I don’t know how much this answers the OP but …
As y’all know if you read my critique of Neo-Keynesians on this board, I probably come across as from the Vienna School. My criticism of N-K is that now it is the government that is the driving force of the economy (blame Ronald Reagan for this) which is not Keynesian* economics which is that the government spends its way out of recession. N-K thinks that the government should be spending. Period. That’s it. Spend an assload of money to constantly stimulate the economy. What this recession showed, and what the government spenders do not want to admit, is that N-K has basically destroyed Keynesian economics in that the government is so engrained in “the system” and already close to the limit of what it can reasonably spend that there is no room to stimulate that economy during major downturns. The $11,000,000,000,000 stimulus barely made a dent (although that may have been because it was like flushing it down the sewer. Read up on the RFC to learn how we made the same mistake Hoover and Roosevelt did giving money to banks.) So the question is how could the government stem the downward spiral of the economy and what could it have done if it got worse? The Obamaphiles (and it would be McCainphiles if he had won) have to consider the answers are “it couldn’t” and “nothing” respectively.
The day before the Bank of England stepped in as the first real answer to the crisis (and followed soon after by the Fed), I started hearing about letters of credit not being honored. Global trade was pretty close to having a monkey wrench thrown in the gears. And that would have had a ginormous impact on the US.
Interesting. Do you think the N-Ks do this (and I agree that they do) because they don’t really understand the consequences, because it is politically expedient, or because there is an intention of putting the government in so much debt that it cannot react to emergencies? Along with spending in up-times, don’t forget that they are unwilling to raise taxes to improve the budget. (Though Reagan did do this.)
Is it plausible that some companies would have had trouble making current payroll, as their rolling lines of credit were frozen? That seemed/seems to me to be the real nightmare scenario: when payday comes and there’s no check and you get a shrug and a “Sorry. Last week we had every reason to think we’d be able to pay you this week”, that’s real collapse. That’s when the economy has stopped working.
Check my link in post #12 " Withdrawal from money markets were $144.5 billion during one week, versus $7.1 billion the week prior. This interrupted the ability of corporations to rollover (replace) their short-term debt."
I think that N-K’s like those on this board do this in part because they misunderstand Keynes theory. But considering how many N-Ks are professional economists, it think its the theory that if a little is good then a lot is better viz. if stimulus is good during recessions then it must be great during good times to get an even BETTER economy.
The problem is that even N-Ks admit deficit spending is not stable long-term while at the same time it is impossible (in their mind set) to pull back from the spending. While raising taxes may be an option, I think at a certain point you hurt the economy taking money out of the hands of the people. Not to say capital-gains and corporate taxes should not be re-examined, but lets look at the Stimulus Bill. If instead of the government deciding how to spend the money, it would have worked out to about $1500 per American. My family would have recieved $4500 for Me, Mrs. Cad and Cad Jr. Imagine if every American got that as spending cash. How much would that have stimulated the economy. Not to say that should have been the solution but the point is that at a certain point, taking the money out of the hands of the people spending money directly is more harmful than helpful.
I don’t think that N-Ks are intentionally trying to hurt our future economy. I just think that they feel they can drive 120mph and never get into an accident. When something like Greece happens it’s just like an accident i.e. they always happen to other drivers.
What was so bad when we let the first bank fail? Should we have saved it instead? What happened here?
I always hear people say that we SHOULD have just let the banks fail because “it would correct the market” in terms of letting the crap die and the strong survive – a sort of natural selection. Why would this be a bad idea? Is the idea to float the bad stuff just for a bit to take a risk and hope that you can emerge from it better than you would be via market correction by keeping things flowing?
What is the main difference between Keynesian economics and Austrian economics? I hear Ron Paul supporters talk about this stuff a lot, too. I tend to get the impression that the Austrian school is loaded with crackpottery, but I don’t know for sure. In school we always learned the Keynesian stuff.
The thing to remember about Keynsian economics is that the government only uses half-assed Keynesian economics.
Keynes said that when the economy was good the government should build up surpluses to be used when the economy was bad. Keynes died in 1946. The government has never built up surpluses, but Keynesianism has always been a great excuse for borrowing. But now some people want to blame the problems on Keynes.
Did Keynes ever see a television commercial? Did Keynes ever say anything about planned obsolescence?
Technology changes economics but economists regard money as more important than technology or natural resources. I asked a PhD economist to explain how a car engine worked. He could not do it. They get to talk about the effect of computers on the economy.
The economy is out of control and running on inertia. Nobody knows what is coming but nobody knows how to stop. Ideas over 50 years old are barely worth anything.
Probably not, but he certainly heard radio commercials. Not much different.
And the term planned obsolescence goes back to 1932 (Cite.) so he knew about it. That increases consumption - so what. He did know about breaking windows.
