A pretty funny exposé of the economic ideas of the liberals and the libertarians:
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#21, I wouldn’t say that it always fails. It was quite successful when the entire country was mobilized for total war.
Hmm. I have to say that I disagree with you. When you have to ration due to your central planning shortcomings, the plan fails.
Unless of course the rationing is PART of the plan. In which case you are right. Perhaps the liberals are wanting to go back to a rationing economy.
#29, Exactly!!! That’s one of the things that government IS for. To enforce contracts that people enter into voluntarily. Not to write the contract and force everyone to adhere to it.
Thank you. You beat me to it.
#34
“Hmm. I have to say that I disagree with you. When you have to ration due to your central planning shortcomings, the plan fails. ”
So WWII era shortages in basic goods during a time of TOTAL WAR… say anything about economic relationships in normal times? I don’t see it.
Keynes isn’t about central planning. Government actions are supposed to be reactive to conditions in the, much larger, private sector.
Sometimes markets take a crap and conditions of low demand can persist for years. Low demand means job cuts, which mean further lower demand.
Now, your lot would say don’t do anything. Let it go until it comes back of its own accord. The stock market came back pretty quickly even during the Great Depression. If you look at only at that level you’ll never understand.
This is about the breaking of massive numbers of human relationships. Jobs, homes, and families.
Even if some great new products come down the pipe large numbers of people are now too poor to afford them.
Government can help itself and the populace by holding a lot of spending during good times. The extra benefit is that government acts as an emergency buyer for labor at the distressed moment. That means the taxpayer can drive a really hard bargain.
They will work, at a reduced rate, on something that benefits everybody. There is still the incentive to go find a better deal somewhere else.
This would be for limited periods. The best example is when problems in the mortgage market killed the residential construction industry OVERNIGHT.
That labor capability, construction tradesmen, could have been used to do infrastructure repair and other worthwhile projects. Stuff that would eventually be done anyway. Demand for raw materials was also very low, so we’d have gotten great materials costs.
Conservatives have this dual idea of government: it is both totalitarian and completely incompetent.
This is completely wrong. Spending into a downturn is EXACTLY the right idea. Not only does government get the best deal, but you give some time for private demand to return on its own.
#36, Now, your lot would say don’t do anything. Let it go until it comes back of its own accord.
A recession/depression is a reaction to an imbalance of resources due to attempted central planning. The market is attempting to correct itself. Stopping a failed policy is just common sense.
Keynes would have you believe that these are preventable by having the government spend more money.
Let’s assume for brevity’s sake that is true. The catch is the government doesn’t have the money to start with; they have to print it (i.e., borrow from the Federal Reserve).
And we see where that leads: massive debt and inflation.
“A recession/depression is a reaction to an imbalance of resources due to attempted central planning.”
Simply not true. Depressions happened regularly before Keynes, and very rarely after. That is not an accident. Keynes, and subsequent Keynesian economists influenced by his work, was not talking about a government run “centrally planned” economy. That is just not the case.
His idea is only operative in times when private demand falls dramatically in a way that can lead to a feedback loop. So many people pull back that everybody else follows.
The traditional counter to Keynes in current economies is Japan. They have been stimulating for a long time and still have very low growth. It should have worked already, right?
Short answer: NO.
Long answer: Japan is facing an even more dramatic demographic bubble than US and Europe. All of these population bubbles are related to WWII. People are going to tend to move their money in predictable ways at different stages of their lives. When there are enough people doing these things at the same time it will cause predictable macro-economic effects. Read more about this idea in books by Harry Dent.
Keynes’ ideas were basically centered on countering human herd behavior when conventional wisdom becomes powerfully negative. It is essentially macro-emotional, I guess you’d say. He doesn’t address why it happens or get into the touchy-feely stuff. Keynes just points out this has happened repeatedly and is very destructive when it does.
Money stops moving because everyone is scared shitless, and wants to hold onto what they have. In that situation government steps in as a buyer until normal demand returns. That is Keynesianism.
Now, this is only half of the problem. We also need to restrain market activity when the public is irrationally exuberant. That requires mostly financial cops. That is NOT Keynesianism. Just good sense.
And what US politics has become, stripping public goods for the benefit of a few connected groups, is also NOT Keynesianism.
To #37, but addressing an incompleteness in my post #38.
