Interpreting Fed Policy

[gonegolfin]

I agree with much of what you are saying. However, it is necessary for the government to spend to keep some people from starving and being thrown onto the street.

I would also say that encouraging people to save now is not the optimal macro solution, though they are going to anyways, and rationally so. The best time to encourage savings was two years ago. However, we are now confronted with the paradox of thrift.

Over time, the savings rate of the US has to rise. However, savings can go too high, as they are currently in Japan.

Savings was high in Japan before the depression hit. Japan was able to finance its government intervention internally (instead of relying on foreign lending). There was also too much government intervention in Japan during this period, along with the propping up of insolvent banks. Japan is paying a steep price for this.

And not to change the subject and venture into another debate, but I do not accept the paradox of thrift. If by saving, you mean hoarding, then yes I agree. But I am not referring to the hoarding of money when I say saving.

At some point in time, the system must revert and the excesses be purged. We need to become, once again, more of a producer nation than a consumer nation. But the excesses are never purged during times when we are in the expansion part of the cycle. The result is that the cleansing does not happen and the excesses continue to build ... until a massive cleansing is forced upon us. That will be an ugly day. A day when many will starve and the government will be out of ammunition to help. It needs to be corrected before we get to that point.

Brian

 

[Zoomie1980]

Not all debt is bad. Too much is bad and consistently relying on increasing levels of debt and government spending to engineer ourselves out of recession is bad. And as I have explained, it has not been working. Our subsequent expansions have been progressively shorter and shallower. We need to save more to build a stronger economy, not spend more.

Relying on increasing levels of debt and spending is not the formula of success for corporations.



I did not make a broad-sweeping statement about going into debt. I am referring to the irresponsible excess being enacted by the government. It has gotten to the point where foreign nations are rumbling about future US borrowings, from foreign official institutions, being denominated in foreign currency. We have not run a responsible fiscal ship. And nowhere did I excuse other entities and individuals from similar fiscal irresponsibility.

And to think that the government is going to spend its way out of this economic mess without creating further mess in the future is pure folly.


No it is not the same. There is plenty of spending in this country that is not necessary to keep "food on the table". Spending must be cut during these times and saving must be increased. Not the opposite. Additionally, savings must not be discouraged, which is exactly what is happening.


No. It is immoral to saddle our children with increasingly burdensome fiscal problems.

Brian

I suppose at some time our debt will create a true and real crisis. But I am old enough to remember LBJ's Guns and Butter and $100,000,000 deficits, and conservatives were apocalyptic about that. Then, 20 years later Reagan ran up debts in the tens of billions in the defense build up and people were bemoaning disaster and we were mortgaging our children's future. Today, Johnson's debts could be repaid in a day or two, Reagan's in several weeks. Our history seems to indicate debt simply doesn;t matter. We NEVER have to repay it in full and never will and we seem to have a bottomless pit of underwriters. I suppose at some time that will no longer be the case but we have been running debts, that at the time, were deemed to be enormous, for over 80 years now. So when will we max out the credit line because we haven't found it for the better part of 100 years....

And personally I don't give a damn about what "we leave behind for our children". My parents left my generation the drugs and free love of the 60's and Misery Index of the 70's and we did ok with that. Our kids will just have to DEAL WITH IT, I did, they can too

 

[Paulie]

And personally I don't give a damn about what "we leave behind for our children". My parents left my generation the drugs and free love of the 60's and Misery Index of the 70's and we did ok with that. Our kids will just have to DEAL WITH IT, I did, they can too

Excusing immorality simply because it's happened before is ridiculous. Tell your kids that, next time you talk to them. Tell them to their faces that you don't give two shits about the situation they're being left with because of previous generations' lack of responsibility and morality. Tell them you don't give a fuck about what dire circumstances their future may hold because of us.

 

[BaronVonBigmeat]

Look, I tend to defer to the market. On the few other forums I frequent, I'm usually taking the "market knows best" approach. However, when one says "based on what has worked," one ignores the fact that activist governments in northern Europe have provided one of the highest standards of living on the planet while the Asian governments have been very interventionist in pulling their economies from amongst the poorest in the world to a fairly significant level of wealth.

Western european nations are nice places to live, generally. However, they are nice places to live in spite of their welfare states, not because of them. Not to mention that we subsidized their defense for 40 years.

Likewise, Japan and Taiwan and so forth became economic powerhouses despite protectionism, not because of it. Sure, it helped selected industries grow. However, the rest of the nation had to pay inflated prices for the foreign goods that were heavily taxed. What industries were never able to develop because of high tariffs? Well, that's impossible to know. But we shouldn't be fooled into thinking that they wouldn't exist. A bad economist looks at what is seen; a good economist looks at what is seen and what is not seen.

