Mr. Catalán states, because government not only cannot manage capital efficiently or profitably (because they lack knowledge), but they will not invest correctly for the benefit of society because they lack motivation to do so. This is not an ad hominem attack on the character of those in government, but only an acknowledgement that they are ordinary human beings who act according to their innate imperative to do good for themselves first, do good for their families and friends second, and to whom the welfare of the anonymous majority of people is a distant third priority.
This is an incontrovertible axiom of human behavior against which no counter argument can stand. Selfless individuals such as Mother Theresa of course exist, but first of all they are extremely rare and second of all they are utterly unknown in the world of politics because they are not drawn to political power, and even if they were they would be unelectable because they would attract no political support from any lobbyists or political hangers-on.
Even if the axiom “power corrupts” fails to convince or is forgotten among the piles of equations and convoluted quibbles over the velocity of money, empirical evidence is entirely supportive of this view. It should be known to anyone with even a slight knowledge of the scholarship of the 1930s depression, which you would think that a distinguished economics professor would be, that there is a well known paper which analyzed the make-work spending of FDR and found that it was almost exclusively applied to electoral constituencies which supported the Democrats. I have not heard of this conclusion being denied or disproven by Keynesians and to my knowledge the prominent advocates for bailouts and stimulus such as Krugman have never discussed this issue. Furthermore, everyone who reads any news media should be aware that the spending by Obama and congress is almost entirely directed towards interest groups which are closely tied to them through political organizations, lobbyists and political donors.
To claim that politically motivate (read: corrupt) bailouts and stimulus are acceptable because sooner or later everyone will benefit from either trickle-down or multiplier effects, is the same thing as saying that you might as well tolerate bank robbers, because it’s only money and there is no real overall loss of wealth if millions of dollars are removed from person A’s bank account and placed into person B’s bank account, because sooner or later B will have to purchase something from A.
Once again, I am Wowed.
Krugmans is wrong, although not as bad as the Austrians.
Learn how the modern money works, how banks and the fed create money, how do inflationary pressures work etc. and grow beyond the gold-standard thinking:
http://neweconomicperspectives.blogspot.com/2010/07/towards-libertarianaustrian-modern.html
http://bilbo.economicoutlook.net/blog/?p=381
http://www.newdeal20.org/2010/02/10/the-federal-budget-is-not-like-a-household-budget-heres-why-8230/
A useful quote from Marshall Auerback:
Marshall Auerback says:
February 26, 2010 at 11:19 pm
First of all, the New Deal shows how “destructive” government spending was during the Great Depression. We basically reduced unemployment by 60%, from catastrophic levels, in 4 years (gasp! horror! socialism!). The unemployment rate (and this was net of work relief) fell from 25% to below 10%
As for the answer to Hayek, it’s very simple. I don’t approve of permanent war, but I do approve of permanent full employment, something which the free markets (on their own) have never been able to achieve:
The only way that the large nations can grow again given the return to overall private sector saving is for that saving to be supported. What does that mean?
An explicit shift to higher saving directly impacts on aggregate demand. This will cause inventories to accumulate and soon enough firms start cutting back production and employment and the process of output-spending losses them multiplies as the rising unemployment becomes a deflationary force in itself.
The only way the shift to higher saving can be realised without the descent into recession and even depression is for fiscal intervention to fill the spending gap.
The higher incomes support the saving and the deflationary impacts of unemployment are avoided.
The typical pattern of advanced nations is to run current account deficits and support private saving with public deficits. In a modern monetary system that combination of sectoral balances is entirely sustainable and will support economic growth levels that are sufficient to maintain high employment levels.
This growth pattern is also the best for emerging economies who rely to some extent on strong export markets for growth.
But we have to be absolutely clear that this does not mean “exit plans”. It does not mean that we plan to go back into budget surpluses as soon as all the shouting has died down. It means permanent deficits will be required and the public has to be made aware of that and understand that this strategy is the only one that sustain steady growth.
Where a nation can exploit a strong net export position, then surpluses are possible (depending on the strength of the external position and the strength of the desire to save by the private domestic sector. But not all nations (obviously) can run external trade surpluses. So it is a special case.
Continuous public deficits is the general and normal case and they should be directed and building strong public infrastructure include first-class education and health systems. Investing in people is the only durable investment.
And for the Chicago and Austrian School types that are now whipping up inflation fears consider Japan – again – they have growing deficits and are still fighting deflation or advocating silly liquidationist recipes that simply achieve nothing.
What would you have us do, Jake? Stop spending and reduce the size of government? Well, you can certainly reduce spending, but you can’t reduce deficits, because deficits are largely determined endogenously, not by legislative fiat. With one brief exception, the federal government has been in debt every year since 1776. In January 1835, for the first and only time in U.S. history, the public debt was retired, and a budget surplus was maintained for the next two years in order to accumulate what Treasury Secretary Levi Woodbury called “a fund to meet future deficits.” In 1837 the economy collapsed into a deep depression that drove the budget into deficit, and the federal government has been in debt ever since. Since 1776 there have been exactly seven periods of substantial budget surpluses and significant reduction of the debt. From 1817 to 1821 the national debt fell by 29 percent; from 1823 to 1836 it was eliminated (Jackson’s efforts); from 1852 to 1857 it fell by 59 percent, from 1867 to 1873 by 27 percent, from 1880 to 1893 by more than 50 percent, and from 1920 to 1930 by about a third. Of course, the last time we ran a budget surplus was during the Clinton years. Has any household been able to run budget deficits for approximately 190 out of the past 230-odd years, and to accumulate debt virtually nonstop since 1837? As discussed above, there are firms that grow their debt year-after-year so it is conceivable that one might be found with a record of “profligate” spending to match the federal government’s. Still, the claim might be that firms go into debt to increase productive capacity and thus profitability, while government’s spending is largely “consumption”.
Fourth, the United States has also experienced six periods of depression that began in 1819, 1837, 1857, 1873, 1893, and 1929. Therefore, every significant reduction of the outstanding debt, with the exception of the Clinton surpluses, has been followed by a depression, and every depression has been preceded by significant debt reduction. The Clinton surplus was followed by the Bush recession, a speculative private-debt fueled euphoria, and then the collapse in which we now find ourselves. The jury is still out on whether we might yet suffer another great depression. While we cannot rule out coincidences, seven surpluses followed by six and a half depressions (with some possibility for making it the perfect seven) should raise some eyebrows. And, as we will show below, our less serious downturns in the postwar period have almost always been preceded by reductions of federal budget deficits. This brings us to an obvious point: the federal government is big—especially since WWII—and movements of its budget position have a big impact on the economy. Exactly what that impact is will be the subject of the next section.