I mentioned that Japan had a bigger demographic imbalance than the US, but not how this related specifically. Japan is going to experience lower levels of demand, REGARDLESS of any government policies, as more of their population becomes aged.
Keynes can’t do anything about that. It might be that the Japanese government feels that their economy is going to be on the permanent edge of a “death spiral” until a lot of the demographic wave goes past. They may be right, I don’t know.
#38, Simply not true. Depressions happened regularly before Keynes, and very rarely after.
Actually, they did. And each time it was because of meddling in the financial markets.
The Fed was supposed to stop this and it only made things worse.
Examples:
1807 – Caused by Jefferson with a trade embargo.
1847 – Caused by Jackson trying to get off of a fiat currency.
1873 – Caused by the government not having enough gold on hand to compensate for the industrial boom.
1893 – Much confusion to the cause. Best guess is over-extension of the railroads.
1913 – Fed Created to stop these.
1929 – Great Depression
1974 – Economic Stimulation by the government. It’s more complex than that but ultimately, that’s what it boils down to.
1980 – Caused by the Fed’s money policy to reduce inflation (which they caused in the first place)
2001 – Easy lending, leading to a bubble
2008 – Easy lending, leading to a bubble
And let’s not forget these:
Collapse of the Savings and Loan
Stock Market Collapse of October 1987
Subprime Mortgage Crisis
In that situation government steps in as a buyer until normal demand returns.
This is based on the assumption that the government knows what to buy and what not to buy to stimulate the economy. That is central planning.
The government does not know and cannot know because there are way too many variables to correlate.
Just one of the factors that prevents this from happening is the most obvious — The government is made up of people. People watch TV. People drive to work. People talk to other people. People are subconsciously affected by external psychological forces such as advertising. They cannot, repeat cannot, make unbiased, scientific decisions when they want the new sexy Ford F150 with leather seats and Sync technology.
And what US politics has become, stripping public goods for the benefit of a few connected groups, is also NOT Keynesianism.
That I agree with. However, you can’t have one without the other. Once you give the government the power to dictate what is in demand, you give them free rein to take bribes. Sure, we know it happens and people are pissed, but this has been going on for a century and it is finally biting us in the a$$. Time to stop the failed policy.
Good discussion. Most economists agree with Chris’s position: Keynes properly applied lessens the swings occasioned by “free market” ideologies.
Liberty–its the tale of a dogmatist to claim that depressions are caused by one thing. Depressions/Recovery are caused by a huge mix of things all interacting with one another. Dogmatic non-think to claim otherwise.
#40 “People are subconsciously affected by external psychological forces such as advertising. They cannot, repeat cannot, make unbiased, scientific decisions…”
That is true, and it is why the strong version of the efficient markets hypothesis is wrong. Once you accept that markets can fall into periods of incorrect sentiment then the next stop is Keynesianism. This is obvious from looking at real events. In 2008 the synthetic debt products were valued too highly before the crash and too low after. Something doesn’t go from being AAA to worthless in a week. In that case the investments were BOTH much more dangerous than the rating would indicate and were more salable then banks claimed afterword. They were essentially refusing to liquidate their positions to make margin calls because they didn’t like what the market was willing to pay for that debt. Remember, that ONLY works if you are the casino!
You are still adding a lot of stuff that doesn’t fit right. Inflation in the 1970’s increased and economic activity decreased substantially because of the Arab Oil Embargo. Once oil prices fell back to more normal levels things did get better.
The other big variable you are leaving out in the 1970s was going off of the gold standard. Nixon did that because US debt from Vietnam was causing foreign exchange partners to pull a lot of gold out of US reserves. This brilliant move externalized a lot of the cost of fighting along war to the rest of the world.
Once the dollar was untethered it began falling. That is a general trend that has continued to this day.
You still haven’t tied central planning to Keynes. Japan’s MITI is a good example of central planning in the export sector. Right now the massive urbanization in China is another good example. These things are different enough that they deserve their own understanding.
China is currently confronting Keynes’ main problem, of over-saving, as they attempt to convert from an export economy to one that runs on domestic demand. People are too worried about their basic health, or losing a job, so the keep a huge percentage of their money as savings. That tendency is exactly what Chinese government is fighting right now.
You might see it as wasted money, but it is easy to argue that spending on social programs provides massive flexibility to an economy.