How does technology change economics again? My daughter, who as an economics degree from Chicago, and I, who have a PhD in CS and work in engineering, teach a class on the economics of IC development. None of her known concepts need to be modified in the slightest. I also don’t get what knowing how a car engine works has to do with anything. Economists today need to understand programming and modeling, but while she knows how to program pretty well she doesn’t know much about computer architecture. I do, and it has no relevance to economics.
I suspect you are much under 50. Well, in any case so much for democracy, and idea slightly over 50 years old.
Since no one has answered yet, I’ll make a try, but I’m sure someone else can do better. Much of what you want about questions 1 and 2 have been covered.
There were two big problems. A lot of the assets banks had were in mortgage backed securities and the like. At the time of the crash there was no market for these things, and so they could not be priced. Banks have reserve requirements - it was not clear to them that they had enough, and so they did not want to lend to make the situation even worse. Thus the credit freeze which was mentioned above.
A lot of banking involves inter-bank lending. If you think that a bank asking for money might go belly-up at any time (and there were lots of rumors) and if you thought the government was not going to step in, there would be no lending - which made it more likely for the weak banks to fail.
There were lots of states and municipalities which, to increase the rate of return on their cash, put it in various instruments, sold to them by banks, which turned over frequently. The freeze meant that these could not be sold which meant that the governments could not get the money they needed to function. Remember, many taxes come in quarterly, but outgoes are continual.
Plus, you’ve already seen how businesses borrow for short term cash. If all the banks went under, or froze, they couldn’t and would not be able to make payroll, and thus have to either not pay or layoff workers.
About the only justification I’ve ever seen for letting the banks fail is that it serves them right and would keep them from doing it again. I haven’t seen anyone reputable show how it wouldn’t have led to a collapse.
BTW, one of stupidest things Romney said in the debate was criticizing Dodd Frank for identifying some banks as being too big to fail. They are because they are - not identifying them does not change this fact in the slightest. I trust that when he was reading balance sheets he didn’t yell at people showing losses as if to not show bad news would make it go away.
I can’t answer about Austrian economics. I don’t want to risk the shreds of my sanity by reading about it in more depth - everything I have read about it makes it seem extremely bogus, especially as used to Paul and other nitwits.
I guess my next question is why everyone acted like this was some big black swan out of nowhere?
I mean, from my understanding, much of the problem came from the notion that house prices would continue to go up. Why did they suddenly go down? Did it just hit a natural stopping point where people were unwilling (based on utility) to play that kind of market at those price points, thus changing its dynamics? Why didn’t it just stabilize at that point? I don’t understand what caused it all to suddenly explode and cascade into economic freefall and why “nobody saw it coming.” Was it because they were making ridiculous bets on these?
Was it a tragedy of the commons situation where people knew it was coming but just not when, and were siphoning profit as long as they could? Why didn’t more firms play it safe and realize that making bets on housing prices going up like that was dangerous and they were taking out so much risk?
If this is indeed a huge “bet”, how does value get destroyed here? Usually in a bet, there’s a winner and loser. Did someone just “win big” during the collapse while the rest of the country suffered? Instead of bailing out the banks with taxpayer money, couldn’t they just figure out some way to unwind the bets from the banks?
I am trying to understand when a bet destroys value vs. redistributes value, on that latter point.
Here is a response over a PM from one of my friends on Facebook a long time ago when he was talking about this:
"I also think the banks and bankrupt companies should have been allowed to fail. If they make bad decisions, they should suffer the consequences themselves, rather than forcing others to cover for them. This kind of accountability is necessary for a free market to work. You only have accountability if you actually pay for all the damages of your actions. Instead, we have a system now where we can just pass the torch up the system into the federal government (which is also going bankrupt) to postpone the damage and compound it into a future, even bigger collapse, rather than allowing the market to rebalance itself naturally.
Yes, there would have been immediate negative effects, probably on everyone. But I think long term it works out better to maintain accountability. Because on the flip side we now have a system where greed, corruption, laziness, and carelessness pay off. That’s an anti-productive precedent and I expect it will have terrible long-term effects on our economy."
True Keynesian economics is similar to a proper house budget. Save in times of feast to spend in times of famine. I don’t think that anyone can argue that that is not a good poicy so what we really need to look at is neo-Keynsian vs Austrian (or Vienna) economics. Austrian economics believes that an economy is the sum total of its parts, that is that by looking at how individual players in the aggregate function in the economy that one can understand how “the economy” works. Neo-Keynesians on the other hand believe that economics is so comlex that it is its own creature and needs to be studied through modeling and statistics. What I find interesting is that the Austrian School gives an almost textbook example of how microeconomics work and Keynesian economics is likewise the textbook model for macroeconomics.
The other difference is that the Austrian School believes in laissez-faire. Since the economy is merely the total of the individual transactions, then with no intervention the economy should reach stability. Understand that this economic theory was developed during the growth of positivism and it was thought that as long as a system followed rules then the system could be described completely an its ultimate outcome known. The biggest problem I have always found with the Austrian School is that I was never convinced that their policies were intended as best economic practice or intended to simplify their theories by limiting the number of variables.
