Jim Devine writes:
>> The problem, of course, is the usual one seen in serious economics:
>> individual rationality leads to collective irrationality. Everyone
>> seeks to deleverage (because that serves individual self-interest,
>> i.e., is "rational" in economics books) but that makes the financial
>> system and the rest of the economy collapse. Thus, people not involved
>> in the financial system's misbehavior (its earlier over-leveraging,
>> which was also individually rational given the lack of serious
>> regulation, which is what the financial lobbyists wanted) nonetheless
>> end up being punished with high unemployment, bankruptcy, and the
>> like.
I think you are fundamentally confusing cause and effect. The deleveraging is
not the cause of the economic collapse, it is the manifestation of the economic
collapse. What is the cause of the economic collapse/deleveraging? The
exhaustion of the credit bubble. What is a credit bubble? Economic activity
based upon an illusion concerning the actual production of goods and serices,
or as I like to put it, people acting as if their wealth was 100x when it was
really 60x.
The economy is going to readjust from 100x to 60x whether we like it or not,
and there is nothing the Federal Reserve, the US Treasury or Paul Krugman can
do about it. Complaining that business and consumers are ignoring cheap credit
in this environment (i.e. the economy is in a "liquidity trap") is to totally
misunderstand what is going on and leads to our present misguided policies of
"stimulus" packages and the like.
>>
>> > The only irrational behavior is that of the politicians trying to stop the
>> > deleveraging.
>> All policy that is intended to prevent deleveraging (i.e. increase
>> borrrowing) at this time
>> is based upon the theory that the problem with the credit bubble wasn't the
>> existence
>> of the bubble, but that the bubble ended. That is irrational.<
>>
>> Maybe, but that does not deal with the collateral damage that results
>> from the financial bomb going off, the way in with Madoff, Thane,
>> Stanford, and similar scam artists (along with a large mass of minor
>> financiers seeking profit and profit by over-leveraging) end up
>> imposing costs on the rest of us. And the vast majority of these
>> scamsters and gamblers aren't going to be held responsible on the
>> dock.
This is all irrelevant to the point. Complain all you want about the policies
that led to the bubble. We can stand together. To complain about a
deleveraging in response to the bubble is to complain about gravity.
>>
>> It may make sense to let the bubble pop completely, following the lead
>> of the famous politician Andrew Mellon ("Liquidate labor, liquidate
>> stocks, liquidate the farmers, liquidate real estate"). Marx,
>> Schumpeter, and the so-called Austrian economists pointed to the way
>> recessions purge imbalances from the economy, allowing for renewed
>> accumulation and prosperity in a normal business cycle. But last time
>> the political elites in the US and much of the rest of the rich
>> capitalist world followed Mellon's path (during a crisis of similar
>> magnitude), the economy's roller-coaster car spun off the track.
I totally dispute this. The ten-year US depression was not caused by following
the recommendations of Andrew Mellon. If he had been listened to instead of
indicted, the world would have been a much better place.
David Shemano
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