“And let’s not forget these:
Collapse of the Savings and Loan”
This is another red herring. Lots of mid-size investors bought into a process that only simulated productive economic activity. After banks took their fees it was discovered that there was nothing left in the kitty. This was the second largest theft in world history, after the sub-prime crisis. The only economic ideology in play at the time was that markets police themselves. Keynes was not present.
#42, Once you accept that markets can fall into periods of incorrect sentiment then the next stop is Keynesianism.[…]In 2008 the synthetic debt products were valued too highly before the crash and too low after.
I see the point you are trying to make but the reasons for that crash were not due to the people making false assumptions on their own. They were led to believe in that through faulty government action — Clinton forcing banks to accept loans that were risky. And Bush standing before a crowd of poor people saying, “All Americans will own their own house.” And then the MACs backing his promise with the backing of the Clinton-era laws.
And that, of course, led to where we are now.
You still haven’t tied central planning to Keynes.
Actually, I did. When you have the government making decisions on what to buy to spur the economy, that is central planning. They are spending to spur the economy (Keynes) and “they” make the decision (centrally planned).
Savings and Loan = red herring
You’re kidding right?
This was a direct response of the government promising to back investments with insurance on the principle AND the interest rate. Nobody shopped for a strong company to deposit money in. They just found the ones giving the best interest rate.
When there is no perceived risk, people will dump more money than is smart into it. They didn’t cause this. The government did with faulty logic.
Now, as far as not being Keynes, the government made the decision to spend money to keep the economy stable should it fail (and boy did it!). Central Planning and Keynes.
Chris, I am confused as to why you thinking spending money we don’t have is the key to success. Perhaps I’m missing something. You do realize the depth of our problems, right?
Our problems are big, but it mostly doesn’t have to do with debt, or more properly debt-to-gdp. Our debt level is around what most of Europe has, and significantly less than Japan. In practical terms it would be wise to push more of that debt to longer terms, like 30yrs bonds. While that would push up the interest rates it would be doing so on our terms. When it comes to debt you can usually tell how screwed somebody is by a very short length between debt rollovers. Debt held for short periods makes the debtor very vulnerable to rapid rate increases at each maturity.
We stupidly moved to much shorter debt maturities to push the long term private debt rates down. We gave easy money to bankers who stole it, and now we are going to pay for the damage(eventually) at much higher rates.
So I don’t think we are in serious danger from debt, unless we see a strategic default from the US based on GOP political maneuvering. If we DO restructure it WON’T be because we CAN’T pay.
me: Savings and Loan = red herring
you: You’re kidding right?
I am very serious. This was the record, at the time, the largest US bank fraud epidemic and transfer of public dollars to cover those losses in history. We’ve had bigger bustups since. Progress, I guess.
What we need is a lot more financial cops. When people become excited about something all sorts of hucksters come out with useless stuff to buy.
That is fraud.
What Obama will ultimately be remembered for is not asking the comprehensive WHY? Why did 10 years of national savings disappear?
That shit doesn’t happen overnight. We should be looking at who got paid big. Since we are tracking the whole economy for terrorist spending that information should be available, right?
The S&L crisis was the test case the sub-prime crisis. Instead of junk bonds it was junk-junk-junk-bonds.
http://en.wikipedia.org/wiki/Savings_and_loan_crisis
#44, This is where I stare open mouthed at you 🙂
I think our debt is a national security issue.
Interest on the debt last year was $413B. This year, it is expected to be around $425B. That is 11% of our $3.8T budget. And it goes up every year. If we keep up this deficit spending the interest is going to consume the entire budget.
That is a problem, however you play the numbers game with short term vs. long term.
Per you comment on the GOP. Do you see something wrong with a two party system that can wield that kind of control?
#45, This was the record, at the time, the largest US bank fraud epidemic and transfer of public dollars to cover those losses in history.
Oh, I agree with you. The point I was making was the government spending the money to prevent the economy from tanking. You don’t see Keynes in that?
“The point I was making was the government spending the money to prevent the economy from tanking. You don’t see Keynes in that?”
That isn’t really the same thing. Building the interstate highway system, the WPA, the TVA, Hoover Dam… those are government investments that addressed both practical needs and low demand. Refilling the bank’s drawers after a theft is not economic stimulation.
After the 2008 crisis the fed used modified Keynesian ideas when they allowed banks to park distressed assets with the fed as collateral. I would have preferred for the fed to have formed an entity to offer to buy all the securities, to clear the market at the distressed price.