Keynesian economics believes in government intervention. It started out from the ideas of Marriner Eccles to counter the Great Depression by government spending and we already see the problem. Many would argue that it wasn’t New Deal policies but rather WW2 that ended the Depression but Keynesians always play the what if game and invariably in their scenerios, the economy would have been worse had they not intervened. The key to Keyesian economics is aggregate demand and what we see is the government control the economy (Keynes originally limited himself to unemployment) as the driving force of demand instead of the Austrian School which believe aggregate demand is the sum of all of the microeconomic decision. So while you have Keynesians like Paul Krugman that looks at the economy through fiscal policy, there are others that view economics through government spending (Democrats*) or supply-side economics (Republicans*). The advantage of Keynesian economics is that relatively few people can have a major impact on the economy since control is at the macro-level. The problem is that most of the people making those decisions have no fucking clue of what they are doing.**
*As a general rule.
** The example I give is the RFC. At the time the RFC was created by Hoover, most banks made money through interest on loans. Hoover & Roosevelt gave banks money with no strings and assumed they would continue making loans. The banks say thank you and take the money and start investing in financial instruments for their own benefit and the credit crunch worsened. In the current economic crisis we decide to give money to banks that got into trouble by investing and not lending (loans being traded as derivatives and securities rather than for the interest) and like giving meth to an addict, they keep the money and the credit crunch continues.
If you haven’t read “The Black Swan” you should. That guy called it. But it did not come from nowhere. Krugman had been warning of the effects of the end of the bubble for some time, and recommended Fed policies, such as raising interest rates, which might have led to a softer landing. As you mention, when people’s bonuses depend on them being optimistic, it is hard for them to face reality.
I’m not totally sure about this, but loans with low teaser rates were beginning to reset. These loans became unaffordable for lots of people. Plus, prices can’t go up forever. As more and more people were locked out of the market due to high prices the prices would stabilize, but a lot of people assumed it would go up. Plus a ton of people were consuming based on home equity loans - as soon as prices stopped rising they stopped consuming as much, and things got weak. Or it could have been like when the Coyote discovers he is in the air well above the bottom of the canyon.
Greenspan was holding interest rates low partially to help Bush. That meant people were looking for high yield investments, and mortgage backed securities were just the thing, especially when the ratings agencies gave them AAA ratings. The demand for these drove the mortgage companies to write ever worse mortgages. Then there was a lot of leverage, and insurance.
Say you have $100K in investments. The market crashes and you now have only $80K. One person selling low affects the value of your stock also, even if you haven’t sold. Now, a couple of things can happen.
People panic and sell, which drives things down even further and locks in their losses. The best advice at the time was to not look at your statement. I didn’t, and I made it all back.
People who have to sell, for instance the retired, cut consumption, as do those planning to sell some of their investments for consumer purchases. This drives down consumption.
Companies, seeing the market drop and knowing that this reduces consumption begin to retrench, by freezing hiring or cutting staff. Those people now are really going to cut back.
How many people are going to have to suffer to teach the banks a lesson? Thanks to regulations we went for almost 80 years without a major problem. Get rid of them, belittle them, and boom. And of course there was greed and all that other stuff before this. If you are going to punish anyone, let’s throw the bankers in jail and bail out the banks, and get some tough regulations in place to try to keep it from happening again. Of course this cuts down the short term profitability of the banks - tough. As it stands if we followed his advice the people who put us in this mess would have been fine while the innocents would have suffered even more than they did. You remember AIG - the very people who screwed up were supposed to get big bonuses to retain them, since only they knew the secrets of the crash.
It is not like there wasn’t greed before this - see Enron, for example.
To answer your first question, yes, the economy was on the verge of collapse. In fact, some would argue that it did collapse.
It is my understanding, and my recollection, that the unemployment rate was not a factor until after we were already in debt over our noses from the previous administration’s overspending/under-collecting, and the subsequent discovery that our banks had been robbing us all blind. Suddenly finding ourselves quite a lot less well off than we’d been lead to believe, many of us stopped shopping, which will slow an economy, then we got into more debt to cover the money the bankers had “misappropriated,” which caused the International Bank to downgrade our credit rating, which made us all even more afraid to spend money, then there was the mortgage thing which sent property values into the toilet and threw a lot of decent people out of their homes, often because they’d lost their jobs because everybody was laying off as many people as they could spare, and we continued in that downward spiral until the President was able to stabilize things somewhat by negotiating with the banks and our major corporations, and providing some stimulus relief.
Of course we’re still not out of the woods by any means, and a lot of us are unemployed, but we’re not all standing on the street corner holding a tin cup either. And that’s a good thing because I don’t need the competition.