Finally, the most important point is that the federal government is the sole issuer of our currency, and the dollar, which is nothing more than the government’s IOU, is always accepted in payment. Government actually spends by crediting bank deposits (and simultaneously crediting the reserves of those banks). These are topics to be explored in detail below. But the point is that no household (or firm) is able to spend by crediting bank deposits and reserves, or by issuing currency. Households and firms can spend by going into debt, but the debt must be serviced with the debt of another—usually a bank debt. Sovereign government only makes payments—including interest payments on its debt—by issuing its own IOU. This is why we will ultimately conclude that the notion of “Ponzi finance” does not apply to government, because unlike private debtors it can always service debt by issuing more of its own debt.
Of course, Hayek chose to ignore all of this.
I’m not going to respond to the entire post, but I’d like to comment on the following,
This is untrue. This can only be true in the event of a liquidity trap, and in the case of the liquidity trap there is no evidence which suggests that government spending can effectively replace the loss in private investment. In any case, outside of the liquidity trap, if every dollar in savings is lent and then invested, obviously every dollar is still being put into circulation through demand. In other words, demand for lower-order goods is simply replaced with demand for higher-order goods. “Aggregate demand” remains the same.
Fourth, the United States has also experienced six periods of depression that began in 1819, 1837, 1857, 1873, 1893, and 1929.
You forgot to mention 1920. I’d say that I wonder why, but I’m pretty sure I already know.
Such a long rant to advocate a religious dictum: full employment.
“This is why we will ultimately conclude that the notion of “Ponzi finance” does not apply to government, because unlike private debtors it can always service debt by issuing more of its own debt.”
Nope, it isn’t. Sorry. Governments aren’t magical entities.
Keynesian short term fixes may show positive results. But since Keynes advocates, consumption before production and this is only possible when you consume capital, this is only true in places with a sufficient capital stock.
That is why there are no Keynesian in Zimbabwe. No capital to consume and do magic with.
Kerem, this may be your best and most heroic post on the Mises blog yet. Kudos to you!
What is “consumption before production” other than borrowing? And isn’t borrowing a concept we’re comfortable with? Banks borrow the use of one’s money from their depositors. Companies borrow cash to expand or conduct normal operations. Consumers borrow cash to make purchases. And we are all expected to pay it back.
Keynesian stimuli are always intended to be paid back. That way the system remains in balance and the dollar strong. Our federal debt has been higher in the past than it is today, and was paid down nicely, without undue pain. That was the Keynesian method we used to stimulate the Fabulous Fifties.
And in the late 1990s we were paying down the debt handily once again, with the federal tax rates that obtained before the tax cuts of 2001, 02 and 03. So the first responsible action I’d recommend would be to let all these tax cuts expire. They’re nice… but we can’t afford them.
The other thing, of course, would be to curtail all our foreign adventures. This military obsession is costing us many hundreds of billions each year. It’s also unsustainable.
What we’re in the midst of right now is selective budget hysteria. Not that long ago, it was the Bush Administration telling us that we were paying down the federal debt too fast, and that we should keep more money out there expanding the economy. That is, he was heating the fires stoking our financial bubbles at the same time that he was compromising our ability to manage debt responsibly.
The facts speak for themselves:
http://zfacts.com/p/318.html
Michael you nit-wit troll, for you to be able to borrow from someone else, that someone else must first have produced and then saved those real resources that you seek to borrow.
Try eating a pound of wheat that a farmer hasn’t first produced and saved.
Your IQ probably isn’t over 60 because you fail to comprehend basic logic.
Troy, there’s a ready accumulation of money from which we can borrow: all the profits that have been made since the world of commerce began. There’s really no shortage of money in the investment pool.
The shortages are all out on the street.
Again, money is not the end goal. You need goods and services. If you are hungry, having all the money in the world does you no good if someone hasn’t previously produced a pound of wheat (and subsequently exchanged it with your money) with which you propose satisfy your hunger.
If you land on a desert island with a bag of gold or dollars (or insert your favorite currency), you’re still toast if you can’t produce the food.
You know michael, all this is so obvious to even a high school student like me. Such a waste, all those years you’ve lived and not an ounce of common sense or wisdom.
Ever heard of the concept of “real-savings”, troll? That’s what you borrow. Money is just used to denominate it.
I don’t understand why chartalists think they can offer anything new to the debate between Keynsians and Austrians. They may disagree with Keynsians (and everyone else) on how the monetary system works, but it seems to me their views on how the economy works is still fundamentally Keyensian. That is, they believe the free market, subject as it is to ‘animal spirits’, periodically ‘underconsumes’. As prices are sticky and will not adjust under certain conditions you have to have a government employ fiscal and monetary stimulus to ‘save’ the economy.
This account of why recessions and depressions happen is exactly what Austrians take issue with. Pointing out that ‘this is how the monetary system really works’ within a Keynsian framework does nothing to dissuade Austrians from their view that artificial credit creation causes the misallocation of resources which leads to a recession. (Not to mention that Austrians say that the governement has no business establishing a monopoly over the creation and supply of money).
Why not just get rid of the money and adopt communism. Then you wouldn’t be limited even by your ability to create deposits in private banks and force them to loan them back to you. You’d just tell people to work on improving society and they’d do it…
” Investing in people is the only durable investment.”
Even if this was true, spending on people is not the same as investing in people. Our government excels at spending, but is pathetic at investing. Unless by investing you mean hiring bureaucrats to perpetuate state power, then yes, government is very good at investing – in its own waistline.
Piotrek GTFO
Why is your blog account suspended? What’s the deal?
Government intervention. Just kidding! I haven’t paid the renewal fees yet.
Krugman and others pretend to be compassionate, and care about people affected by the bust. If they were really concerned for these people, they would make some attempt to understand that the bust naturally follows the boom, and that the real problem is avoiding the entire cycle in the first place. It’s like they totally ignore the fundamental cause of the problem, and only focus on applying band-aids to symptoms.
>Krugman and others pretend to be compassionate
They are subjectivists who intend to be compassionate. The reality of enforced compassion, at the expense of production, may be…unfortunate but that is of no concern to subjectivists for whom morality is intention without consequences. Rational selfishness is the alternative.
“They are subjectivists who intend to be compassionate.”
After some discussion with michael, I have to agree. I think his heart is in the right place, but he thinks that economic theory is useless, favors pure hit-or-miss experimentation to determine policy, and thinks that once we hit on the right policies we can make the economy into anything that we will it to be. His worldview is so confused that any cure he espouses would cause more damage than the disease.
“Rational selfishness is the alternative.”
Rational compassion would also be an alternative. Any policy that ends up hurting those that it intends to help is an irrational policy.
Thanks for your vote of heavily qualified support, Russ. I would offer, though, that Keynesian stimuli have a solid track record of being effective. Particularly when the followup half of the cure is effected, and moneys advanced to loosen up frozen credit markets get paid off during the resulting boom times.
All our recent problems have resulted from out-of-control federal spending during the good times, followed by yet more spending. And tax cuts! God how we love those tax cuts!
