I don’t see the reasoning in this. I don’t see the expectation of haste.
The entire recorded history of large-scale financial bubbles and collapses has always worked differently. I know of literally zero exceptions. Over the years of prosperity, people get more and more irresponsible with borrowing and lending, until asset prices are inflated well past any reasonable value. The illusion holds for several years based on nothing but faith, but eventually reality sets in and the crash comes–almost like Wile E. Coyote not falling until he realizes he’s not standing on anything. The crash is hot and terrible, and everyone becomes fire shy from their serious burns.
Tolerance for risk moves from one extreme to the other, from irresponsibly high to irrationally low. Once that shift has occurred, the story is set: We’re left with a generation of depression-raised penny-pinchers who know how to save. And then their children and grandchildren and sometimes great-grandchildren, who have no personal memory of the previous crisis, go and do the same thing again. But this process of risk tolerance relaxing enough for people to jump willingly into the easy credit parade again takes a long time, decades even.
So far as I know, it’s never once happened that a seriously burned economy has gone out and got itself irrationally exuberant quickly again. The Fed will have to unwind, of course, but quickly? The stock market is up, and GDP is now (in all probability) rising. But unemployment is rising, the real estate markets (both commercial and residential) are still in trouble, banks are still failing, private investment is still stalled from the troubles with banks, personal consumption hasn’t recovered, and so on. These are serious problems, and I can’t possibly see the banks looking at this situation and suddenly deciding as a group to send dollars flying around quickly again. That just doesn’t make any sense.
I disagree that it would result in a lower standard of living, not if we’re at a 9.8% unemployment rate and rising instead of a stable 5% rate. You’re using the wrong baseline.
These arguments make a certain sort of sense when the economy’s healthy, but they don’t make any sense when our labor force isn’t being utilized. Rising costs are a real bite, but a bite that’s made irrelevant by the context: we’ll take a hit from higher imports, but not nearly as big a hit as from leaving our most valuable resource sitting at home reading the unemployment page of their nearly bankrupt city paper every day instead of actually going out to work to make stuff. Real wages might decline some, yes, but a weaker currency will put more people to work, the gains of which will compound throughout the economy.
Well, okay. I don’t agree with all the political perspectives, but I see where you’re coming from.
But my point on this has always been that if we can’t be expected to do the right thing in a crisis, then why should we be expected to do the right thing afterward? Along with interest rates, we’re eventually going to have to raise taxes, too, not just for Obama’s spending, but also for eight years of W spending that he never bothered to pay for. I’d rather have the party that’s willing to pay for what it wants to spend instead of the party that believes en masse that deficits don’t matter when their own guy is in the White House. The sole exception I can think of from the entire Republican Congressional delegation is Ron Paul, and he’s an odd duck, being one of those very people who are now trying to undermine the Fed. Thankfully, he’s a very small minority right now. From what I’ve seen, he’s only got a few dimwit Demmies with him, and I don’t think that situation is likely to change too much.
In any event even if you take that episode as an analogy it suggests it’s premature to worry about new bubbles. The dot-com bubble burst in 2000 and the housing bubble really got going only around 2004. The equivalent year in today’s context would be 2012. Of course the current crisis is a lot worse than 2000 and recovery will take a lot longer, let alone future bubbles. Whichever way you look at it it’s way too soon to worry about bubbles today.
A typically astute pieceby Martin Wolf arguing that the panic over the dollar is overdone and that reducing the dominance of the dollar may benefit both the US and the world. Whenever the hysterics run amok on the WSJ editorial page, Wolf always seems to have the best-argued response.
Which raises the question; why is there such a big difference between the quality of the commentary at the WSJ and FT? They are by a wide distance the two leading financial papers in the world and the reporting in both is superb. In the FT the commentary, with the likes of Wolf and Brittan, is equally good so why does the WSJ have such a sorry excuse for an editorial page?.
I’ll bite on that for a separate topic, as you’re quite right. The target audiences are nearly identical, but WSJ -in particular its American edition (at least as I read it back 15 yrs ago) has an editorial page that verges on self-mockery.
Whereas the FT is quite liberal/libertarian, but in a highly rational and pretty even handed fashion. (In particular after they booted that loony WSJ type American bitchy, Shlaes).
The countries that are shifting away from the dollar are not doing it immediately, and they are moving to ‘basket currencies’ which will have the dollar in the basket.