Imagine going to a drag race and seeing a '67 GTO beating the hell out of late model cars. You might come to the conclusion that plenty of chrome and blocky, squared-off styling is vital for going fast. After all, the really fast cars at the track all have that, and most of the plasticy jellybean-looking cars are slow. At the very least, we might assume that heavy chrome bumpers and blocky styling don't actually harm performance, right? Empiricism ahoy!

 

[mash107]

Yeah, what interventionists tend to ignore is the overwhelming power of the free market to make life better for all. We've allowed our capitalist system to become corrupted with intervention, and whenever there's a failure due to these interventions, it's the market that's quick to blame. Whenever there's success due to the free market's sheer power, ignoring what the government has done, it's the government that gets credit. Why is that so?

 

[Toro]

Likewise, Japan and Taiwan and so forth became economic powerhouses despite protectionism, not because of it. Sure, it helped selected industries grow. However, the rest of the nation had to pay inflated prices for the foreign goods that were heavily taxed. What industries were never able to develop because of high tariffs? Well, that's impossible to know. But we shouldn't be fooled into thinking that they wouldn't exist. A bad economist looks at what is seen; a good economist looks at what is seen and what is not seen.

Imagine going to a drag race and seeing a '67 GTO beating the hell out of late model cars. You might come to the conclusion that plenty of chrome and blocky, squared-off styling is vital for going fast. After all, the really fast cars at the track all have that, and most of the plasticy jellybean-looking cars are slow. At the very least, we might assume that heavy chrome bumpers and blocky styling don't actually harm performance, right? Empiricism ahoy!

A good economist is also an empiricist first. A good economist looks at what the data tells him, not interprets the data in a manner that supports his view, nor do they explain away a variable that contradicts their preconceived view. That's the difference between a scientist and a philosopher.

You say that if there was demand for a road, it would be built by private enterprise. Yet virtually every road in residential areas, and almost every road in the country, is built and maintained with public money. How many toll roads do you travel on when you are driving around neighborhoods? The philosopher will rationalize away this condition. The scientist will attempt to explain this condition. The philosopher assumes his worldview is true and attempts to prove his belief. The scientist assumes his hypothesis is false and attempts to disprove his belief.

Neuroeconomics.

More on Neuroeconomics.

Behavioral economics.

More on Behavioral economics.

 

[BaronVonBigmeat]

Of course there aren't many private roads. The government has subsidized roads to such an extent that private roads are pointless and unprofitable. If the government subsidized say, fried chicken restaurants to the same extent, we would see restaurants like Popeye's wither away. And no doubt, you would tell us that the alarming rise in heart attacks from the overconsumption of fried chicken is due to market failure.

Anyway, I'm not saying empiricism is worthless by any means. It's just that with a topic as complicated as the entire world economy, it has to be interpreted through the lens of the correct philosophy, otherwise you can come to erroneous conclusions. Same thing with math--the Greeks had a complex (and accurate) system of predicting the positions of the planets, even though they thought the earth was the center of the solar system.

 

[Toro]

Of course there aren't many private roads. The government has subsidized roads to such an extent that private roads are pointless and unprofitable. If the government subsidized say, fried chicken restaurants to the same extent, we would see restaurants like Popeye's wither away. And no doubt, you would tell us that the alarming rise in heart attacks from the overconsumption of fried chicken is due to market failure.

They don't "subsidize" roads. They build them. And they do so because it is the most economically efficient method to do.

Anyway, I'm not saying empiricism is worthless by any means. It's just that with a topic as complicated as the entire world economy, it has to be interpreted through the lens of the correct philosophy, otherwise you can come to erroneous conclusions. Same thing with math--the Greeks had a complex (and accurate) system of predicting the positions of the planets, even though they thought the earth was the center of the solar system.

So you're saying that wealth creation has nothing to do with capitalism then...

 

[BaronVonBigmeat]

They don't "subsidize" roads. They build them. And they do so because it is the most economically efficient method to do.

The difference between subsidizing and building directly is irrelevant, the government is allocating resources. Likewise you could compare corn subsidies to say, uncle sam using tax dollars and eminent domain to grow corn and dump it on the market, the end result is essentially the same.

The example of James Hill's Great Northern Railroad also shows that, surprise surprise, a private road allocated resources more efficiently than the government/private "partnerships" did. The government railroads squandered resources, built shoddy and dangerous tracks, and ran inefficient routes due to political pressure. This was nothing new of course; Illinois nearly went bankrupt before the civil war building canals and so forth. The waste and corruption was so notorious that the confederate constitution outlawed internal improvements.

edit: to be clear, building roads is not the worst thing our governments do, not by a long shot. We do get some use out of them, even if they are poorly-implemented and over budget and so forth. If I could make a list of things I'd like to cut, roads wouldn't make the top ten.