I think you and I might both agree on which periods in recent history were the fiscally responsible ones. They’re even color coded in black and red, in this handy chart:
http://zfacts.com/p/318.html
Can this joker make lemonade out of lemons or what?
“[While] his heart is in the right place…[h]is worldview is so confused that any cure he espouses would cause more damage than the disease.”
This, of course is, “heavily qualified support”
He’s apparently old enough, maybe he’s the one who renamed the War Department?
You’ve forgotten, to a (so-called) Liberal, having others believe that you have your heart in the right place is all that matters!
Possibly the sharpest definition of lefties I’ve yet seen, thanks.
michael wrote:
“I would offer, though, that Keynesian stimuli have a solid track record of being effective.”
We’ll just have to agree to disagree here. I could be wrong, but I don’t agree with your analysis of cause and effect. It’s too easy to make post hoc ergo propter hoc fallacies here.
“All our recent problems have resulted from out-of-control federal spending during the good times, followed by yet more spending. And tax cuts! God how we love those tax cuts!”
Yeah, imagine that, people actually like the idea of being allowed to keep the money that they’ve worked hard to earn! Greedy bastards!
Tax cuts in and of themselves aren’t the problem. The government refusing to live within its means is the problem. If tax cuts are instituted, that should mean that the government should not spend more than the revenue it takes in. I know, I know, that’s crazy talk!
And I also realize that Republicans can rely too much on the magic of the Laffer curve. Although I believe there is something to it, it’s obvious that there are limits. If you need more government revenue, you can’t just lower taxes, and through Laffer magic, be guaranteed to get it. There is (obviously) a point beyond which lower taxes do result in lower revenue.
I’ll talk here in maybe overly simplistic analogies, because I don’t know enough econ to get technical. I see your approach as similar to a doctor giving a person a nice stiff shot of amphetamines when he has trouble getting up in the morning. Then, if he starts tweaking too much, you give him barbituates to calm him down a bit. The problem, as I see it, is that the barbituates might just be what cause him to have trouble getting up the next morning. My approach would be, get the patient off both uppers and downers. Yeah, there might be a few unpleasant withdrawal symptons at first, but in the long run its better for the patient.
Maybe so, Russ. Purely by coincidence, we blundered into spending more on crash war programs funded by the future, back in 1941-45, than was dared by any pump priming attempted during the 1930s. And then imagine our surprise, when that full employment led to everyone having fat savings accounts, instead of the dry bread they’d gotten used to during the Depression.
Then when the troops came home and the factories converted back to peacetime production, everyone could suddenly afford to buy ALL of America’s product. For the first time ever. And we were still making enough money left over to have paid down nearly all our wartime debt by the start of the 1950s, by fully funding our debt via taxation.
Plus, there was enough government money left over to afford every returning GI the ability to put himself through college, or to buy a home, through GI loans. Had he waited for the private banks to lend him that money he’d have died a high school grad, renting a small apartment somewhere.
Yup. All a big coincidence.
I can’t find the post now, but somebody here just a while ago said that the economy didn’t really recover until the late 40′s / early 50′s. Your only response is simply to assert that that isn’t so, and claim that you remember how great the post-war economy was. I definitely remember that I posted something earlier doubting that you are old enough to have lived through the Depression, and actually have understood what was going on at the time. My dad would have been 13 in 1945, and now he is 77. I doubt you are a 77-year-old who is computer literate and like to waste his time on blogs.
“Broadly speaking, the economics profession is divided into two camps. One side is made up of “liquidationists” and “deficit hawks,” supporting tight monetary policy and low — or no — government spending. The other group is composed of those fearing a fall in prices, who support easy credit and expansive fiscal policy to combat it. While most economists probably fall in between, this dichotomy represents the two poles. The extremes are occupied by the Austrian School on one end and Paul Krugman on (or close enough to) the other.”
This is exactly what drives me crazy. The alternative are not death by austerity versus death by drowning in additional liquidity. Don’t forget that it is the people in their routine trading that runs the economy and is the source of its success. Success does not come from crashing prices nor does it come from sky-rocketing prices.
>death by austerity
Boomed-up prices must fall to guide production into an equilibrium between producers and consumers goods. What is austere about paying for food instead of betting on the horses? Is socialism your hidden context? Socialist No. Korea is austere. They have a special on boiled grass this decade. Throw in a few fried cockroaches and you can invite Krugman for a sumptuous repast.
Great article. Rarely on this site have authors given an even-handed account of the Keynes-Hayek back-and-forth.
What I don’t understand is why Keynesians avoid both ciritcisms of their solutions: (1) that monetary pumping is ineffective in a liquidity trap, and (2) that the government cannot effeciently invest.
They can avoid that argument by pushing for regressive tax cuts to people who are more likely to spend. While I don’t think this is a good idea (it delays the correction), they wouldn’t be as wasteful as current measures. Here are two Keynesian options:
1. payroll tax cuts, perhaps exempting the first $20,000 of income
2. Sales tax rebates: rebate to state and local governments the roughly $400B people pay in sales taxes every year.
Both of those would increase spending without government malinvestment or monetary malinvestment.
Sicne they aren’t advocating these, I’d have to agree with the hypothesis that this is all a fig leaf for more government spending and control.
From one of Piotrek’s recommended links (at http://bilbo.economicoutlook.net/blog/?p=381, Deficits 101 part 1):
“» Governments do not spend by “printing money”. They spend by creating deposits in the private banking system. ”
Talk about a difference without a distinction.
Wow, glad you caught that one Beefcake, this guy is coming from another planet.
Thanks tralph, but this notion (that governments can spend money into creation via their ability to prevail upon their central banks to monetize their debt) seems pretty widespread among those of the Keynesian persuasion. It’s shocking to me that it can actually be believed, but it does in fact lend a certain consistency to the Keynesian position, and it is *this* presupposition that should receive more criticism here, not the absurdities in Keynesianism that really only arise if it is supposed that Austrians and Keynesians mean the same thing when they speak of money.
So true.
When (Oh, when?!?!) are we medieval peasants going to finally be delivered a truly good king, who will give us a good sheriff, so we can live in peace, free from all of this sawdust in our grain???
Where is this white knight, this brave and selfless crusader of justice, this hero formed of finer clay than mere humanity, this super-human, god-like in his knowledge and his motives, pure of heart, incorruptible, who will save us wretched and helpless peasantry from predation and fraud?
We seem destined to get nothing but bad kings, and bad sheriffs, who merely pretend that they are here to help us, to act for our benefit, when in the end, they act for their own, and not only fail to remedy the problems that they are specially empowered, armed and entrusted to solve, but make them worse, and more permanent! Why, these kings and sheriffs are no better at their tasks than a random drunk chosen off the road, and yet they cost our purses tenfold for their incompetence!