Our serious debt holders like China and Saudi Arabia do not want the dollar to tank because they are holding a large amount of dollars. The reduction in the value of the dollar is a reduction in the value of their investments in dollars. They also have to find customers to buy their dollars, so getting out of dollars isn’t as simple a proposition as you might believe because moving a millions is one thing, moving a billion is another and moving a trillion is another matter entirely. To tank the value of the market would make it a buyers market and people would snap up the dollars that are coming up on the market thus slowing its descent.
Dumping the dollar is in no one’s best interest, at least no one who could seriously rock the dollar value, because those who can rock it are those who are heavily invested and they’d have to take a definite loss on the trade. Only way it would happen is for strategic purposes, but then again China the most likely able to pull such a thing off depends on western consumption to buy their goods.
So we are likely to see the end of dollar hegemony in our lifetime, it doesn’t necessarily mean the end of the world. Yes, we’ll see inflation, as we have our entire lives.
Yes, I’m talking more about the simple equation of exchange, MV=PT. The Fed has injected what, 1.5 trillion dollars into the money supply? From 900 billion? It did that to counteract a slowing velocity. The U.S. doesn’t have inflation right now because all that liquidity is not moving - M has expanded while V dropped. But when that money starts moving as the economy picks up, the money supply will expand, and prices will start to rise.
If your argument is that this will be a slow, L shaped recession, I could buy that. That at least seems like a reasonable possibility, and in that case I would agree that inflation is not a big problem for the immediate future and modest rate increases over a longer period of time will solve the problem. But the Obama administration has based all its forecasts and economic plans on this being a rapid, V shaped recovery. They’ve forecast continual growth of over 4% per year in the out years of the administration. They had forecast 3.6% growth for next year. That’s a pretty rapid recovery.
As for the likelihood of another bubble forming… If the economy does grow at 3.6%, and then the government dumps another $400 billion in ‘stimulus’ money on the economy (the amount that will still be left to spend next year), that could be a good start at overheating the next business cycle.
That’s the way it used to be. But that was before we had the kind of safety nets we have now. Not knowing how you’ll find your next meal has a way of cleansing the mind.
My fear is that this recession is going to teach one big moral hazard after another. We just teaching the banks and auto companies that they can be as wildly irresponsible as they want, and nothing really bad will happen to them. We’ve taught people that if you really want a secure job, you should work for the government. We’ve taught them that home speculation pays off, because if you time it right you’ll make it rich, and if you time it wrong, well, the government will either let you off the hook or even reward you by negotiating your mortgage down.
This was a recession that was caused by speculation, and our response was to reward all the speculators. What makes you think this is going to be some sort of big disincentive?
As for the low savings rate - I suspect that has more to do with people knowing that they’ve got a big damned safety net under them. Why save when the government will look after you if you’re old, or if you get sick, or even if you just screw up and lose everything because you were an idiot?
The fact is, we have low savings rates because we’ve made low savings/high consumption economically rational behavior. We incentivized it. If the incentives are still there after the recovery, I don’t see much changing. Perhaps around the margins.
I hope I’m wrong. I hope people have suddenly discovered fiscal responsibility and the concept of living within their means. On the other hand, their demand that the government borrow another trillion dollars on their behalf and spend it giving them cheaper health care does not bode well for a major sea change in fiscal responsibilty.
“What happened to you in the big crisis of '08, Bob?”
“Well, my wife and I had been flipping houses for a few years, and made a couple of million bucks. We got cauught with three million in real estate when the floor fell out. Luckily for us, they were all mortgaged at 100%, so we threatened to walk away. The government forced the banks to renegotiate all our mortgages at the new value of the property, so we didn’t lose a thing. The bank took the hit, but then the government bailed out the bank. I guess no one got hurt by it at all.”
“How about you, Steve?”
“I lost my job, but the government gave me a full year of unemployment, paid for my way back to school, and then I got a stimulus job at 30 bucks an hour picking weeds off of boulevards.”
Yeah, that’ll teach 'em.
I don’t expect either from the government. I generally view government as incompetent. That’s why the federal government should have as small a budget as is consistent with the need for mutual defense, courts, and such minimal social programs as are needed to maintain a civil society and keep people from starving in the streets. The structure of the U.S. government makes it particularly bad at technocratic governance.