What has happened to US politics IMO is more Cookie-Jar-ism. The politicians set up direct fee-for-service deals with business sector groups. Pay me and you can get a tax break or access to public funds.
Separate thing.
#48, You keep dancing around the issue.
Why would the government insure the investors and depositors through the FSLIC?
“Why would the government insure the investors and depositors through the FSLIC?”
To prevent bank runs, just as the FDIC does today.
The S&L crisis was caused, apart from fraud, by institutions with fed-guaranteed money being allowed to do too many types of transactions. They got themselves into nonsense deals that fell apart when interest rates dropped.
FSLIC was okay as long as the S&Ls were in a more narrow business. Spain is seeing this same issue with their caja’s, or “savings box” banks. They were like a lower tier of the banking system. Local focus on loans for small projects. Then these little guys got too big, but didn’t have the same controls you’d see in a similar sized regular banks.
Part incompetence and part sleeze.
#50, “Why would the government insure the investors and depositors through the FSLIC?”
To prevent bank runs, just as the FDIC does today.
Actually, no. The purpose of the FSLIC is to insure deposits so if an institution goes out of business, the depositors get their money. Bank Runs are just one cause of a bank going out of business.
It does other things, too, as you mentioned but by enforcing the fractional reserve. Unfortunately, that didn’t stop the S&L fallout.
It doesn’t prevent bank runs. It is there to clean up the mess after one occurs.
How does it do this?
“Actually, no. The purpose of the FSLIC is to insure deposits so if an institution goes out of business, the depositors get their money.”
And that has the practical effect of preventing a run on the bank. Without a guarantee everybody runs to get their cash out of a troubled institution. Perception becomes reality: now the bank really is in trouble.
Kind of goes back to the same theme as Keynes, trying to stop a negative feedback loop in how people think.
I’ll grant that as long as we understand that was not it’s only purpose. It also gave people enough confidence to actually DEPOSIT their money instead of putting in a mattress.
So, now that we’ve moved past that, how does the government ensure people get their money back after a failure?
Who makes the decision to actually write the check to the depositors?
Why does the government have an interest in insuring banks in the first place?
Depends on what you mean by “bank.” I would insure a borrow short / lend long operation that had higher capital and holding requirement. Randomize which loans were held. Got 500 loans? You got to keep 125 random ones. Maybe 10x leverage, or not even that much.
Have to isolate the protected businesses. Let traders get their cash from somewhere else.
Today, I think that the FDIC cuts checks for failed banks, but they very rarely ever have to. The idea that somebody heavy arrived who COULD deliver your money is enough for most people. As long as you aren’t trafficking crap somebody will be able to take over your loan portfolio. Most people wouldn’t be effected by a bank failure, and that is due to a history of successful government intervention.
Hundreds of little banks have failed in the past few years, and it isn’t a story at all. That is pretty cool.
You are right that deposit insurance is not limited to bank runs. The directors of the bank could simply embezzle or abscond with the money. It would cover that too.
#54, I’m not sure you answered the questions.
Hundreds of little banks have failed in the past few years, and it isn’t a story at all. That is pretty cool.
Is it cool? Who made the decision? Why was the decision made? Where did the money come from?
#55, Not until you answer my questions first, please. I don’t want to get off subject.
It’s cool because life goes on for everybody who banks at the institution. If there wasn’t any deposit insurance there would be real human tragedy from a bank failure.
The kind of banks that actually do fail, and get taken over, are little regional ones. The big guys can get much worse for much longer before anyone even sends a check… ha ha, not funny.
The FDIC is generally the one who steps in. They sell off the loan portfolio and pay off depositors out of those proceeds, with any remaining costs coming from the FDIC insurance pool.
I think this is nearly automatic. Like margin calls for individual investors. The bank isn’t considered viable if it is taken over, unless it has special friends.
The money comes from an insurance fund paid into by banks. Rates are computed off of prevalence of failures going back several years.
Just so I understand your answers. If I’ve put words in your mouth, please feel free to correct me.
Who made the decision?
The FDIC.
Why was the decision made?
If there wasn’t any deposit insurance there would be real human tragedy from a bank failure.
That is a subjective answer. Can you be more specific, please? What happens metrically?
Where did the money come from?
Insurance fund that is paid into.