Gee, ’tis as though these kings and sheriffs are not only no better at solving complex social problems than us lowly and ordinary folk, but they are actually quite worse, in that they are invariably drawn from among the most degenerate, bloodthirsty, manipulative liars in the known worlde! It’s as if these cretins, these bilge-rats of humanity, are attracted to the power and prestige of royal office, attracted to it like files to manure!
And who are these brain-addled fools who clamor for more kings, with mightier and mightier squadrons of sheriffs? They are a plague among us, these minions, these sycophants, for they are more offensive than the tyrants themselves!
Maybe if we didn’t have kings, we wouldn’t have tyrants … just a thought.
Magnus FTW.
A hearty jest, o Magnus! Thy sally hast struck a funny bone.
“Where is this white knight, this brave and selfless crusader of justice, this hero formed of finer clay than mere humanity…?”
Where can we find an honest man? The majority of men are honest, in the hope that their fellows might emulate them. But the winnowing process prevents them from attaining high office. Achieving that goal has become a money game. Mr Smith can no longer get to Washington from where he’s coming from.
“Gee, ’tis as though these kings and sheriffs are not only no better at solving complex social problems than us lowly and ordinary folk, but they are actually quite worse…”
Aye, they are all quite worse than the average man in their actions. If you don’t believe it, just visit a working man’s bar after the 5:00 whistle. Every one among them knows quite a bit more about how to properly manage the economy than does the king currently in power!
“Maybe if we didn’t have kings, we wouldn’t have tyrants … just a thought.”
Had we no kings the tyrants would rule in their stead. Chinese history affords numerous examples of what follows when the Empire collapses. It’s always the period of the Warring Princes. And the winner always founds the next dynasty.
Lame.
[Vote for me! A raspberry in every pot!
There is a third option in addition to liquidation or government spending; a bailout of the victims of fractional reserve lending which is to say everyone. FRL cheats both savers and borrowers:
1) savers by suppressing interest rates.
2) borrowers by driving them into unserviceable debt.
ref: Deuteronomy 15, Leviticus 25
“You may require payment from a foreigner, but you must cancel any debt your brother owes you.”
Hmm… I don’t think usury based on special terms depending on what race/nationality you are is the solution… :-/
Then bankers must consider us foreigners if they oppose debt forgiveness or a debtor/saver bailout. In that case perhaps bankers should be deported? Why deport poor Mexicans when our own bankers have looted US?
Abolishing legal tender is the key to this whole mess.
Agreed. However let government money be legal tender only for government debts and let the private sector develop private moneys as it sees fit with no government mandated exchange rates.
Also, a one time reset before reform might be desirable to get US out of this depression.
I would love seeing Washington-types having to round up a big herd of cattle (the medium of exchange) to bail out some failing company (not that I’m for bailouts, just seeing Federal workers do this). Imagine a bunch of pinheads from Washington, D.C. herding cattle into a trailer…….
I guess we’ll have a depression then. The Austrians can’t see the clear justice of a legal tender bailout of both savers and borrowers and the Keynesians will keep trying to stimulate a debt-numbed society. Oh, well. Too bad.
Compensation in the form of money ripped out of other people’s hands under threat of violence is not justice.
The original theft was backed by government violence; compensation via government would merely be turn-about which is fair play. Besides I don’t advocate taking anyone’s money. I advocate the US Treasury issuing new legal tender to everyone to roughly correct the injustice. It would halt the deflation and relatively benefit the population with respect to bankers in real terms but also bailout out the banks in nominal terms. Why should banks be repaid in money more valuable than they lent out?
If the government had a lot of money, which was originally taken from others by force, just sitting around doing nothing, then turn-about might make sense. But if the “turn-about” must needs be funded by yet another cycle of government violence? Two wrongs don’t make a right, anyone?
The banks robbed the population and ironically put their balance sheets in jeopardy via government backed fractional reserve lending in a government enforced monopoly money supply. Everyone is hurting:
1. banks with overpriced assets on their books.
2. savers who have been cheated via suppressed interest rates.
3. borrowers who were driven into unserviceable debt.
4. state governments who can’t collect enough revenue.
The Keynesians in their typical unprincipled manner attack the problem indirectly via “stimulus”. A principled solution based on justice could attack the problem directly.
Fatbeard, I enjoyed reading your posts, frankly it was a refreshingly new view I have not heard here before. One point though, you said: “I advocate the US Treasury issuing new legal tender to everyone to roughly correct the injustice.” Since the original injustice was the issueing of unsupported legal tender in the first place, how do you intend that this new issue of legal tender not be the same injustice?
Since the original injustice was the issueing of unsupported legal tender in the first place, how do you intend that this new issue of legal tender not be the same injustice? tralphkays
Actually, the problem is a shortage of legal tender that is masked by bank leverage. Banks have historically created 10-12 times the amount of real money (M0) via fractional reserve lending (that ratio has been much higher recently). Then why couldn’t savers and debtors be bailed out with new legal tender while at the same time forcing banks to adhere to higher (preferably 100%) reserve requirements? Thus we could have a bailout of the population without the risk of serious inflation. However, to avoid moral hazard and a repeat of the problem this should only be a one-time reset combined with fundamental reform and liberty in money creation.
So you are saying we should convert all non-physical forms of money to physical paper dollars, in the hands of the same people? How does this correct any injustice? It might stop future injustice, especially if money creation by government was stopped.
So you are saying we should convert all non-physical forms of money to physical paper dollars, tralphkays
The money need not be tangible but it would be permanent money as opposed to credit money which is destroyed as it is repaid and is thus temporary money.
in the hands of the same people? tralphkays
No, borrowers would end up with serviceable debt and savers would be equally compensated too.
How does this correct any injustice?
Because the only losers and only in real terms not nominal ones would be the banks which are the villains. But they would not be cheated; they would be repaid but not in a money that was appreciating in value from deflation.
It might stop future injustice, especially if money creation by government was stopped. tralphkays
That raises the problem of where interest would come from if neither the banks or the government could create new money. Modest increases in the money supply from the government could provide that interest and would be a small universal inflation tax. If it did not exceed productivity increases then no price inflation would result.
Fatbeard, now that you have explained it all, I am sorry to say, you really should read Man Economy and State. What you have proposed is so full of holes that a full course in Austrian economics is the only advice I can give you.
Banks do not lend out money that they actually have in hand. Banks issue loans based upon expected payments from prior loans. In one sense they actually create money out of nothing. That happens to violate the Constitution. Banks also issue titles to land and structures as well as vehicles. The concept of titles of nobility is not as narrow as some would pretend. Most are taught that our government can not create a “Lord of Texas” or an Earl of Virginia. But a title of ownership for land and property actually creates the power of a noble over land etc.. The concept that private ownership of land may never preclude good use of the land by all people should be addressed by law.
“Banks do not lend out money that they actually have in hand. Banks issue loans based upon expected payments from prior loans.”
