166 comments on DrumBeat: December 13, 2008
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166 comments on DrumBeat: December 13, 2008
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It's not his credentials that would make him right or wrong. Just ask for the points in the argument itself. You're asking for an argument to be proved by Authority, begging for an Ad-Hom argument to start up.
That said,
The solution you refer to sounds sensible.. it seems that money trickles up, not down, and so should be planted down low in the economy. Throw water at the base of the fire, not on the biggest flames, right? My question is how could this be best expressed; in WPA-type jobs programs to catch the recently unemployed and so get critical infrastructure jobs underway while keeping families from falling (further) apart? Instead of direct Mortgage-forgiveness, is there a better instrument that encourages the best corrections for mis-valued housing stock, and doesn't spur the superdevelopment of more cheap construction?
Bob
FWIW...there was a study awhile back that found increasing food stamp allotments is the best way to stimulate the economy. People use food stamps, they don't hoard them. And the money stays in the US, a lot more than middle-class tax rebates do (that might be spent on new TVs or whatnot).
What about the possibility of competing currencies? Like what they had in Austria during the great depression. That got the town moving pretty quickly again till the authorities stepped in. Money is a human invention to facilitate trade of goods and services.
People can always use other things for trade and exchange, such as cigarettes, gold coins, alcohol etc.
At a local level, a lot can be done to stave of deflation if people chose to innovate and apply new ideas.
That should be fine, right after the average weight of a US citizen has returned to normal and the obesity plague has resolved.
Ironically, the poor tend to be more obese than the rich. Junk food is cheap, while fresh fruit, vegetables, and meat are expensive. So increasing food stamp allotments might actually reduce obesity.
Exactly..
you can't buy McD's with food stamps.
"You can't buy ammo with food stamps"
The Milagro Bean Field War
Funny book, bad movie
Well give it just a bit of time, they are hard and fast into their 1$ menu, only a matter of time before they take foods stamps and government vouchers. They are going to be the new soup kitchens. The planning and infrastructure are there, so a grant to feed people from the government is no different than collecting cash. This is, at least, for the first part of the slide down Classic capitalism.
So it gets bad, Obama wants to help, he sets it up so you present your id, and get a free meal, and the government prints some dollars to pay the McDonalds corp. Far fetched right? I can picture a time when the drive thru becomes the walk thru for free food.
Don in maine
"Far fetched right?"
Not really, I could see it happening.
Whether, where and how much the government decides to inject money into the system is again a policy decision.
The government can give money to banks, big corporations, small businesses, middle-class homeowners or poor people on welfare. It can choose to give money to all of these, some of these, or none of these.
The point I'm trying to make is that, if it wants to, it can create out of thin air $1 trillion, $10 trillion or $100 trillion and lavish it on all of the above. And it is a mistake to think that wouldn't cause inflation.
$100 trillion. Hmmm. Sounds like a lot. I assume you were just trying to make a point and so picked what seemed to you an incredibly high figure to make it.
And I think most people would be pretty much in your camp.
The trouble is that even hundreds of trillions of dollars may vastly underestimate the amounts being sucked under by hedge fund schemes.One estimate I've seen was $1140 trillion. But, given the secretive nature of these things, it could be much more than even that.
As long as the amount going into the toilet is less than the amount flushing down, we still have net loss of money in the system=deflation.
And when do you stop? If not at $100 trillion, at a quadrillion? Unfortunately zeros after ones are cheap.
Gee, A party in my name that i haven't been invited to. Where's the booze?
First: VK cites my reaction to a LondonBanker article called Deflation is inevitable, which can be found, among other places, at The Automatic Earth.
Doughboy, it's a mistake to think that the US can print whatever they want, at least for now. Big Mistake.
All US debt that is sold abroad goes through the bond markets, and when you print as much as you want, they will kill you. Simple. Murder all international trade, and you can print what you fancy, but then you have an entire other set of problems to deal with, like no buyers. Given that the US for the past decade has survived solely on international deb t purchases, I often wonder what is hard to understand about that.
Not that it would matter much either way: the gambling debt is so astronomical that printing presses nor helicopters could keep up once the chips start falling down.
Hi Ilargi,
It's great that you've popped over here for a bit of play. I wouldn't dream of accepting your challenge one-on-one (I've seen too many episodes of Zorro to forget what can happen to the shirt-fronts of those so foolish.) Besides, I pretty much agree with everything I've read of yours so far, at least to the extent that I could follow it.
What I have is a question, posted a few days ago over on The Automatic Earth.
In brief:
It seems to me that all of the various 'bail-out' funds must eventually wind up in the pockets of actual individuals, or institutions consisting of individuals.