 

[Toro]

The difference between subsidizing and building directly is irrelevant, the government is allocating resources. Likewise you could compare corn subsidies to say, uncle sam using tax dollars and eminent domain to grow corn and dump it on the market, the end result is essentially the same.

The example of James Hill's Great Northern Railroad also shows that, surprise surprise, a private road allocated resources more efficiently than the government/private "partnerships" did. The government railroads squandered resources, built shoddy and dangerous tracks, and ran inefficient routes due to political pressure. This was nothing new of course; Illinois nearly went bankrupt before the civil war building canals and so forth. The waste and corruption was so notorious that the confederate constitution outlawed internal improvements.

edit: to be clear, building roads is not the worst thing our governments do, not by a long shot. We do get some use out of them, even if they are poorly-implemented and over budget and so forth. If I could make a list of things I'd like to cut, roads wouldn't make the top ten.

Generally markets allocate resources more efficiently.

But not always, for various reasons.

For example, a breakdown of the financial system is partly due to the credit ratings agencies. Executives for the ratings agencies were paid stock options and bonuses for hitting profit targets. Stocks go up when profits go up. Profits go up because revenues go up. Revenues go up when you get more business. You get more business by making your customer happy. The customers were the entities being rated. If Citigroup floats a bond, CMBS, synthetic CDOs, or whatever, it goes to Moody's, Standard and Poor's and/or Fitch and pays them to rate the security. If S&P and Fitch are going to rate it AAA while Moody's is going to rate it AA+, Citi goes back to Moody's and tells them they are going to lose business if they don't get a AAA rating. So Moody's jacks up the rating. Institutions that can only buy AAA rated paper can now buy the security. In the mean time, standards are lowered across the board because the institutions paying the ratings agencies control the revenue flow, and the executives are incentivized to appease the customers who effect their compensation, i.e. the issuing entity. This is a big reason why mezzanine subprime collateralized mortgaged backed-securities packaged into collateralized debt obligations - in English, "really shitty subprime mortgage securities" - could receive a AAA rating, the same rating as the United States of America. And because the subprime mortgages were rated AAA, they could be purchased by institutions which otherwise wouldn't touch them with a 10-foot pole. Institutions bought this garbage thinking it was safe. It was not. They are trading at pennies on the dollar. Now, credit is frozen and Wall Street has collapsed caught in its own negative vortex, taking the economy down harder than at any time in nearly three decades.

 

[editec]

Private money requires a more immediate return on investment that Public investment does.

Often the value in use of public investments is not as easy to understand or account for as the value in use (AKA return on investment) as private investments.

Nations are NOT businesses.

They proform functions that cannot be measured in strickly accounting terms.

For example...what is the return on investment of our nuclear arsenal?

Zero, right? In fact, less than zero since it costs us money to maintain something that we HOPE we'll never use.

Still, I think most of you who think market is always right and government is always wrong would agree with me that the nuclear arsenal is probably a good investment.

 

[Paulie]

Private money requires a more immediate return on investment that Public investment does.

Often the value in use of public investments is not as easy to understand or account for as the value in use (AKA return on investment) as private investments.

Nations are NOT businesses.

They proform functions that cannot be measured in strickly accounting terms.

For example...what is the return on investment of our nuclear arsenal?

Zero, right? In fact, less than zero since it costs us money to maintain something that we HOPE we'll never use.

Still, I think most of you who think market is always right and government is always wrong would agree with me that the nuclear arsenal is probably a good investment.

The ROI of our nuclear arsenal is no one else having the audacity to fuck with us for fear of retaliatory annihiliation.

Those nukes are what make us what we are today. Without them, we'd be sitting ducks for the countries that would otherwise love to see us go down.

 

[Zoomie1980]

The difference between subsidizing and building directly is irrelevant, the government is allocating resources. Likewise you could compare corn subsidies to say, uncle sam using tax dollars and eminent domain to grow corn and dump it on the market, the end result is essentially the same.

The example of James Hill's Great Northern Railroad also shows that, surprise surprise, a private road allocated resources more efficiently than the government/private "partnerships" did. The government railroads squandered resources, built shoddy and dangerous tracks, and ran inefficient routes due to political pressure. This was nothing new of course; Illinois nearly went bankrupt before the civil war building canals and so forth. The waste and corruption was so notorious that the confederate constitution outlawed internal improvements.

edit: to be clear, building roads is not the worst thing our governments do, not by a long shot. We do get some use out of them, even if they are poorly-implemented and over budget and so forth. If I could make a list of things I'd like to cut, roads wouldn't make the top ten.

