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Blockhead confidence
Joined: 02 Apr 2008
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 Posted: Mon Feb 09, 2009 11:59 pm Post subject: |
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Hypothesis:
Taxes are cut.
People save the money, put it in the bank (not under the matress).
Banks become cashed up. But banks are competitive and in a terrible bear market are concerned only with hoarding cash. The result is the money is unspent.
Doing nothing is equal to or better than cutting taxes. |
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mises
Joined: 05 Nov 2007
Location: retired
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| Posted: Tue Feb 10, 2009 6:06 am Post subject: |
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| Ya-ta Boy wrote: |
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| It also means the stimulus is unnecessary. |
Shhhhhhhhhhhhhhhhh!
With 1.5 million jobs being lost in the last couple of months, I suspect things are not going to be all peppy by the end of the year. But it's fun to fantasize. |
No, 2009 will be terrible. You're right. But I believe the mass layoffs will taper off in mid q2. |
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Ya-ta Boy
Joined: 16 Jan 2003
Location: Established in 1994
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| Posted: Tue Feb 10, 2009 7:48 am Post subject: |
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Both you and I, in different threads, have said employment--and by extension, the US economy--have fallen off a cliff recently. The sites you link to indicate a recovery starting later this year. I hope they are right. I don't believe they are, but I'm just a schmuck English teacher. What do I know?
What I remember is that for 30 years we have had periodic 'downturns' and the only thing the gov't was willing to do was to declare ketchup a vegetable so they wouldn't have to actually do anything for the people actually suffering for the poor decisions other people had made. That was the version of capitalism being marketed during my adult life.
I am anti- keep your friggin' hands off me when things are going good but give me a bail out when I screw up capitalism. I am against the idea that gov't bailouts are only for the rich and capitalism (suffering builds character) for the rest.
I do think things are worse this time around since no loans seem to be going out. The other week I saw a TV clip of empty ports. SOMETHING is wrong. Deeper and more serious than other 'downturns' in my memory. I do think a stimulus is needed. I don't think it can solve all the problems. But I do think it has a chance to kick start things. Part (but only a part) of a recession/depression is psychological and gov't can't do much to change that except to try. It may work. It may fail. The object is to try. The alternative is to sit back for 2 years, 10 years, 400 years and wait for things to improve.
As you said a couple of months ago, economics is 20% objective fact and 80% theory....I'd like to amend that. Some significant portion of it is psychological. People have to believe that things will get better soon. If they do, then they begin to spend. Some of it is predictability. Business has to know what the rules are so they can plan ahead. I agree. But some other part of it is on the consumer level. The public in general has to have some faith in their future. Only government has the ability to speak to the public and address those fears and dreams.
IF, IF, IF the sudden plunge in employment were a short-term thing, it wouldn't be worrisome, but it doesn't appear to be that. That is if I were looking at it from a safe place with a decent bank account and a steady income coming in, but IF I were a 35-year old father of two and have just lost my job and have to figure out how to feed the kids and pay for the mortgage on the house in the suburbs, I'd be pretty much panicking at this point.
But that is not my station in life at this point. I'm 59 and single. What I'm looking for is a gov't policy that will a) stabilize the economy b) get people back to work c) figure out a way to support me in my retirement so I'm not living in a cardboard box d) build a future for the next generation...and don't scare me with crypto-nazi fantasies of 3rd Century economic delusions from Austria. Arg! [The Austrian Hapsburgs were a bunch of losers. OK. Anyone can get a bad family. But when you add that dude with the funny mustache, you are getting into the realm of chronic wackydom. Maybe it's just a coincidence, but if there isn't something to balance it, it's time to give up. Austrians should stick to music.] |
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ontheway
Joined: 24 Aug 2005
Location: Somewhere under the rainbow...
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| Posted: Tue Feb 10, 2009 8:11 am Post subject: |
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| Ya-ta Boy wrote: |
| I hope ... I don't believe ... I'm just a schmuck English teacher. What do I know? |
This is why you should listen to those who are not just schmuck English teachers.
The Austrian School of economics is the newest of all Economic schools of thought. It is currently the ONLY school of economics that can explain what has happened and is happening in the economy. It is the only school that predicted the current crisis.
The Austrian School of economics is now the only school of economics. Austrian Economics can just be called Economics.
The others are all Ponzi Economics. It's like comparing alchemy to chemisty, they are so far out of touch with the current science.
