The Great Recession - and the Recovery - Explained

[Sundial]

Boom and bust cycles are common in countries with financial markets. That's because financial markets work differently from other markets. In other markets, rising prices reduce demand, and vice-versa. In financial markets, rising prices increase demand, which in turn pushes prices even higher. As a result, financial markets are highly unstable. Panics and bubbles regularly follow each other.

Unfortunately, these booms and busts effect the real economy, because ordinary people have assets which are affected by the gyrations of the market. When there's a bubble, people spend more, thereby increasing national income, GDP and employment. When values plummet, the opposite occurs.

Bubbles are naturally self-correcting. If a crash leads to a sufficiently deep depression, on the other hand, it can go on indefinitely. In the absence of government regulation or intervention, a financial panic can destroy banks. That, in turn, destroys not just the value of people's financial assets, but their cash savings as well.

In the most recent financial panic, $15 trillion of net wealth was erased. People reacted by cutting spending, which in turn reduced incomes and employment, which resulted in the recession, which reduced income even more.

The government, fortunately, reacted by protecting the banks - so that people's money - their checking accounts, savings accounts, CDs - wouldn't also disappear. This prevented a recession from turning into a depression. People might survive the decimation of their 401k's, but they can't survive not being able to buy groceries, because checking account is gone.

The second thing it did was to spend more into the economy than it was taxing.

This is essential, because the Federal government is the only institution that has the power to increase spending when every other part of the economy is shutting down. When the government spends money into the economy that wasn't taxed, it increases private sector wealth by the same amount. The cumulative effect was to add several trillion dollars to the economy.

While a relatively small amount compared to the losses, it was enough to get the economy growing again. Once the the recovery is secure, it becomes self-perpetuating.

 

[Chris]

Well done.

When an economy goes into a deflationary spiral, the government HAS to be the demand of last resort.

Congress did it with a combination of tax cuts and government spending.

It probably should have been bigger, but it did the trick.

 

[occupied]

That all sounds reasonable, what is unreasonable is an almost total lack of political will to confront the manipulators that willfully built a bubble and are still benefiting from it's collapse to the detriment of the country.

 

[Sundial]

Well done.

When an economy goes into a deflationary spiral, the government HAS to be the demand of last resort.

Congress did it with a combination of tax cuts and government spending.

It probably should have been bigger, but it did the trick.

It's not too late. The economy is growing, but but it's growing slower than it could be. What's needed is a jobs plan. And to extend the payroll tax cut.

 

[Sundial]

That all sounds reasonable, what is unreasonable is an almost total lack of political will to confront the manipulators that willfully built a bubble and are still benefiting from it's collapse to the detriment of the country.

It's hard to punish the malefactors when so many of them are running things. At minimum, we need to maintain the rules that prevent commercial banks from gambling in the financial markets. It'd be nice to break up the cabal of elites who profit no matter how much damage they inflict on the rest of the country, as well...

 

[Trajan]

Boom and bust cycles are common in countries with financial markets. That's because financial markets work differently from other markets. In other markets, rising prices reduce demand, and vice-versa. In financial markets, rising prices increase demand, which in turn pushes prices even higher. As a result, financial markets are highly unstable. Panics and bubbles regularly follow each other.

Unfortunately, these booms and busts effect the real economy, because ordinary people have assets which are affected by the gyrations of the market. When there's a bubble, people spend more, thereby increasing national income, GDP and employment. When values plummet, the opposite occurs.

Bubbles are naturally self-correcting. If a crash leads to a sufficiently deep depression, on the other hand, it can go on indefinitely. In the absence of government regulation or intervention, a financial panic can destroy banks. That, in turn, destroys not just the value of people's financial assets, but their cash savings as well.

In the most recent financial panic, $15 trillion of net wealth was erased. People reacted by cutting spending, which in turn reduced incomes and employment, which resulted in the recession, which reduced income even more.

The government, fortunately, reacted by protecting the banks - so that people's money - their checking accounts, savings accounts, CDs - wouldn't also disappear. This prevented a recession from turning into a depression. People might survive the decimation of their 401k's, but they can't survive not being able to buy groceries, because checking account is gone.