That was the argument in California for the last tax increase. And the one before that. And the one before that. And the one before that. How’s that working out for them.
My argument against tax increases is that the U.S. government seems to only be constrained in it spending by political pressure when the deficit gets too large. If that’s the case, then raising taxes will do nothing except grow the size of the government. Deficits will still rise until political pressure builds. And given how big it’s gotten, it appears there’s very little political pressure left.
The one short period of fiscal sanity was during part of the Clinton administration, but that only happened because of two things - the ‘peace dividend’ and the dot-com boom which drove up government revenue at a fantastic rate. The government couldn’t spend fast enough to keep up, so suddenly there were surpluses. But it was also because the last six years of Clinton’s presidency were carried out with a Republican controlled Congress, so there was institutional gridlock. Had Clinton has freer reign, there would have been no surplus despite a huge boost in government revenue. There would have been a universal health plan, no welfare reform, and other big ticket spending items.
So here’s my thing: How about the government show the fiscal restraint FIRST. How about a bill that says that every dollar in new tax raised must be met with a dollar of spending cuts? Or even ten cents in spending cuts?
I’m sorry, which one would that be? Surely you’re not talking about the one that plans to double the U.S. national debt over the next eight years?
The Republicans were really bad fiscal stewards of the economy. But what this election has reminded everyone is that for however bad the Republicans are, the Democrats are worse.
That’s what I’m expecting, yes. GDP is working its way back up, but the fundamentals of the economy still haven’t recovered.
That’s not a disincentive, but even the concern of moral hazard has to be balanced against other restraining forces, including the regulatory agencies, the traditional banking sector, and foreign investors, all of whom remain gun shy. I have more hope for regulatory reform than some others, but even if that falls short, all potential counterparties to the big financials are not going to forget what happened when they’re drawing up new contracts.
These strawmen are particularly bad. You normally dress up your fallacies a little more convincingly.
Does it even have to be said that the vast majority of home foreclosures are not residential speculators? Does it need to be mentioned that good public works projects can be found in a nation where infrastructure disrepair is at such a state that big bridges literally fall down? Do I actually have to write out, explicitly, that in a time of 10% employment/17% underemployment and rising, with functioning but still incredibly tight credit markets, with bank failures every week, with the real estate market still suffering waves of foreclosures, and with a health care system that’s so dysfunctional and costly that health care problems are a significant factor in the majority of personal bankruptcies, that people are genuinely suffering?
Well, yes, I did need to mention that. Obviously, you hadn’t noticed. Look around, Sam. People are genuinely suffering.
You are free to pull a couple entirely fictitious people out of your ass to mock them. It doesn’t change the depth of this recession. This is the worst since the Depression, and yes, our fail-safes are much better than they were, but the fact that human misery has been mitigated by our superior institutions does not mean that the people who are losing out right now are going to skate to prosperity and forget all about it. This isn’t even to mention the absurd contradiction of believing that the government is fucking everything up, but that even losers will be okay afterwards–you can’t even keep your criticisms straight, let alone the facts.
“Generally.” That’s a good word. You think the US government does just fine when it helps govern distant countries with bombs and bullets. It’s governing ourselves that you think we’re poor at.
Complete nonsense.
The problem with California is that they couldn’t raise taxes. They need only a simple majority for spending increases, but require a super-majority for tax increases. And now, because of that, they have to cut spending in the midst of recession, which even the most conservative economists must admit is contractionary and will compound the downturn. Not because they kept raising taxes, but because they couldn’t when they should have done so.
We spend almost twice as much per capita on health care as any other advanced nation, without even providing universal coverage as every other advanced nation does. And you cite the fact that we let things get this bad as a budgetary success?
Even without welfare reform, we would be saving gobs and gobs of money if we’d dealt with our medicinal problems 15 years ago instead of letting prices rise faster than inflation for that entire time period.
It’s only “reminded” people who were ideologically predisposed to believe that horseshit anyway. The facts, for those who are actually interested, are very different.
The vast majority of the deficits that Obama is facing right now are inherited structural deficits. I’ve seen estimates that Obama’s contribution is as low as 10% of what we’re facing this year. He’s adding to it at present, yes. He’s following standard macroeconomic theory in doing so. You can disagree with the theory, but you can’t fault him for being irresponsible when he’s following the playbook to the letter. He even went back and allowed W’s tax decreases to continue until their originally legislated expiration. That you personally believe these guidelines are wrong (as is your choice) does not reflect on Obama’s fiscal responsibility. Not in the slightest. If he starts planning to build a giant golden statue of his ass in Hyde Park after the economy recovers, you can bitch about it then.