Yata, your loyalty to the Democratic Party has cost you your ability to reason and learn. |
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caniff
Joined: 03 Feb 2004
Location: All over the map
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| Posted: Tue Feb 10, 2009 8:55 am Post subject: |
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| ontheway wrote: |
Yata, your loyalty to the Democratic Party has cost you your ability to reason and learn. |
The Republicans have been hammering away trying to maximize tax cuts. Is that a better idea, do you think? |
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ontheway
Joined: 24 Aug 2005
Location: Somewhere under the rainbow...
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| Posted: Tue Feb 10, 2009 9:48 am Post subject: |
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| caniff wrote: |
| ontheway wrote: |
Yata, your loyalty to the Democratic Party has cost you your ability to reason and learn. |
The Republicans have been hammering away trying to maximize tax cuts. Is that a better idea, do you think? |
Since taxes are ALWAYS a drag on an economy, then cutting taxes will always help an economy. That is true, but unfortunately, in this case, it fails to address the current economic crisis. The Democrats and the Republicans are both in the process of looting the national treasury and robbing the average Americans of their present chances for work, investment, savings and a decent life. They are robbing future generations of years of economic growth and burdening present and future generations with a crushing debt that ultimately can never be repaid.
Obama's campaign of "Hope" has become the next step in an era of hopelessness.
The current economic crisis was caused by the Federal Reserve. It was caused by debasing the currency - printing more money that was not backed by gold. This creates financial bubbles that pop and wreak havoc on the country.
This depression was caused by the government, specifically the Federal Reserve, just like all the other recessions since the Fed was created.
Of course, this is exactly what caused the first great depression and its amazing that so many people haven't learned yet.
Now, although we went off the gold standard under Nixon, we are not quite in a pure fiat money situation. That is because the US Government still has very large gold reserves. It is the existence of those gold reserves that has slowed the fall of the dollar to zero. Without the presence of that decoupled gold backing, the current dollar would have already ceased to exist.
Our most recent crisis is not really a separate event from the 1929 to 1943 Great Depression. It is really one continuing roller coaster ride downward due to the Fed.
The Federal Government keeps running huge deficits and borrowing huge sums. This is a major problem that must end.
The Federal Reserve keeps expanding the money supply which debases the currency. This is how we get the "financial bubbles" which means "malinvestment" in economic terms.
Our economy has for too long suffered from massive government subsidies, incentives, disincentives and wrongheaded government programs - the free land for the railroads, the free roads and highways, subsidized nuclear power, rural electrification, TVA, RFD ... that have caused massive malinvestment at the infrastructural level, which is the most incidious kind of economic distortion as it causes huge losses for generations, even hundreds of years.
Social Security and the other government entitlements that have brought the total Federal Government debt to over $71,000,000,000,000 (that's 71 trillion dollars) and growing. These programs have also destroyed a similar amount in investment that would have occurred and hundreds of millions, perhaps over 1 billion new, good, permanent jobs that would have been created worldwide if FDR's evil programs had never been created.
We can essentially lay all world poverty today on the shoulders of FDR and his fascist-socialist New Deal.
So, what we need to do:
1) Abolish the Federal Reserve and go on a 100% gold standard immediately. Eventually, we will have to divide the dollar by 100 as well (you will receive 1 cent in new currency for each dollar of the old) to reset the dollar at nominal levels that are more comprehensible. This will also force us all to recognize that the Fed looted the nation of 99% of its monetary wealth.
2) Pass Constitutional Amendments to prohibit deficit spending and to prohibit net new borrowing (only refinancing allowed) by any level of government for any purpose at any time.
3) Pass Constitutional Amendments to prohibit taxes on income and property by any level of government.
4) Institute a national sales tax to replace all other taxes that have been repealed. This tax will be collected and shared by the Federal, State and Local governments. No other taxes will be allowed.
The national sales tax must have a cap of 10% for the total tax collected and shared.
5) Eliminate all subsidies and all government involvement in the transportation and energy markets, privatize all highways, roads, bridges, airports, waterways. We must end the massive market distortions that have plagued our nation's infrastructure development and set back our living standards, created our foolish, wasteful and environmentally disasterous dependence on roads, cars and oil and with it all the ensuing problems with the oil rich regions of the earth.
6) Repeal most entitlements, fund those that can be financed with government assets and are essential for the most dependent, and then privatize those funds and payments.