#58, Forgot to ask something else: Where else does the FDIC get its funds for repaying depositors? You listed one source.
“That is a subjective answer.”
Not really. If you see a bad thing happen a bunch and develop a means to counter that bad thing…
There were these pyramid schemes sweeping the former Soviet block in the early 1990s after Communism’s fall. It ended badly, obviously. These groups would jump from country to country and nobody stopped them. Consider that this was a very inflationary time, so money sitting around was worth less and less.
I thought to myself then, smuggly, that it was the real difference between them and us. Their power group would let that happen. And then something classier but similar happened here. Several times.
Sorry, I am straying from your format. I can live with that though.
I can tell you’re trying to lead me using the Socratic method to some conclusion you already have. It would be much easier if you bring it up directly.
I don’t think the FDIC has ever had costs more than the insurance pool, but could be wrong. If they did it would come from government or the FED, and be paid back out of larger FDIC bank premiums after the fact. They would probably cut the increased premiums as soon as the public falls back to sleep, under lobbyist pressure.
In the S&L crisis, I’m not sure. Think the setup was different then. The public got hosed, probably. Same as in 2008.
The TARP money wasn’t all that went out. Maybe as much, give or take, went out as straight grants. Just money transfers. So the triumphalist paying back of TARP money, to reacquire the collateral assets(now worth more), did not impress me.
You think things are screwed, so what would YOU change?
I can tell you’re trying to lead me using the Socratic method to some conclusion you already have. It would be much easier if you bring it up directly.
I have. A couple of times. But you keep refuting it. The only way to get you to see you are wrong is to get you to answer in an objective way without expressing feelings about the issues.
For instance — saying that it is human tragedy when a bank fails without insurance is an assumption on your part. Perhaps the bank didn’t have any depositors left. In which case the only people hurt would be the owners. That’s not much of a tragedy.
On the other hand, the FDIC insures creditors, not the banks, to keep the economy stable. By your own statements, and fact, Keynes stated that when people hoard their money, the government has to spend to keep the economy stable. People hoard their money for what purpose? Because banks are unreliable. FDR solved that problem, as defined by Keynes, by creating the FDIC (some historians say he didn’t, but congress did).
The FDIC and it’s payouts follow Keynes because without them, according to Keynes, people don’t trust the banks.
I think you realize this but for some reason don’t want to say it.
I don’t think the FDIC has ever had costs more than the insurance pool, but could be wrong.
You are. Over half of the FDIC get’s its money from government subsidies. The FDIC is not self-sufficient. It requires taxpayer money to keep it afloat.
But, according to Keynes’ theories, without it the economy would be unstable. Thus, it is a Keynesian institution because the government pumps money into it for those reasons.
And as that money never, ever, ever gets repaid in Total, the deficit continues to climb.
Now, all of that being said, I think the FDIC is probably a good idea. If we’re going to let special interests dictate how the government does things, I want to make sure those same special interests don’t end up with all of my money.
You think things are screwed, so what would YOU change?
http://tinyurl.com/2ftfbug
🙂
“The only way to get you to see you are wrong”
I appreciate the honesty.
As a preemptive side note, I do like Ron Paul. He isn’t the finished product, and shouldn’t be mistaken as such. He can be more pure in message because he is never going to be President.
I would like your thoughts on Howard Dean, who was a similar figure on the left.
I appreciate the honesty.
Yeah, it’s easy to be pure in my honesty because I’ll never be president either. 😛
And I agree with you on Paul more than you probably think I do.
Re: Howard Dean
Surprisingly, I support a lot of what he was to say. All things being equal, I would have supported him. However, not everything is equal.
His ideas on universal healthcare provided by the State was the nail in that coffin in my book.
I liked his ideas on equality. They have a most libertarian scent to them.
I liked his ideas on open government. Beating on Cheney didn’t get the attention it deserved in my opinion.
He could balance a budget. Unfortunately, some of things IN that budget were questionable to me. The people of his state seemed to like him so I guess they didn’t have a problem it, though.
I liked his opposition to Iraq.
There are more things in common between libertarians and democrats than most people think (probably more in common with them than republicans). What drives the democrats nuts about that is we can agree on social issues but not economic issues.
The democrats believe in equality of outcome.
The libertarians believe in equality of opportunity.
“The democrats believe in equality of outcome.
The libertarians believe in equality of opportunity.”