Here’s the sticking point with your example–we’re not talking about generalized investment, we’re talking specifically about financial sector investment. In other words, the money is being spent by the top income earners, folded spindled and mutilated, and returned back into the hands of those income earners. Generation of return for **financial **investments doesn’t necessarily imply ANY money flow from the top to the bottom in terms of wages.
Take for example the CDO. (What follows is going to be VERY simplified) This security, the proximate cause of the bank collapse the last time around, was a way to package high-risk, medium-reward mortgages into aggregate instruments that looked like medium-risk, high-reward securities. Because these financial instruments represented a way to convert risky consumer debt into apparently stable and profitable investment, the banks had every incentive to increase the amount (or at least, not control the amount) of high-risk subprime mortgages. So you have investment, profitable for the top class, that’s being financed by increasing the debt of the lower classes.
I think (and Krugman would likely agree), investment into productive capital (as opposed to abstract securities, debt-based securities, or simple cash-hoarding) remains both viable and a way to generally increase the lot of “the 99%”.
Not to put too fine a point on this, but shouldn’t you be working from the other end? Rather than trying to find a theory to fit the pre-determined notion and then maybe facts later, shouldn’t you attempt to sych up historical inequality data to economic results?
You mean, aside from similar patterns in both major stock collapses in the last 100 years? It’s not like there’s a gigantic historical dataset of crashes that happened since the advent of modern banking and investing.
There may be if you include other nations and smaller crashes. As I pointed out in my first post, two points of data isn’t meaningful. If you’re only looking at the Great Depression and now, coming to any sort of conclusion is probably silly. If Krugman did some real research and analysis, including all countries with modern banking, and came out with a strong set of data then sure, but he hasn’t done that.
Actually, that’s not really true. We have reasonably reliable data going back almost two centuries at this point, to the Second Bank of the United States, and a long list of booms and busts. While income and wealth distribution isn’t fully known, it’s been reasonably estimated that far back. And this is, of course, just one country.
That’s probably true, but the problem as I see it is that I never see anyone refuting Krugman with actual data, just accusations of sloppy research and partisanship.
I don’t think income inequality causes economic collapse, and I doubt Krugman does either. He must have been stating that it was either a causitive factor, or a symptom, or both.
Sage Rat has explained how it can be causitive factor, it seems quite obvious. A much simpler analogy is to look at the percieved value of Monopoly money once someone owns all the properties. As a symptom it simply shows that an economic system is failing to support a major component of that system.
Generally because he’s extremely partisan and tends to look for support after establishing his conclusions, which is why he often proudly proclaims bad or misinterpreted datas.
It’s no shame to counter bad math, sloppy research, and unsupported claims by simply point out the flaws. The onus is on him to prove something. And for one small example, Megan Mcardle (who is about as liberal as libertarians get) has pointed out blatant flaws and better records to counter many of Krugman’s statements.
To restate your argument, just to make sure that we are on the same page, you are supposing that investors will invest in investments themselves. That can then loop back into itself and make a little spinning economy of its own, paying out to everyone based on a sort of ponzi scheme. Most of it is never going to actually invest in the investment.
Certainly that’s a theoretical possibility for any market (and probably does happen to some extent), but the problem there is that we know this isn’t the case in our last market collapse.
Your average Joe was speculating in houses, making foolish choices based on an assumption that the housing market could never become a market bubble. And the banks were being just as foolish by letting him do so. But banks themselves were not, in particular, speculating en masse in housing. It was the Average Joe.
Banks were, obviously, including their housing loans in their investment bundles that others could pay into – and that’s why, when the bubble burst, it was able to cause a domino effect. But like I said, mass speculation was being undertaken by the common man, not financiers. Banks weren’t speculating that housing was going to be the next big thing. The Wall Street Journal wasn’t telling the wealthy to buy up Adjustable Rate Mortgage-based investments. It was just one investment of many that they held, but which they ranked as being far less of a risk than it actually was.