These steps would end our current downturn almost immediately and prevent a recurrence as long as the government is never allowed to get out of control again. |
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mises
Joined: 05 Nov 2007
Location: retired
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| Posted: Tue Feb 10, 2009 10:04 am Post subject: |
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| I am anti- keep your friggin' hands off me when things are going good but give me a bail out when I screw up capitalism. I am against the idea that gov't bailouts are only for the rich and capitalism (suffering builds character) for the rest. |
Of course, I agree with you.
| Quote: |
| I do think things are worse this time around since no loans seem to be going out. The other week I saw a TV clip of empty ports. SOMETHING is wrong. Deeper and more serious than other 'downturns' in my memory. I do think a stimulus is needed. I don't think it can solve all the problems. But I do think it has a chance to kick start things. Part (but only a part) of a recession/depression is psychological and gov't can't do much to change that except to try. It may work. It may fail. The object is to try. The alternative is to sit back for 2 years, 10 years, 400 years and wait for things to improve. |
You have to look at how that trade expanded. Americans (and others...like Canadians) took on huge debt to import from Asia. They are now not willing to take more debt, so the trade slows down. This is not something that a stimulus can change. The direction of the economy needs to shift.
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| As you said a couple of months ago, economics is 20% objective fact and 80% theory....I'd like to amend that. Some significant portion of it is psychological. People have to believe that things will get better soon. If they do, then they begin to spend. Some of it is predictability. Business has to know what the rules are so they can plan ahead. I agree. But some other part of it is on the consumer level. The public in general has to have some faith in their future. Only government has the ability to speak to the public and address those fears and dreams. |
In usual circumstances, I would agree with you. However, what we've reached is "peak demand" in the United States. Many people (millions of people) have no more money to borrow to spend. So this time around, the psycology factor is largely not relevant. The average American (Canadian, Spaniard, Brit etc) needs to get savings back up to 8%.
| Quote: |
| What I'm looking for is a gov't policy that will a) stabilize the economy b) get people back to work c) figure out a way to support me in my retirement so I'm not living in a cardboard box d) build a future for the next generation... |
I don't disagree. What I do disagree with is the idea that borrowing a trillion dollars from tomorrow to make today more tolerable doesn't seriously impact the economic future.
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| and don't scare me with crypto-nazi fantasies of 3rd Century economic delusions from Austria. Arg! [The Austrian Hapsburgs were a bunch of losers. OK. Anyone can get a bad family. But when you add that dude with the funny mustache, you are getting into the realm of chronic wackydom. Maybe it's just a coincidence, but if there isn't something to balance it, it's time to give up. Austrians should stick to music. |
When you hear "Austrian economics" don't think of Austria. It is just a reference to where a couple dudes came from (L.V.Mises, for one).
Essentially, what AE is, is micro-economics made large. It is a very useful way of looking at the economy.
...I just found (took me a while) the quote that best summarizes our situation. It is from David Rosenberg, from Merrill.
'This is an epic event; we're talking about the end of a 20-year secular credit expansion that went absolutely parabolic from 2001-2007. 'Before the US economy can truly begin to expand again, the savings rate must rise to pre-bubble levels of 8pc, that the US housing stocks must fall to below eight months' supply, and that the household interest coverage ratio must fall from 14pc to 10.5pc. 'It's important to note what sort of surgery that is going to require. We will probably have to eliminate $2 trillion of household debt to get there,' he predicts, saying this will happen either through debt being written off, as major financial institutions continue to do, or for consumers themselves to shrink their own 'balance sheets'.
In no way does a stimulus help the problems. None. It will just decrease aggregate wealth in the future. |
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caniff
Joined: 03 Feb 2004
Location: All over the map
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| Posted: Tue Feb 10, 2009 10:22 am Post subject: |
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Politically, Obama must be seen as doing something. What would you recommend he do, were you in his shoes?
edit: I know the "return to the gold standard" argument, and I see that side of it. I just don't think it's gonna happen (unless we are in for a really huge shitstorm).
I guess my question is how would you patch things up for the time being? (you've probably already answered this question on this forum, but I'd like the Reader's Digest version).
Last edited by caniff on Tue Feb 10, 2009 10:32 am; edited 1 time in total |
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ontheway
Joined: 24 Aug 2005
Location: Somewhere under the rainbow...