Are you sure that’s the whole of it, jim? Banks have to keep a balance between assets (money on the street they’ve lent out) and liabilities (money they owe to their depositors and creditors). They normally achieve that balance by being sufficiently capitalized– that is by having enough money left over to zero out the balance. So there is some buried money involved. Otherwise when you came in to make a withdrawal, they’d just shrug.
Here’s a valuable guide to how the magic works:
http://thismatter.com/money/banking/bank-balance-sheet.htm
They do get to play with this formula, for instance by borrowing from the Fed or from other banks and then re-lending. But if the equation doesn’t balance, they are declared insolvent. That is, they don’t get to be a bank any more.
This is an excellent article.
BTW, on the Krugman in Wonderland blog, APLerner has challenged you with these gems:
“But what’s clear is if the public deficit is cut aggressively, then all this does is pull much needed surpluses from the private sector. Surpluses that are in very high demand so the private sector can de-lever. When you look at financial balances in this framework (often referred to as MMT – modern money theory, although there is nothing modern about this..it’s been around forever) it should become pretty obvious that a move towards fiscal austerity will only steal surpluses from households, preventing the much needed deleveraging. In this context, Krugman is 100% correct – the deficit must be maintained to allow the private sector to de-lever. He may be wrong about the composition of the deficit, but he is 100% correct about the need to run a public deficit.”
and
“It is incorrect to assume savings are required for investment.”
Bob,
I saw his comments, but I consider it a better use of my time to do something other than to respond to him. I feel that commenting here on our discussion there might be a bit a unfair to him, but I mean no ill towards him. I simply don’t know how to respond to someone who believes that capital accumulation is unnecessary for investment — from his posts, it seems as if chartalists have no capital theory (otherwise, without capital accumulation how would one fund an investment?).
Also, I don’t see his reasoning as clear as he would like me to. I admit that it is because of some ignorance on my part (very little formal education on accounting methods he considers elementary — although, for the most part it just seems that he over-complicates very simple concepts and masquerades what he really means through overly-technical terminology [assuming we all know what he is talking about]), but mostly it has to do with the fact that we are both operating within totally different frameworks.
For example, I don’t see why a reduction in fiscal deficits will “steal surpluses from households”. He claims that this is proven by “simple arithmetic”. This may be the case, but the theory behind the arithmetic may be wrong (and, I believe this is a common criticism of chartalism).
Unfortunately, without knowing exactly what he is talking about I am unable of posting an adequate response on Anderson’s blog. Furthermore, regarding his empirical data (that all major recessions have been preceded by a fall in fiscal deficits) I cannot really put up opposition, because I am uninterested in committing to the research.
Maybe he’d rather debate someone with more patience and time. On the other hand, thanks to “A.P. Lerner” I have begun to look into this so-called “Modern Money Theory”, and so maybe after a little bit of reading (where I can finally decipher the theory) I can write a dedicated response.
With this said, I encourage all of those interested in economics to do the same with major theories they oppose. You’ll come to find that there may be specific points you agree with, and otherwise it will help you better understand why you oppose them intellectually.
Sincerely,
Jonathan
Jonathan,
Have you seen this?:
http://neweconomicperspectives.blogspot.com/2010/07/towards-libertarianaustrian-modern.html
Bob
Friend people constantly invest money that they do not really have. It is quite easy to do. For example in current crash we see many people who in essence lived off of charge cards and loans and had stashed away money that got them a home. In some cases the value of those homes doubled, tripled or gained even more. They were sold and in the best cases the charge cards and loan companies were paid off and these folks made money. In other cases they simply stopped paying for everything but the home as many states severely retrain charge card companies and small loan companies from collections. That is actually recognition that these charge card companies operate at a moral level no different than mafia loan sharks and the states involved do not mind them being beaten up at all.
PIOTRECK: “I don’t approve of permanent war, but I do approve of permanent full employment, something which the free markets (on their own) have never been able to achieve.”
The statement, “I don’t approve of permanent war, but I do approve of permanent full employment,” is a Keynesianism if ever there was one. It implies two things that are demonstrably true of Keynes and Krugman, and likely true of Piotrek. They are:
They don’t approve of permanent war BUT if that is what is necessary to achieve the Keynesian nirvana of permanent full employment, which holds them in thrall, well…so be it.
And, while not approving of permanent war, a temporary war is an exceedingly useful way of reducing stubborn unemployment, for what with loads of government spending, mandatory military enrollment, a reduction in the size of the workforce through wartime casualties, and perhaps a good measure of deficit spending, why a little temporary war can go a long way towards fulfilling several of the policy means and objectives touted by Keynes in his GENERAL THEORY in order to reach full-employment nirvana. Like Marx, Keynes and Krugman shed crocodile tears over the plight of unemployed workers, but don’t mind using and losing a few (thousand, hundred thousand?) in order to accomplish their “economic” agenda. After all, one cannot make an omelette without cracking a few eggs.
Even the most grotesque caricature of the free market painted by rabid socialists is likely to be a more secure environment for workers than the full-employment Nirvana of Keynesians, what with their allowance of–if not reliance on–war.
Well said, Ned. I hate it when people see war as any kind of solution.
Please give me just one example of any market that has ever been free of laws, taxes, and regulations!! The free market is an evil fantasy. It has never existed and never will exist. It is a straw man put up such that false deductions and false statements about capitalism can be passed of as reasonable or sane.
If we had a free market I could sell you fifty pounds of finely powdered plutonium. Obviously, just as a girl can not be a little bit pregnant a market can not be somewhat free.
Now that you know you are not a capitalist we can continue with our real form of government. SOCIALISM!
Examples of free markets:
Icelandic Commonwealth, 930 to 1262
Ireland 650 to 1650
The Mild West
I’d elaborate and give more examples, but you can suck my ass
Nice touch with the smiley face on that one, Daniel, had me laughing.
You heard Jim, and apparently his posts can’t just be a little bit stupid.
Daniel, love your post!
>If we had a free market I could sell you fifty pounds of finely powdered plutonium
rational freedom is not subjective freedom. And in socialist freedom, mass murder is
ok. socialist no korea sells nukes to islamic terrorists
Yglesias the Keynesian Warrior said this recently:
“From a Keynesian standpoint, I believe that with the economy depressed it’s better to spend the money in Afghanistan than not to spend it.”
http://yglesias.thinkprogress.org/2010/07/priorities-2/#comments
What you have proposed is so full of holes that a full course in Austrian economics is the only advice I can give you. tralphkays
Actually my background in economics is Austrian. Noticed that the arguments I make are based on a principle, just compensation. Since that compensation would involve the use of government to correct a situation caused by government priviledge, my suggestion is rejected?
Perhaps it will seem more reasonable when the on going deflationary spiral eliminates the jobs of more Austrians. If that happens will they concede that their jobs were a form of malinvestment that SHOULD have been liquidated? I would bet not in most cases.
As for your reading suggestions, I suggest that the Austrians, many of whom claim to be Christian, read the Bible and take it seriously with regard to economics.