And, if so, then who are they? Are they Arab Sheiks, Columbian Drug Lords, Sovereign Funds, Paulson's cronies, or just who, precisely? Is that even knowable and traceable in the first place?
Isn't it fair to conclude that those beneficiaries are the motive force behind the stunningly stupid outpouring of money?
My current opinion is that what is being sold to the public as 'solutions' is really just a robbery in broad daylight, whereby cash is involuntarily being 'borrowed' in our name , given to robbers for nothing, to be repaid by us peasants in some bleak and murky future (in the form of taxes, inflation and low wages I suppose.) The repayment part may be left vague because even the robbers don't expect anyone to be able to do it.
I would deeply appreciate further education about what happens beyond the event horizon of that Black Hole we keep hearing about.
DBS, I understand why you would think so, but it sort of just ain't so.
What's missing in your reasoning is that the majority of gamblers at the table - I'm talking about bankers with $100 million bonuses here- put in bets that were worth many times more than they could cover. You presume that for every winner, there's a loser. But what if one of the guys at the crap table defaults, and can't pay his losses?
Say that's $10 billion. What's it going to be? An art-deco redesign of the kneecaps, or a $1 billion loan provided by the Treasury? See, whether the creditor accepts that 10% down payment for now or not, the fact remains that the $1 billion loan vanishes into a previously created black hole of $10 billion. And before you say: but that's still $1 billion changing hands, you need to realize that not only did the creditor just potentially lose $9 billion, (s)he also used the probability of the full $10 billion payback (back in the day when that looked safe) as the collateral for a $100 billion bet of his/her own. Say that bet was lost, and only $1 billion was recuperated so far, with no kneecaps artistically modified. Where will the remaining $99 billion end up? Or, for that matter, more importantly, where will it come from?
The whole thing works as a zero sum game as long as the losers can cover their obligations. If they can't, considering it's not a two or three-way game, but an entire intricate web of losses and very few gains, all the bail-out funds will disappear into a deep pond of previously suffered losses. And since everybody who once was a winner is now a loser, and many will default on their losses, money will vanish just like that. If some one goes bankrupt, there's the same action: money is being written off as not collectable.
Ilargi,
Thank you for taking the time to walk me through the maze. It took several careful re-readings for the mechanics of how it works to finally sink in, and I've a few neural circuits that will never work properly again, but I believe that I now get it.
Black Hole is very appropriate nomenclature.
I see a big "Game Over" sign flashing for all but the absolutely most audacious in finance and government. For the rest of us, hard and very dangerous times.
"If some one goes bankrupt, there's the same action: money is being written off as not collectable."
Yup, it can be kind of painful though. we just won a judgement of $117,000, the company promptly declared bankruptcy. turns out they had bled it bone dry. Managed to grab about $900. Now we are on to discovery to try to find exactly what they did and where the money went, just more legal fees and time.
I think we can just kiss it goodbye. Pretty much sucks. Could have done a lot of PO prep with that.
Dead on ilargi.
Don in Maine
A flaw I see is the assumption that the banking crisis is the cause of the economic downturn. The banking crisis was caused by the recession that started over a year ago. All those gamblers counted on economic growth to cover their bets and when growth stopped more and more bets could no longer be covered and the casino closed. The big mistake of the Paulson plan was an attempt to reopen the casino instead of directly investing those funds in manufacturers and needed infrastructure which would sustain well paid workers. It is almost impossible to get bankers who have just been burned to loan money to folks who may soon lose their jobs. If businesses have no customers then bankers won't loan them money either. The recovery depends on creating well paid jobs which will keep folks working for the next five to ten years.
They should just let the banks default and fail, guarantee all the deposits in the failed banks and than use the 700 billion in TARP funds to create 100 new regional banks each with a capital base of 700 million.
The people laid off from the big banks would transfer to these smaller ones.
A clean start, would cause havoc for some time, US GDP would tank sharply but it gives a fighting chance for the financial system to hold and assist in preparing for peak oil.
If I understand correctly, this bubble that has burst means that people's ability to access credit has been curtailed so sharply that demand for oil will simply give way as no one will be able to afford it.
It's like the floor just fell through, we could easily face a situation where oil production plummets from 75 mn barrels to 25 mn in one year due to limited financing, lack of credit and loss of purchasing ability.
That would be THE shock scenario. It would mean that governments would basically have to take over at all levels of society?
Speaking of booze, peak oil = peak alcohol. I keep my johnny walker close to me!
Methinks there is a zero missing there somewhere.
But yes, in theory really feasible, even Meredith Whitney hinted at regional banks recently, the witch! In practice the problem is that the present financial system owns the government. As I wrote earlier today at TAE:
The guys you voted for have only one goal: to stay in power, A nd it's the old system that gave them that power. Regional banks to them is a threat, not an opportunity or a solution.