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| Posted: Tue Feb 10, 2009 10:31 am Post subject: |
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| caniff wrote: |
But, politically, Obama must be seen as doing something. What would you recommend he do, were you in his shoes?
edit: I know the "return to the gold standard" argument, and I see that side of it. I just don't think it's gonna happen (unless we are in for a really huge shitstorm).
I guess my question is how would you patch things up for the time being? |
There are no patch ups available.
The steps I have outlined are quite reasonable and modest at this point in time.
Obama's various stimulus plans will make things worse for generations to come and possibly grant Yata his wish of sleeping under a bridge.
The market is voting on the Obama plan today:
Down 4.42%
Dow Jones Industrial Average(DJI: ^DJI)
Index Value: 7,905.60
Trade Time: 1:26PM ET
Change: 365.27 (4.42%)
Prev Close: 8,270.87
Open: 8,269.36
Day's Range: 7,903.93 - 8,269.44
52wk Range: 7,392.27 - 13,191.50 |
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mises
Joined: 05 Nov 2007
Location: retired
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| Posted: Tue Feb 10, 2009 10:34 am Post subject: |
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| caniff wrote: |
But, politically, Obama must be seen as doing something. What would you recommend he do, were you in his shoes?
edit: I know the "return to the gold standard" argument, and I see that side of it. I just don't think it's gonna happen (unless we are in for a really huge shitstorm).
I guess my question is how would you patch things up for the time being? (you've probably already answered this question on this forum, but I'd like the Reader's Digest version). |
Martin Wolf (from the FT) said Obama is "politically frightened" to admit American banks are insolvent:
http://www.nakedcapitalism.com/2009/02/financial-times-martin-wolf-team-obama.html
If Obama were being more honest (or maybe getting better advice) he wouldn't be posing this latest bank plan. It is obscene.
What to do? I don't know. But don't try to prop up failed banks. Let them fail, and help make it orderly. Some say nationalize the banks, I don't know. But don't just give them money. |
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caniff
Joined: 03 Feb 2004
Location: All over the map
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| Posted: Tue Feb 10, 2009 10:37 am Post subject: |
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| What do you foresee happening over the course of the next few years? |
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mises
Joined: 05 Nov 2007
Location: retired
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| Posted: Tue Feb 10, 2009 10:38 am Post subject: |
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I'll post Yves Smith's take on all this:
http://www.nakedcapitalism.com/2009/02/geithner-bank-bailout-plan-fiasco.html
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That one word assessment of the Geithner plan, as previewed in the New York Times tonight, comes from reader Scott, and is good enough to print.
I am so disgusted with this entire proceeding that I am going to dispatch it quickly.
Let's start with the basics. The US banking system is insolvent. Got that? Insolvent. That does not mean every bank in the US is toast, in fact quite a few are probably just fine, and another large group is no doubt hurting and undercapitalized, but a couple of years of not shooting themselves in the foot again would enable therm (via earnings) to rebuild their equity bases sufficiently to proceed more or less as normal.
The problem is that a significant portion of the very biggest banks are insolvent. And on top of that, most of them have very large capital markets operations which have bean the nexus of credit intermediation. The regulators spent the last decade plus being in studious ignorance of those businesses, at least the complicated ones where all the risk resided. The SEC never was very interested in bonds, and the Fed took a hands-off, "let a thousand flowers bloom" approach to risk management, derivatives and what was called innovation. Author and market observer Martin Mayer warned "a lot of what is called innovative is simply a way to find new technology to do that which was forbidden with the old technology."
But the history of major banking crises unambiguously shows that insolvent financial institutions need to be resolved. There are variations on the theme: the government can take them over and recapitalize them, clean them up and re-sell them, a la Sweden; you can wipe out equity investors and bondholders; you can try new twists, like various good bank proposals that have surfaced lately (making new entities out of the deposits and good assets and leaving the dreck with the existing bond and shareholders). While there would be many important details to be sorted out, this is not path breaking, except in the scale at which it needs to occur. And now, having had four actute phases of a credit crunch, the Fed and other central banks have plenty of liquidity facilites ready to deal with any initial overreaction. Rest assured, although radical measures would not be pleasant or easy, there are plenty of models and precedents.
But...here we have another scowling Treasury secretary, with a bit more hair than his predecessor, serving up the same fatally flawed approach as before: let's just throw money at the banks and hope they get better. This is tantamount to using antibiotics to treat gangrene. You waste good medicine and the progression of the rot threatens to kill the patient.