We can argue this back and forth all day–did the banks start allowing more risky subprime mortgages because of demand, or because they could profit by selling them off as CDOs. I believe the latter–that is, the existence of and demand for CDOs allowed banks to price mortgages at a lower price level, opening more demand.
Sure, Average Joe always wanted to speculate on mortgages, but the banks (sensibly) didn’t let him unless he had a decent chance of total repayment. That changed.
How am I to prove a statement about apparent motivations, when you’ve made it as clear as day that you think the responsibility was on Joe Average (unsophisticated, beholden to specialists and lawyers when mortgages and financial dealings are involved) rather than on the banks (sophisticated, aware of risks and rewards enough to make profit on them in the general case on a regular basis)?
I mean, the timeline is clear enough to me–CDOs were created as a investment type in the late 1980s, but didn’t really go anywhere until 2000. Suddenly, they shot up out of nowhere along with the subprime lending rate. From 2004 to 2007, for example, CDOs grew from $157b to $571b total extant volume, with a lot of major players seeing 600+% returns if they got in early. In the same time period, the percentage of CDO assets that were subprime went from 5%ish to 36%ish. In the same approximate time period, Credit Default Swaps went from $300b mostly held by banks in 1998, to $62T in 2007. That’s trillion, with a T. This, in my view, was the primary speculation driver of the bubble, because the existence of credit default swaps combined with the existence of synthetic CDOs (which are essentially CDOs that are backed by a CDS rather than actual assets) allowed for the market to essentially pretend to hedge against foreclosures without actually having to have any money backing it.
Meanwhile, home mortgages issued at a subprime rate grew from 8% in 2003 to 20% in 2006, and the total amount of residential mortgages outstanding grew from $6.2T in 2002 to $11.9T in 2008. Also in 2006, 22% of homes were bought for speculation purposes (as opposed to residence or vacation home).
Within these numbers is the basic proof that the financial speculative investments, not subprime mortgages, were driving the bus. The total amount of securities related to the collapse were in an amount of $62-63T in 2008–ther’es no hard data on how much of the CDS market was driven directly by subprime mortgage speculation, because those securities are notoriously unregulated. Regardless, even if every single subprime mortgage AND every single speculative home purchase defaulted in 2008 (a worst-case scenario that, mind you, didn’t happen), that’d only cover approximately $5 trillion, out of a collapse of CDO and CDS total extant values of somewhere in the vicinity of $30-35 trillion.
I don’t think it or not think it. It’s just Occam’s Razor. You are supposing that there was two market bubbles going at the same time, the second of which we only discover now (some five years later), due to speculation that every bubble which forms in some particular industry will also have a matching bubble in the financial world. Why make that supposition? If financiers had some way to know that a particular market was on unsteady footing, then certainly they could always start investing in investments related to that market in a flurry just for the sake of screwing themselves over. But that makes no sense. If they did know exactly the wrong market to start a recursive investments loop on, they’d avoid it, not jump in. And if they did have that power, it wouldn’t have taken this long to figure it out, since Krugman’s theory is that they consistently do it and thereby the tools for figuring out unsustainable markets is commonplace.
Occam’s Razor says that if we know there was one bubble – housing prices – and that burst, and everything went to hell immediately after, well the simple answer is that there probably aren’t secondary nor tertiary factors as well.
I’m sorry, but the CDS/CDO bubble and collapse has been apparent and talked about since day one of the crisis. It’s not “some five years later” we’re suddenly discovering this.
The bubble in the housing market was insignificantly small compared to the bubble in the financial speculative instrument market–I have already shown you the numbers.
Even supposing EVERY subprime and speculative mortgage failed at once, that covers less than 10% of the collapse of financial securities.
The whole point of CDS is that they’re a technical tool designed to insulate the financiers from the instabilities of real-world real property bubbles. Due to poor regulation and too-rosy assumptions, they failed to do that.
Occam’s Razor also suggests that a max $5T value collapse can’t explain a tens of trillions value loss in semi-related security instruments, but apparently tails can wag dogs in your world?