They’ll find it deals with inflation, deflation, loaning at interest, debt forgiveness, collateral, diversification, investment, hoarding, proper treatment of employees, etc. I’ll also point out that Jerusalem could have been saved from destruction by the Babylonians if it had not reneged on its release of illegally held Hebrew (debt?) slaves. Jeremiah 34:8-32
>Superficially, religion is many things, some maybe even rational and productive. But ,basically, religion is a turning away from the world to a rich fantasy life. Fantasy does not produce wealth. Man’s mind, the basic enemy of religion, does. Its no coincidence that most societies were/are religious and poor. Religion and wealth are coincidental. Recall early Christians who gave away all their wealth and lived in caves or atop poles in deserts. Or religious vows of poverty. Conservatives are moral cowards who evade the need to choose either religion or capitalism. Liberals are consistent.
There is no need to choose between religion and capitalism; this would only be the case if one had to be a dogmatist like FatHead in order to be religious. The religion/capitalism dichotomy is completely false. In fact, the early Protestants were so famed for their industriousness and business acumen that it became a stereotype. Jews are still stereotyped as being sharp businessmen. You must be a Randroid. (I am an atheist, BTW.)
There is no need to choose between religion and capitalism; this would only be the case if one had to be a dogmatist like FatHead in order to be religious. Russ
My, aren’t you hasty? In fact I believe in capitalism which is to say I believe in individual liberty. However, because I believe in justice too you think I don’t believe in capitalism? So the Keynesians allow the bankers to rob while the Austrians oppose any recovery of stolen goods?
“However, because I believe in justice too you think I don’t believe in capitalism?”
I never said you don’t believe in capitalism. I merely said you were a dogmatist. I was thinking specifically of your apparent hatred of “usury” due to Scriptures written thousands of years before the laws of economics were understood.
>There is no need to choose between religion and capitalism
There is if you want to live in the material universe. Youre a moral coward, afraid to challenge convention.
Its no coincidence that most societies were/are religious and poor. Religion and wealth are coincidental Stephen Grossman
Hast thou considered the Jews? Furthermore the Torah and New Testament are completely consistent. If the early Christians were poor it is because they had to learn by experience how to properly apply the teachings of Christ.
>Hast thou considered the Jews?
You evade the need to identify causes by burying your mind in coincidence.
You evade the need to identify causes by burying your mind in coincidence. Stephen Grossman
It is no coincidence that the Jews have done well even in the face of persecution. The Torah is a splendid source of economic wisdom.
Deflation means you get more bang for your savings, so people don’t need to work as long to maintain the same standard of living. Deflation is good.
Deflation is good. End the Fed
Yes your saving will go further but you may lose your job during the deflation for no other reason than there is not enough money/credit in circulation. The Austrians mistakenly believe that since inflation can be bad that deflation is good. In fact, both inflation and deflation are consequences of the evil fractional reserve lending scheme. Why then do the Austrians defend deflation? If a barbed arrow wounds on the way in, is the solution to pull it out?
You may lose your job, but you can also ask for lower wages. Since you can buy more with your money (assuming deflation), you won’t be lowering your standard of living.If monetary deflation (caused by Federal Reserve meddling) causes all prices to be halved, then take half your previous wages instead of losing your job. You have really lost nothing.
FatBeart,
Unfortunately, you are mixing up the definitions of deflation. No Austrian defends deflation in the sense of a fall in the supply of money. The deflation Austrians defend is price deflation.
MV = PY
or
P = MV/Y
A decrease in the price level, P, can be caused by:
1) a decrease in the supply of money + credit, M, = bad
2) a decrease in money exchanges per year, V, = velocity = bad
3) an INCREASE in aggregate output, Y, = GOOD.
What we are experiencing is a combination of all three with only 3) being good. If the Austrians don’t address 1) and 2) then the Keynesians will resort to decreasing aggregate output such as they did in the Great Depression and WWII. Keynesian stimulus is indirect and does not address the root of the problem which is that BOTH savers and borrowers have been hurt by government backed fractional reserve banking in a monopoly money supply.
Uh, why is #2 bad, exactly?
I would contest that we are currently experiencing an increase in “aggregate output”, but I don’t see why a fall in velocity is bad. While I recognize that one money is in circulation it has velocity, the only thing I see as relevant is whether it is in circulation or not.
jfc> “…I don’t see why a fall in velocity is bad.”
If M is constant, then a fall may imply lower productivity, or lower wealth generation, presuming one subjectively values that wealth.
I mean, it implies someone can “spend money faster.” (Or save at an accelerated rate, for that matter.) If I am a roofer, for example, and I discover a new way of roofing that increases my productivity 100%, well, the velocity through “my hands” is faster, and more people have new roofs.
Greg,
Comparing money to the speed at which you can roof is a poor comparison. See Shostak’s “Is Velocity Like Magic?“.
I quit reading here:
“The number of times money changed hands has no relevance whatsoever on the baker’s capability to fund the purchase of potatoes. What matters here is that he possesses bread that can be exchanged by means of money for potatoes.”
I’m not sure about his claim of “relevance,” but I in no way said it was causal (and I also hedged by “may imply”).
But I agree with the second sentence. The “bread” is my “roofs.” More (making faster) bread and more (making faster) roofs imply an ability to exchange at a faster rate given a fixed supply (which I say only because it is easy for illustrative purpose). A higher velocity in this case would be related to higher productivity.
While I did not detail the following paragraphs, I agree with Shostak’s subtitles:
Velocity Has Nothing To Do With the Purchasing Power of Money
Velocity Does Not Have an Independent Existence
I don’t see how what I said is contrary. I am not aware of any contratiction to Shostak’s thesis, as I did not even talk about it.
I think what’s missing is the context of what I was replying to.
Like I said in one of the other replies, the only velocity that matters at any instance in time is whether the dollar is being used or not. As such, velocity should be either 1 or 0, because as Shostak writes, beyond 1 the velocity of money is largely irrelevant.
So, back to the context of the post I was replying to,
This is clearly incorrect.
I am talking about the causes of a fall in the velocity of money, not a fall in exchanges over time which would lead to a fall in the velocity of money.
@jfc regarding context:
Sure — I was only trying to give a “could” (a scenario) that would be coincident with FatBeard’s sweeping claim, for which I think I am with you and would not make such a sweeping claim.
jfc> …the only velocity that matters at any instance in time is whether the dollar is being used or not. As such, velocity should be either 1 or 0, because as Shostak writes, beyond 1 the velocity of money is largely irrelevant.
Of course you are correct in saying that transactions are not continuous functions of time, and are instead discrete acts. In a strict sense, we can’t differentiate discrete events to obtain a “velocity.” I don’t (yet) find this theoretical difficulty particularly interesting. It only calls out what type of math is used. We use discrete differencing rather than continous differentiating. One can argue the results and justifications, of course.