In fact, the state of affairs may be even worse that I thought. I had grumbled about the fact that the earlier leaks of this plan, like the MLEC and the TARP, seemed little more than a sketch, when its success or failure founder on key details.
The elephant in the room is how do we solve the heretofore insurmountable problem that the market price of the bad assets is well below what the banks are willing to sell them for? Paulson was unable to find a way to finesse the problem to get private investors to pick up even a cherry-picked portion of the junk in the MLEC incarnation; in TARP, he (presumably) planned to have Uncle Sam buy the paper at a price the banks would find acceptable but somehow camouflage the subsidy. He abandoned that course of action quickly, perhaps because the magnitude of the payment over market prices would be so large as to be politically explosive were the bagholder taxpayer ever to find out.
There is no evidence in the various elements leaked that this impediment has been overcome, which raises the real possibility of a Paulson-like seemingly bold advance followed by an equally hasty retreat. Inviting investors in with you on the buy side does not address the issue of the pricing gap, unless the deal with the investors is intended to help obfuscate the overpayment to the banks.
Note I have no objection to equity infusions if accompanied by sufficient ownership, controls, and a methodology for the goners, say taking over or putting into receivership. No private equity investor would put 20% into a company without getting lots of goodies, such as veto rights, antidilution provisions, a board seat, etc.
Now in fairness, Geithner may treat the banks more consistently than Paulson & Co. did. But that is cold cheer if the basic approach is still fatally flawed.
In fact, the present course is the worst of all possible worlds. AIG has demonstrated that a player deemed to by systemically important has a blank check. Not only did they get additional dough with few questions asked, they got improved terms on their initial loans. Let me stress, for those not familiar with the ways of deal-land: if you ask investors for money and maintain it is enough to achieve X (get you to break even, get your first product launched) and then come back not having done what you said you promised, the next round is on MUCH more punitive terms. Having a party that badly underestimated its needs come back, get more dough, and get relief on its inital loan is from an alternative reality.
In addition, AIG had given large numbers of staff very large retention bonuses. This is when the loans per employee are $1.4 million. Now the retention bonuses may very selectively be warranted, but they have been handed out like candy, and AIG is know for generous pay, so even if extra comp might have been necessary, query whether at this level. Given the less than rosy hiring conditions in the insurance industry, a lot of these payments appear flat out unnecessary and were thus effectively looting right under the government's nose.
Thus, the banks get funding on an open-ended basis, with no requirement to write down or sell the dreck. And even if some miraculously does get unloaded via this process, we wonder how far it will get to really cleaning up the banks. Ken Rogoff estimates US credit losses at $2.0 trillion; this plan appears likely to fall far short of that, which means we still have a lot of sick banks, just somewhat less so. (We'll need to wait to see how this unfolds, but since the banks have no reason to part with bad assets and take a writedown, this is the scenario they are trying to avoid, we still have crappy assets being funded at fictive prices, but this time by you and me rather than by Citigroup). The failure to clean up the banks and write down bad assets was a big contributor to Japan's lost decade.
Now to get to the punch line, let us turn to the New York Times. The headline "Geithner Said to Have Prevailed on Bailout," is already bad news, since as we have discussed, Geithner is a living, breathing example of cognitive regulatory capture. |
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mises
Joined: 05 Nov 2007
Location: retired
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| Posted: Tue Feb 10, 2009 10:45 am Post subject: |
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| caniff wrote: |
| What do you foresee happening over the course of the next few years? |
I'm actually upbeat.. I've been freaked out that a crises was coming for several years and now that it is here, I feel relieved (not to have been vindicated, but that being in it means we are close to being out of it). We're in a depression and it is very fast moving. Job losses taper off in May/June and growth in negative until early q1-2 in 2010. Then we recover. And depending on how the response to this is (so far, so very bad but I trust Obama to learn from his early mistakes) enjoy our new, more stable political economy. |
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caniff
Joined: 03 Feb 2004
Location: All over the map
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| Posted: Tue Feb 10, 2009 10:47 am Post subject: |
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Will the U.S. become a socialist state? That's Bill O'Reilly's worst nightmare, but it's looking more and more like that's where we're (at least temporarily) heading.
McCain was perhaps right after all.  |
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mises
Joined: 05 Nov 2007
Location: retired
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| Posted: Tue Feb 10, 2009 10:51 am Post subject: |
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| Nah. I suppose most things will be as they were, with some higher taxes and more regulation of finance in both Canada and the United States. Not the end of the world. |
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