In 2001 Bush inherited a budget surpllus and a fiscal situation where for the first time in many decades the national debt had been paid down in the previous couple of years. A Democrat was responsible for that after he’d inherited record budget deficits and a skyrocketing national debt from a GOP President(s). Bush then spent like a drunken sailor, the largest spending increses in history, while at the same time slashing taxes. The combination of huge spending increases and huge falls in tax revenues caused record budget deficits. But even worse from this were the bubbles created by his disastrous management of the economy, the bubbles got so big and the economy got so out of whack that when they burst data from the resultant crash showed that the economy was declining faster than it had in 1929. Bush responded by allowing the Treasury and the Fed to flood the financial system with truly historic amounts of liquidity and guarantee all bad debts that American banks had run up. Here’s how much Bush had promised to pay out for by November 2008 and a comparison of other large bills the government has had to settle over the years :
World War II: Original Cost: $288 billion, Inflation Adjusted Cost: $3.6 trillion
Total cost : $7.52 trillion.
Nov. 24 2008 (Bloomberg) – The U.S. government is prepared to provide more than $7.76 trillion on behalf of American taxpayers after guaranteeing $306 billion of Citigroup Inc. debt yesterday. The pledges, amounting to half the value of everything produced in the nation last year, are intended to rescue the financial system after the credit markets seized up 15 months ago.
The unprecedented pledge of funds includes $3.18 trillion already tapped by financial institutions in the biggest response to an economic emergency since the New Deal of the 1930s, according to data compiled by Bloomberg. The commitment dwarfs the plan approved by lawmakers, the Treasury Department’s $700 billion Troubled Asset Relief Program. Federal Reserve lending last week was 1,900 times the weekly average for the three years before the crisis.
When Congress approved the [TARP](http://www.saddoboxing.com/boxingforum/redirect-to/?redirect=http%3A%2F%2Fwww.ustreas.gov%2Fpress%2Freleases%2Fhp1207.htm) on Oct. 3, Fed Chairman [Ben S. Bernanke](http://www.saddoboxing.com/boxingforum/redirect-to/?redirect=http%3A%2F%2Fsearch.bloomberg.com%2Fsearch%3Fq%3DBen%250AS.%2BBernanke%26site%3Dwnews%26client%3Dwnews%26proxystylesheet%3Dwnews%26output%3Dxml_no_dtd%26ie%3DUTF-8%26oe%3DUTF-8%26filter%3Dp%26getfields%3Dwnnis%26sort%3Ddate%3AD%3AS%3Ad1) and Treasury Secretary [Henry Paulson](http://www.saddoboxing.com/boxingforum/redirect-to/?redirect=http%3A%2F%2Fsearch.bloomberg.com%2Fsearch%3Fq%3DHenry%2BPaulson%26site%3Dwnews%26client%3Dwnews%26proxystylesheet%3Dwnews%26output%3Dxml_no_dtd%26ie%3DUTF-8%26oe%3DUTF-8%26filter%3Dp%26getfields%3Dwnnis%26sort%3Ddate%3AD%3AS%3Ad1) acknowledged the need for transparency and oversight. Now, as regulators commit far more money while refusing to disclose loan recipients or reveal the collateral they are taking in return, some Congress members are calling for the Fed to be reined in.
Obama inherited this mess last January. The ongoing deficits are almost all down to the previous disastrous eight years and any room for fiscal maneuver has been hamstrung by the huge fiscal and monetary problems Obama inherited, his hands are basicallty tied in terms of future spending as just getting out of the current mess dictates ongoing future deficits, spending etc. Obama’s total spending increases on legislation he alone is responsible for currently totals $65 billion, a drop in the fiscal bucket and a tiny fraction of the money Bush blew in his initial budget. Since January 2009 our fiscal problems have suddenly become relevant to Republicans, but if you look back to when the US fiscal situation started to deteriorate, 1980, and look at the way various Presidents have handles it since then, it’s very hard to make a case that Democrats have done a bad job and Republicans have done a good job, but very easy indeed to make the opposite case.