So then, regarding the 1|0 “velocity,” to me it looks like you (and I guess Shostak) are confusing the (sampling) Kronecker delta function (discrete form of dirac delta function; unit impulse) with the “function” (phenomena) being sampled. This is way off the track of the article, but I didn’t get what you were saying on that, in any case.
Unemployment is the core: all talks about liberty (tarian) makes no sense if the main individual right to work is coerced.
Catalan,
“As a general concept, the liquidity trap is legitimate in the sense that we are currently in a situation in which, despite the extreme provision of liquidity on the part of the Federal Reserve, there has not been a substantial increase in real private investment. As such, any Austrian rebuttal to Krugman should concede this point.”
I do not agree with this. Austrians should not concede this point, and the actual problem is they unfortunately do because they are still confused when it comes to what is money or not.
The key here is the concept of “liquidity”, which actually is a fancy way of saying money, but the concept of “liquidity” is not only a semantics play but actually helpful when you want to find out what is money or not.
To the point, “there was not extreme provision of liquidity on the part of the Fed” and that is actually the problem from the Fed’s perspective. They wanted to increase liquidity, or create money, but they couldn’t. Sure, what they created is still called money by a lot of people as a part of different M’s, but if something doesn’t have liquidity, or being used as a medium of exchange, it is absurd to call it money. And if something does not function as money it doesn’t cause any effects, like effects on general price level, or interest rates.
For example the excess reserves the banks hold as of today, are not liquid thus they are in fact not money.
Thus there is no liquidity trap here, only the helplessness of the Fed, to create money and cause the effects it wants, or more broadly manipulate the money supply.
What many people, including Austrians, fail to realize is that money is a subjective function that appears and disappears in peoples minds. Money is not a good or a commodity. For money supply to change only a change in perceptions of people is enough and change in the money supply doesn’t depends on some act that has physical consequences. Money supply may decrease or increase even if there is not change in the physical thing that has the money function. Even if only gold is being used as money, the money supply changes when one person who holds the gold decides to view it as jewelry and not a medium of exchange. And in this day an age the changes are even more complex than that.
Can we agree that the “problem” is real but that the name “liquidity crisis” is bogus? Certainly at some point, further money dilution by the central bank will not induce more malinvestments in the short run for whatever reason. Krugman’s explanation of “why” is probably a very small part of the explanation but may very well be true taken alone. The main reasons are that most everyone is broke or much poorer than they recently thought they were (which they now finally recognize) and, with interest rates still artificially lower than their natural rate, the prospects for a return to prosperty are dim.
Also, implicit in the Krugman explanation is the idea that money dilution is this wonderful thing that causes prosperity and then it stops working its magic. We Austrians know that is absurd.
“Can we agree that the “problem” is real but that the name “liquidity crisis” is bogus? ”
Of course. “Liquidity crises” implies there is not enough money to do its function, being a medium of exchange, and that is bogus. The problem is there isn’t enough capital. And liquidity and capital are not the same things, although money can and does “represent” capital.
Keynesians, and sometimes Austrians, forget that money is inherently a representative function and if it has no goods, capital or consumer, to represent, it doesn’t mean a thing. Even if you have 1 million dollars in a deserted island, you are not rich. If there are no real wealth to be exchanged money ceases to be relevant, because it is only that a medium of exchange.
>I think his [Krugman's] heart is in the right place
His selfless heart is rotten to the core.
>Rational compassion would also be an alternative.
No, compassion does not create material wealth nor is it or any emotion a proper guide to morality, politics or economics. Compassion is not even a moral value but merely an option for certain situations. Man’s mind, which we need to grow wheat or build a computer, is our basic moral guide to life. And morality is a guide to life, not the sacrifice of life. People oppose capitalism, not, basically, because they are ignorant of economics, but because they correctly recognize that capitalism is the economics of selfishness. And selfishness is moral. Sacrifice is evil, absolutely. See _Atlas Shrugged_.
Kerem,
Just because bank’s excess reserves are not currently in circulation does not mean that at some point they will not enter circulation. Recently, Paul Krugman considered the present provision of liquidity by part of the Federal Reserve as insufficient and ineffective. Bradford DeLong corrected Krugman, taking note that when the liquidity trap subsides those excess reserves will serve to fuel investment again (a point Austrians should agree with, except that while DeLong sees this as healthy we see this as the root of malinvestment).
In any case, I think you are being overly pedantic. I’m not sure what your post has to do with what you quoted. It is undeniable that we are currently in a situation where despite the extreme provision of liquidity to banks there has not been an equally as extreme increase in bank lending. In other words, despite the increase in credit creation, the Federal Reserve has found itself unable to fuel another boom. The liquidity trap should be considered just a term; a term which has unfortunately (or fortunately, depending on how you look at it) entered the vocabulary of economics. I’m not sure how useful it is to debate on the worthiness of the term “liquidity trap”, as the concept at its basis is sound (of course, once you start getting at the various more specific definitions, the liquidity trap no longer holds to be true).
An example of your pedantry,
That is a liquidity trap.
Believe me, nobody is forgetting anything.
Catalan,
“An example of your pedantry,
Thus there is no liquidity trap here, only the helplessness of the Fed, to create money and cause the effects it wants, or more broadly manipulate the money supply.
That is a liquidity trap.”
What I understand from the concept is that it is represented as a general economics phenomenon, like the paradox of thrift. But the situation described is only the result of some particular banking system.
Fed’s inability to inflate at will depends on the banking systems and more generally economy’s structure. I live in Turkey and I have seen all kinds of booms and busts, and inflation and stagflation but I have never witnessed “liquidity trap” because in here the government controlled a big part of the economy and the banking system and could flood the market with money at will.
Making a distinction of a broad economics concept and the result of a particular banking system shouldn’t be a viewed as pedantic.
And again because of the banking system or not, money not in circulation is not money at all. Viewing it as such will cause problems like the great inflation vs deflation debate.
Uh, why is #2 bad, exactly? Beefcake the Mighty July 30, 2010 at 2:23 pm
Because decreasing V, the velocity of money, implies a decrease in the division of labor.
OK, I see where this is going, but I’ll try one more time: why, exactly, does increased demand for money (which is what decreased “velocity” implies) mean a decrease in the division of labor?
Come to think of it, perhaps you can also explain what it means for the division of labor to “decrease?”
OK, I see where this is going, but I’ll try one more time: why, exactly, does increased demand for money (which is what decreased “velocity” implies) mean a decrease in the division of labor? BeefCake
Imagine an unemployed person who can’t afford to go the doctor, treats himself and dies.
So we should pay for him to go to the doctor by stealing from everyone else? But now a venture capitalist can’t afford to invest in medical research, causing someone else to die because they couldn’t be cured in time.