The second thing it did was to spend more into the economy than it was taxing.

This is essential, because the Federal government is the only institution that has the power to increase spending when every other part of the economy is shutting down. When the government spends money into the economy that wasn't taxed, it increases private sector wealth by the same amount. The cumulative effect was to add several trillion dollars to the economy.

While a relatively small amount compared to the losses, it was enough to get the economy growing again. Once the the recovery is secure, it becomes self-perpetuating.

q- yes or no; Keynes believed in consumer stimulus?

 

[Avorysuds]

I love how people claim we have recovered... Wait a fucking month people, you did the same crap last year...

 

[likeabird03]

Well done.

When an economy goes into a deflationary spiral, the government HAS to be the demand of last resort.

Congress did it with a combination of tax cuts and government spending.

It probably should have been bigger, but it did the trick.

You mean the bailouts saved the economy? Run, go tell your friends that because apparently they didn't get that memo.

 

[Trajan]

I love how people claim we have recovered... Wait a fucking month people, you did the same crap last year...

yup....annnnnd hold still for another;

 

[Wiseacre]

You lefties are entitled to your opinion about the stimulus, that's fine. But here's what bugs me, it coulda and shoulda been done more effectively, they shoulda managed it better to give us more bang for the buck economically speaking. And I thought we were supposed to get a lot infrastructure work done back then, and now we need another $450 billion? Ticks me off, it's like I'm being lied to.

Doesn't help much either when the president laughs about it and says those jobs weren't as shovel ready as we thought. I'm left thinking either he deliberately mislead us about it or he really didn't know what he was doing. IOW, he was incompetent. Maybe both.

And here's another thing for you guys to chew on. You say Obama spent trillions that flowed into the economy, yet the lower and middle classes are no better off. I guess all that money ended up with the rich guys and the big corps, how come you're not pissed off about that?

 

[Sundial]

Boom and bust cycles are common in countries with financial markets. That's because financial markets work differently from other markets. In other markets, rising prices reduce demand, and vice-versa. In financial markets, rising prices increase demand, which in turn pushes prices even higher. As a result, financial markets are highly unstable. Panics and bubbles regularly follow each other.

Unfortunately, these booms and busts effect the real economy, because ordinary people have assets which are affected by the gyrations of the market. When there's a bubble, people spend more, thereby increasing national income, GDP and employment. When values plummet, the opposite occurs.

Bubbles are naturally self-correcting. If a crash leads to a sufficiently deep depression, on the other hand, it can go on indefinitely. In the absence of government regulation or intervention, a financial panic can destroy banks. That, in turn, destroys not just the value of people's financial assets, but their cash savings as well.

In the most recent financial panic, $15 trillion of net wealth was erased. People reacted by cutting spending, which in turn reduced incomes and employment, which resulted in the recession, which reduced income even more.

The government, fortunately, reacted by protecting the banks - so that people's money - their checking accounts, savings accounts, CDs - wouldn't also disappear. This prevented a recession from turning into a depression. People might survive the decimation of their 401k's, but they can't survive not being able to buy groceries, because checking account is gone.

The second thing it did was to spend more into the economy than it was taxing.

This is essential, because the Federal government is the only institution that has the power to increase spending when every other part of the economy is shutting down. When the government spends money into the economy that wasn't taxed, it increases private sector wealth by the same amount. The cumulative effect was to add several trillion dollars to the economy.

While a relatively small amount compared to the losses, it was enough to get the economy growing again. Once the the recovery is secure, it becomes self-perpetuating.

q- yes or no; Keynes believed in consumer stimulus?

I can't speak to Keynes. What I know about him is only second-hand.

The school of thought that I've been following is called "Modern Monetary Theory," or sometimes Chartalism. It rejects the "loanable funds" model, and the "money multiplier," and argues that money is a creature of the state (among other things).

I suspect that Keynes would have said deficit spending should be made on "investments", however you want to define that term.