What you fail to understand is Absolutism, is Absolutely wrong....No one model, or belief system, explains all. We do not have a Unified Theory, and likely never will.

 

[Zoomie1980]

Generally markets allocate resources more efficiently.

But not always, for various reasons.

For example, a breakdown of the financial system is partly due to the credit ratings agencies. Executives for the ratings agencies were paid stock options and bonuses for hitting profit targets. Stocks go up when profits go up. Profits go up because revenues go up. Revenues go up when you get more business. You get more business by making your customer happy. The customers were the entities being rated. If Citigroup floats a bond, CMBS, synthetic CDOs, or whatever, it goes to Moody's, Standard and Poor's and/or Fitch and pays them to rate the security. If S&P and Fitch are going to rate it AAA while Moody's is going to rate it AA+, Citi goes back to Moody's and tells them they are going to lose business if they don't get a AAA rating. So Moody's jacks up the rating. Institutions that can only buy AAA rated paper can now buy the security. In the mean time, standards are lowered across the board because the institutions paying the ratings agencies control the revenue flow, and the executives are incentivized to appease the customers who effect their compensation, i.e. the issuing entity. This is a big reason why mezzanine subprime collateralized mortgaged backed-securities packaged into collateralized debt obligations - in English, "really shitty subprime mortgage securities" - could receive a AAA rating, the same rating as the United States of America. And because the subprime mortgages were rated AAA, they could be purchased by institutions which otherwise wouldn't touch them with a 10-foot pole. Institutions bought this garbage thinking it was safe. It was not. They are trading at pennies on the dollar. Now, credit is frozen and Wall Street has collapsed caught in its own negative vortex, taking the economy down harder than at any time in nearly three decades.

1982-83 is the post Depression standard we are measuring against. Eclipse that, an only the Great Depression is available as a comparison. I doubt we will quite reach the severe levels of 82-83, mostly because we missing the double digit interest rates and unemployment levels.......

 

[Zoomie1980]

The ROI of our nuclear arsenal is no one else having the audacity to fuck with us for fear of retaliatory annihiliation.

Those nukes are what make us what we are today. Without them, we'd be sitting ducks for the countries that would otherwise love to see us go down.

Yes, when all else is lost, and human civilization is about to end as we know it, having the ability to eliminate life on earth with the push of a button, is a compelling power....

 

[Toro]

1982-83 is the post Depression standard we are measuring against. Eclipse that, an only the Great Depression is available as a comparison. I doubt we will quite reach the severe levels of 82-83, mostly because we missing the double digit interest rates and unemployment levels.......

I agree that the yardstick is the early 80s, even though the causes of this and that recession are different. But in terms of severity, I think you are correct.

 

[editec]

The ROI of our nuclear arsenal is no one else having the audacity to fuck with us for fear of retaliatory annihiliation.

Exactly. And the investment to give us that is not something that a FOR RPOFIT corporation could easily do, could it?

After all, that nuclear arsenal, for all its value in use provides no return on investment that a beancounter can put on its books.

Those nukes are what make us what we are today. Without them, we'd be sitting ducks for the countries that would otherwise love to see us go down.

That is absolutely my point.

The nuclear arsenal is but one example of why thinking that government needs to run like business is the mantra of simpletons.

 

[AmericaFirst]

Generally markets allocate resources more efficiently.

Institutions bought this garbage thinking it was safe. It was not. They are trading at pennies on the dollar. Now, credit is frozen and Wall Street has collapsed caught in its own negative vortex, taking the economy down harder than at any time in nearly three decades.

Hello,

Any idea what the total amount of derivative junk is out there globally? I have heard estimates in the hundreds of trillions US$.

Thanks

 

[editec]

Hello,

Any idea what the total amount of derivative junk is out there globally? I have heard estimates in the hundreds of trillions US$.

Thanks

I read somewhere recently that it amounts to about 1.75 years GROSS WORLD PRODUCT.

I haven't had time to look at this

OCC: Publications - Qrtrly. Derivative Fact Sheet

but it may give you some idea of what lunatics our MASTERS OF THE UNIVERSE class really are.

 

[Toro]

Hello,

Any idea what the total amount of derivative junk is out there globally? I have heard estimates in the hundreds of trillions US$.

Thanks

Total value of swaps was $454 trillion.

ISDA PUBLISHES YEAR-END 2007 MARKET SURVEY

I'm not sure what the values of futures and options are.