So we should pay for him to go to the doctor by stealing from everyone else? End the Fed
What I propose it that the bankers should not be repaid in money that is more valuable than what they lent. How is that theft? Because the savers who have might have waited to swoop down on depressed assets like vultures are cheated of a cheap meal? Fine. Then bail the savers out too. The only losers in real terms would be the bankers who would lose some of their relative wealth position with regard to the population. How is that unjust since they are the villains in this situation?
Then let the bankers keep the collateral. If you’re upside-down on your house, it isn’t really yours anyway.
>bankers should not be repaid in money that is more valuable than what they lent. How is that theft?[I'm assuming here that price equals value for you.]Prices, including money and self-sufficient farming are constantly changing because situations and choices are constantly changing as we seek more of this and less of that. I was going to say that there are no price changes in death but the price of cematary land and of grave maintenance is also changing. Borrowers must accept this or attempt to politically enforce a stable money price at the cost of disequilibrium and the resulting production decrease. And borrowers don’t own the price of money. Its a market fact, not stolen from borrowers by bankers. Further, a successful business borrower has increased the market’s productivity, thus lowering prices w/the resulting increase in the price of money. Borrowers can increase the price of money!Another pseudo-scientific, Marxist rationalization for the destruction of production and the sacrifice of the individual to society bites the dust. Eat dust, commie! Get thee to a gulag.
Fatbeard is not worth the effort.
An increase in demand for money doesn’t necessarily mean that velocity has increased. An increase in demand for money is only relevant if money leaves circulation.
So you mean jobs that are actually not useful (profitable) will be liquidated, and those people will be “forced” into jobs that are useful (profitable)?
So you mean jobs that are actually not useful (profitable) will be liquidated, and those people will be “forced” into jobs that are useful (profitable)? End the Fed
Thought experiment: Imagine either the money supply shrinks drastically and/or people are so terrified of losing their jobs that they hoard every possible cent. How many jobs would be profitable in that circumstance? Yours? You say that wages and prices would shrink ala Rothbard to fit the new money situation? But what about debt that was ratcheted up during the boom and now must be repaid 100 cents on the dollar plus interest during the bust?
“But what about debt that was ratcheted up during the boom and now must be repaid 100 cents on the dollar plus interest during the bust?”
What about it? If a debtor files for bankruptcy, the debtor has gained and the lender has lost: the debtor has consumed goods that the lender paid for. If the debtor offered collateral (that he already owned outright), then the lender can keep the collateral and cancel the loan. It would be as if the debtor sold the collateral outright.
The FR banks don’t lend existing money; they create credit money as they lend it thereby driving up prices. They are a government backed banking counterfeiting cartel. Let them be repaid then with new legal tender fiat given to the debtors (and savers) by the US Treasury so they can pay down their debts to current market prices.
Or just abolish the Federal Reserve and abolish legal tender laws. Then everyone can default on what would be worthless debt anyway.
And abolish the income tax (which is what “backs” the dollar).
“Imagine either the money supply shrinks drastically and/or people are so terrified of losing their jobs that they hoard every possible cent.”
They should be more terrified of starving, dying of thirst, etc. That causes them to spend on things they need, which creates jobs producing things people need.
“How many jobs would be profitable in that circumstance?”
The number of jobs involved in producing things satisfying consumer demands. The rest would be liquidated.
Ah, so the overindulgence of the boom is to be paid for with hair-shirts during the bust? What about the innocents who neither borrowed or could save much? Shall they lose their jobs to punish the borrowers? And how were people supposed to save with negative real interest rates in housing? Were they supposed to grit their teeth and wait for an economic depression so they could get affordable housing without borrowing?
“What about the innocents who neither borrowed or could save much? Shall they lose their jobs to punish the borrowers?”Absolutely. They can produce things in actual demand from now on.”And how were people supposed to save with negative real interest rates in housing? “That makes as much sense as: “And how are people supposed to save with negative real interest rates in computers?”Housing is as much of an “investment” as plasma TVs (which also have “negative” real interest rates).”Were they supposed to grit their teeth and wait for an economic depression so they could get affordable housing without borrowing?”No, it means they shouldn’t have their mortgage payments subsidized by a printing press (i.e., everyone else). They should buy only what they can afford.
>money supply shrinks drastically
Yeah, after you Keynsian twits counterfeited money and bank credit that shifted scarce resources to unsustainable but politically correct and compassionate investments. BTW, the same US govt that counterfeits money and bank credit, enforces the use of counterfeit with the legal tender law and bans gold as market money is now selling gold coins as a hedge against the govt-created decrease in the value of paper assets. Recall an Abbott and Costello film, “Africa Screams!” We need a sequel, “The Tea Party Screams!” or maybe “Frank, Pelosi and Bernanke Scream.” Altruism is impractical, no matter how much you shrink the range of your vision.
Correction: those gold coins are now legal tender. Being a Pragmatist means never having to say your sorry.
Who are you calling a Keynesian and a Commie? Fact: The fractional reserve banking cartel robbed savers of market interest rates and at the same time drove borrowers into unserviceable debt. Now supposedly Austrians understand the injustice of government backed fractional reserve lending YET they are unwilling to address the injustices. So, in my mind that makes the Austrians complicit with the Keynesians. Rather than follow Moses, they follow Mises instead, an agnostic.
FRB privileges are not merely unjust. They decrease production. Austrians are divided on this issue. Mises opposes FRB privileges.
Or just abolish the Federal Reserve and abolish legal tender laws. End the Fed
Agreed but let’s not start a new honest game until we compensate the victims of the old one.
Then everyone can default on what would be worthless debt anyway.
And lose real collateral to the counterfeiting cartel?
And abolish the income tax (which is what “backs” the dollar). End the Fed
Agreed. It would be impractical to have an income tax on private currencies anyway. However, let the government issue money that is only legal tender for government debt (taxes, fees, etc).
I was thinking specifically of your apparent hatred of “usury” due to Scriptures written thousands of years before the laws of economics were understood. Russ
As a libertarian, I do not believe in government backed usury. In a true free market in money creation, fractional reserve lending would not be tenable or at least leverage would be very limited as Rothbard has indicated. In fact, with a true free market in money creation, I predict that lending in general would be rendered mostly obsolete. Common stock, for example, is an excellent form of money that requires no lending or borrowing.
“You shall not charge interest to your countrymen: interest on money, food, or anything that may be loaned at interest. You may charge interest to a foreigner, but to your countrymen you shall not charge interest, so that the LORD your God may bless you in all that you undertake in the land which you are about to enter to possess.” Deuteronomy 23:19-21 (New American Standard Bible)
>Russ/You’ve forgotten, to a (so-called) Liberal, having others believe that you have your heart in the right place is all that matters!
And that right place is in other people’s bank accounts and wallets.
“That government cannot satisfy another’s demand at a profit can be extrapolated empirically, because if it could, there would be no need for deficit spending — the capital necessary to fund these programs would come from received profits.”
You ignore externalities and other market failures. Epic fail.
Thanks pal. Nice website you have here. Got some extra links to point to with more stuff like this?
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