MMTers would say, I think, that HOW the deficits are created may make a difference in terms of public policy, but not in terms of getting the economy moving. IOW, whether you cut taxes (for example) or increase spending makes a difference politically, but so long as they both create the same size deficit, they'll be equally as effective in terms of promoting economic growth.

Reagan, for example, created deficits by cutting taxes and buying weapons. I might disagree with those decisions politically, but it was the deficits that created the subsequent growth, not how he got there.

 

[Wiseacre]

" MMTers would say, I think, that HOW the deficits are created may make a difference in terms of public policy, but not in terms of getting the economy moving. IOW, whether you cut taxes (for example) or increase spending makes a difference politically, but so long as they both create the same size deficit, they'll be equally as effective in terms of promoting economic growth. "


I would take issue with this Sundial, the effectiveness of tax cuts or more spending depends on the circumstances. Right now, I think we've got enough money on the sidelines so a tax cut does little good. Problem is, a tax hike on the other hand could be detrimental, especially if you raise the rates on capital gains, which are the life blood of economic growth.

On the spending side, it kinda depends on what you spend it on. IMHO, it's gotta be spent on ways that will improve our productivity and increase our GDP. If you introduce politics into the equation, or for some other reason the money is not spent as wisely or managed as proficiently, then the economic growth that might be achieved is minimized to some extent. If you're going to spend billions on high speed rail systems that can never be profitable, or Solyndra type companies that are not viable, then you're certainly not doing as much as possible to improve economic growth.

 

[Trajan]

the answer is no, he didn't belive in consumer stimulus. and he decided to not do his homework and ignored a now even more proven school of economic thought ala- the totally intuitive fact that people do behave differently when they are taxed more heavily. what a shock eh?

The multiplier is blarney.

 

[Remodeling Maidiac]

Will Obama be parting the seas soon to allow the owsites to escape the wrath of the evil republican oppressors?

 

[Rozman]

Let's just keep spending.....
If they had just cut a check, tax free to anyone who paid taxes the year before
in the amount of maybe $50,000.00 and just let us "spend" it that money would
have had a bigger impact then this stupid stimulus which was supposed to go to
shovel ready jobs,and infrastructure.Instead it went into union members pockets.
The Great Obama Slush fund.

 

[oreo]

Boom and bust cycles are common in countries with financial markets. That's because financial markets work differently from other markets. In other markets, rising prices reduce demand, and vice-versa. In financial markets, rising prices increase demand, which in turn pushes prices even higher. As a result, financial markets are highly unstable. Panics and bubbles regularly follow each other.

Unfortunately, these booms and busts effect the real economy, because ordinary people have assets which are affected by the gyrations of the market. When there's a bubble, people spend more, thereby increasing national income, GDP and employment. When values plummet, the opposite occurs.

Bubbles are naturally self-correcting. If a crash leads to a sufficiently deep depression, on the other hand, it can go on indefinitely. In the absence of government regulation or intervention, a financial panic can destroy banks. That, in turn, destroys not just the value of people's financial assets, but their cash savings as well.

In the most recent financial panic, $15 trillion of net wealth was erased. People reacted by cutting spending, which in turn reduced incomes and employment, which resulted in the recession, which reduced income even more.

The government, fortunately, reacted by protecting the banks - so that people's money - their checking accounts, savings accounts, CDs - wouldn't also disappear. This prevented a recession from turning into a depression. People might survive the decimation of their 401k's, but they can't survive not being able to buy groceries, because checking account is gone.

The second thing it did was to spend more into the economy than it was taxing.

This is essential, because the Federal government is the only institution that has the power to increase spending when every other part of the economy is shutting down. When the government spends money into the economy that wasn't taxed, it increases private sector wealth by the same amount. The cumulative effect was to add several trillion dollars to the economy.

While a relatively small amount compared to the losses, it was enough to get the economy growing again. Once the the recovery is secure, it becomes self-perpetuating.

And with your expertise--what to do--when it is the FEDERAL GOVERNMENT that creates--an economic COLLAPSE?--lol--Fannie Mae--Freddie Mac ring any bells?

