me:
>>> 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.
David Shemano writes:
> 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.<
Deleveraging is _both_ a cause and an effect. The end of the housing
bubble and the speculative superstructure built upon it (the
"exhaustion of the credit bubble") led to deleveraging, as David
points out, but then the decline of asset prices and the restriction
of credit hurt the economy (as measured by GDP and unemployment
rates). This recession in turn undermines asset prices and discourages
the extension of credit further. This makes the recession worse...
It's a vicious circle. The deflation of the bubble drives housing
price to the floor indicated by long-term trend (given the trend of
GDP, the population size, and the like), but then the wealth effect of
falling house prices and intensified credit rationing leads to
over-shooting, drilling through the floor to even lower prices. (This
might happen anyway: equilibration isn't always pretty.) Eventually,
as long as there's no mass popular movement aimed at replacing
capitalism with something else, the economy recovers, but this happens
only after a decade or two (ignoring other changes).
> The economy is going to readjust from 100x to 60x [??? what does this refer
> to???] whether we like it or not, and there is nothing the Federal Reserve,
> [or] the US Treasury ... 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.<
I did not "complain" about businesses and consumers were ignoring
cheap credit. Instead, I and others "observed" this fact. Of course,
I've given more attention to the fact that banks and other financial
institutions are refusing to lend, requiring higher and higher
standards (including collateral, etc.) That's perfect rational, in the
economics textbook sense of reflecting narrow self-interest, of
course, but has major external effects on the US and world economies.
As I noted, it's not collectively rational.
The idea that the Federal Reserve cannot do anything about it is
simply a version of the liquidity trap concept, so it seems that David
is agreeing with the LT idea. (Strictly speaking, however, the LT says
that the Fed has to go beyond normal means (fiddling with short-term
interest rates), for example, by buying long-term bonds or by trying
to engineer inflationary expectations. Of course, that may not work
either.)
The Treasury (or the "Trashury" as my stumbling fingers first spelled
it -- an apt Freudian slip!) is not trying to end the deleveraging as
much as trying to save its friends at Chase Manhattan[*] and its many
other banking buddies. A lot of these are zombie banks (technically
bankrupt but still in business feathering their depleted nests)
nowadays, so it's not surprising that they're not lending.[**] Hank
Paulson (and, it seems, Timothy Geithner) are promising that this
will help the rest of us (a version of the trickle-down theory), but
it's mostly for the banks: look at the blank checks that Paulson gave
to the banks when he should have been nationalizing them. Of course,
the bank bail-outs might be done right some time in the future, but
it's not happening yet.
The "stimulus" on the other hand (the increased government deficit)
seems more enlightened, even if it may be insufficient and too subject
to GOP-oriented compromises (including the GOP within the Democratic
Party and within Obama's brain). Following Keynes the way FDR never
did in a sufficient way, it directly helps the "real" economy, not the
finance boys and girls.
This -- and the aid to homeowners that Obama recently proposed -- may
prevent the over-shooting of housing prices referred to above. By
buoying up the real economy, it may save the financial system
_despite_ the mollycoddling approach of Paulson and (seemingly)
Geithner. It may create the objective conditions (what David calls the
"environment") that undermine the "fear itself" which is freezing
finance. Of course, I can't predict the future...
David had written:
>>> 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.
me:
>> 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.<
Again, I never "complained." However, I did point to the collateral
damage that arises from deleveraging and the previous leveraging. One
of the things I learned in Econ-School was that serious economics
involves (among other things) being conscious of costs and benefits,
paying attention to as many of these as possible. It does not involve
cheer-leading for the "free market" (or for the government, for that
matter).
"We stand together"? What in heck does this mean? We should support
the Madoffs, the Thanes, the Stanfords? They rip people off and
shouldn't be thrown in jail? Instead, we should _all_ go to jail? It
reminds me of the famous scene in the movie "Spartacus." "I'm Madoff!"
"I'm Madoff!"
>>> 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.<
That's a matter of faith, it seems. It's not backed by either logic or
factual evidence. Among other things, most countries' central banks
followed his advice (joining the Mellon ball) until it became so
obviously wrong that they had to stop (among other things dropping the
gold standard, thank the gods). Among major powers, Germany was the
most successful at Mellonian deflation and thus reaped a whirlwind.
(It was trying to liquidate its reparations and foreign debts.)
By pushing for and achieving tax cuts for the rich, of course, Mellon
reinforced the trend of increasing inequality in the wealth and income
distributions that helped to create the Great Slump of 1929-33. He was
at the center of the Calvin Coolidge Capitalism movement which
prevailed back then and came back with a vengeance starting in the
1980s. Just as the original spawned the Big Bull Bubble of the 1920s
(involving housing and stocks), the latter has created bubble after
bubble (starting with the S&L sector). Increasing inequality made the
real economy increasingly dependent on bubbles for GDP-type
prosperity.
With the fundamental problem of growing inequality and the resulting
under-consumption undertow unaddressed, solving one bubble problem via
Mellon-flavored liquidation does not end the economy's dependence on
financial craziness (bubbles) and the kindness of stranglers (the
financiers). It produces either sustained stagnation or GDP-prosperity
based on another bubble economy. There is a third alternative,
naturally enough: we could attain GDP growth via war. That's what got
us out of the earlier Mellon mess.
--
Jim Devine / "Segui il tuo corso, e lascia dir le genti." (Go your own
way and let people talk.) -- Karl, paraphrasing Dante.
[*] This dredges up an old advertising slogan; of course, its current
alias is "J.P. Morgan Chase."
[**] With a little bit of recovery of GDP, these zombies may start
imitating the "walking dead" S&Ls of the late 1980s, making really
risky loans hoping that they can save their skins. (This is like
making "double or nothing" bets.) This means that any half-decent
recovery plan requires serious re-regulation of finance. Maybe
ceilings on interest rates should come back, but this time with
cost-of-living escalators.
JD
_______________________________________________
pen-l mailing list
[email protected]
https://lists.csuchico.edu/mailman/listinfo/pen-l