 

[Chris]

Wall Street's $516 trillion dollar derivatives Ponzi scheme created the collapse.

Not Fannie and Freddie.

Only 2% of American homes were in foreclosure in 2008.

How did 2% of American homes being in foreclosure bring down the world economy?

It didn't.

 

[Sundial]

You lefties are entitled to your opinion about the stimulus, that's fine. But here's what bugs me, it coulda and shoulda been done more effectively, they shoulda managed it better to give us more bang for the buck economically speaking. And I thought we were supposed to get a lot infrastructure work done back then, and now we need another $450 billion? Ticks me off, it's like I'm being lied to.

Doesn't help much either when the president laughs about it and says those jobs weren't as shovel ready as we thought. I'm left thinking either he deliberately mislead us about it or he really didn't know what he was doing. IOW, he was incompetent. Maybe both.

And here's another thing for you guys to chew on. You say Obama spent trillions that flowed into the economy, yet the lower and middle classes are no better off. I guess all that money ended up with the rich guys and the big corps, how come you're not pissed off about that?

The reason I'm not pissed off that the money was wasted - aside from the fact I don't think it was - is that money can't be wasted. Time can be wasted. Effort can be wasted. Resources can be wasted. But money can only be spent. And since spending money doesn't destroy it, the same money can be spent again and again.

How the money gets into the economy in the first place is important, but the main thing is that it gets there.

I'd like to see high-speed rail. But almost any employment - even bigger swimming pools for millionaires - is better than no employment at all - because it not only wastes the talents of the unemployed person, it prevents him spending money that would employ other people as well.

 

[Wiseacre]

You lefties are entitled to your opinion about the stimulus, that's fine. But here's what bugs me, it coulda and shoulda been done more effectively, they shoulda managed it better to give us more bang for the buck economically speaking. And I thought we were supposed to get a lot infrastructure work done back then, and now we need another $450 billion? Ticks me off, it's like I'm being lied to.

Doesn't help much either when the president laughs about it and says those jobs weren't as shovel ready as we thought. I'm left thinking either he deliberately mislead us about it or he really didn't know what he was doing. IOW, he was incompetent. Maybe both.

And here's another thing for you guys to chew on. You say Obama spent trillions that flowed into the economy, yet the lower and middle classes are no better off. I guess all that money ended up with the rich guys and the big corps, how come you're not pissed off about that?

The reason I'm not pissed off that the money was wasted - aside from the fact I don't think it was - is that money can't be wasted. Time can be wasted. Effort can be wasted. Resources can be wasted. But money can only be spent. And since spending money doesn't destroy it, the same money can be spent again and again.

How the money gets into the economy in the first place is important, but the main thing is that it gets there.

I'd like to see high-speed rail. But almost any employment - even bigger swimming pools for millionaires - is better than no employment at all - because it not only wastes the talents of the unemployed person, it prevents him spending money that would employ other people as well.

I didn't say anything about money being wasted, what I'm talking about is it's most effectve use for economic growth and job creation. All that money Obama has spent on the stimulus and everything else, these things did somebody some good, I'm not saying otherwise. But the money could have been more wisely used, and more should have gone to those who needed it most. We could've built or fixed more roads, bridges, and schools, but instead it went to other projects that were far less productive.

You tell me, where'd all that money end up? Who got the most benefit? Trillions of dollars spent, and the 99%ers are no better off, true? We know the big corps got most of it right, they've got trillions on their books. You guys bitch about it all the time, why aren't you mad at Obama and the dems for doing such a poor job of redistributing all that money? Don't be telling me it's the repub's fault, they couldn't do squat about it until Jan 2011. Since the GOP gained control of the House how much spending have they really cut? Not very damn much, the dems squeal like stuck pigs over a few paltry billion in a 3.7 trillion budget.

 

[editec]

Keynes would not only have supported DEMAND SIDE spending.

If the sitution were reversed, he'd have supported SUPPLY SIDE investment, instead of a demand side stimulus.

I know that confuses most of you folks.