I wrote a lot more on that topic, on who owns and decides what, and the perversity of power right here in the comments at TAE today.
WOW, so that would be 7 billion for each bank and with a reserve ratio of 10%, that's 70 billion for each region in America.
I hope that the present financial system won't own the government in the future, as they'll be too broke :-)
What I find really strange is that I always thought that American politicians are held accountable for what they do eg Nixon, Clinton, the recent senators were caught in scandals. It may take time but usually justice is served.
I'm used to seeing despots and tyrants back in Africa. We had one for 24 years and the current one is no different - rigged an election, resulted in 2000 deaths. But America?? :-( The land of hope and freedom. Sometimes on blogs that I follow, I find myself to be the only one thinking that America is actually a great place. There's a lot of anger out there, just looking at the TOD board, marketwatch, mish, CR, TAE etc.
What i'd like to point out is that America's politicians might not be so bad compared to the rest of the world and especially developing countries. America might be on the descent but the fact that it so dominated the world and for so long must mean that you guys are doing something right!?
From an outsider's view, it seems like a really cool place.
I found this on Bill Boner's the daily reckoning, Chicago sounds a lot like back home I must say ;-)
You are obviously confused about the difference between the Fed and the US Treasury. The Treasury issues debt. The Fed can buy debt with money it creates out of thin air.
The Fed is like a money counterfeiter. The difference being that when the Fed creates money it is legal because those dollar bills are Federal Reserve Notes.
If the foreigners stop buying US Treasury notes the Fed can buy them. This'll cause inflation - inflation that is the opposite of the supposedly inevitable deflation.
Most commenters on here provide no information about themselves. Opinion is opinion. At least Ilargi and others claim to be active and trained/experienced in finance and the way banking operates. The technical posters on TOD reveal backgrounds of training and experience that support their work. Many people make reasoned and supported arguments even without any credentials. However there are many more who use tones of authority " ... without merit." with neither credentials nor reasoned arguments to support them. In any event, the resolution of this argument will come through either a renewed spurt of growth or producers going bankrupt with consequent shortages because prices deflate below costs. Perhaps we won't have long to wait.
If I say that I am not in economics, does that help?
I would like one of the money supply gurus to elaborate on the difference between 'potential' gains/losses and 'real' gains losses.
If I had 1 potato yesterday, and today I have 2 - I have gained a potato.
If my house cost me $100000, then it's 'value' rose to $200000, and now its back to $110000..I haven't lost $90000. I only lost the potential to sell it at the peak value and leave the country with the money.
There was no increase in wealth as real estate prices went up. There was the opportunity offered to get further into debt by increasing your loan against the increase in potential sale value as collateral.
So talk about 'trillions disappearing' due to falling property values is daft. On the other hand, money given to bail out bankers, well maybe that really is lost?
Anyone care to explain??
I think that a lot of people used appreciating home prices to borrow against the appreciation e.g. HELOC's. They used this money to make purchases, pay for their kids tuitions, healthcare etc. So when home prices rose, their spending ability increased and they indulged lavishly. As home prices fall, their HELOC's disappear, they can't borrow at all, affecting the real economy, they "feel" poorer and hence are inclined to spend less.
Thus this affects the economy as at every stage, people spend less, hence the economy worsens, as the economy worsens banks don't want to lend money, thus the people spend even less. It goes on, till it can't go on in this vicious circle.
Also the banks made a lot of income of rising home prices, they packaged all sorts of bonds and sold them off to investors across the world and each other. As home prices fell, people walked away from their homes, thus when they stop paying mortgages, the banks couldn't pay of their investors. Thus their holdings of CDO's became essentially worthless as the income stream had ceased. This led to massive write downs, further hampering the banks ability to lend as now they need capital replenishment either through equity or preferred stock or direct investments by government or sovereign funds.
Banks also made side bets of the bonds and loans they made, this is how the CDS market came about I believe and as the CDO's went bad, the side bets went bad as well. And the banks incurred further losses.
I believe that most banks leveraged up 20-40 times. Thus even a small loss means that their entire capital base is wiped out, think of Citi or AIG. Thus they can't lend out anymore as they need to rebuild their capital.
I think that's what I understand, I'm sure to have missed some points. But the basic gist of it is, that people borrowed and spent to much based on the illusion that growth in debt is real growth.
Thanks, that is a nice summary.
I understand the transient in the economy pinching off the supply of loaned money.
It's just that I have noticed that many commentators talk about:
drop in house values of [xx%] X the number of mortgages = money withdawn from circulation.
All that has been withdrawn is the extra debt that COULD have been offered to consumers by loan companies if your collateral value was higher, not the total value drop in 'potential sale value'. Moreover repaying that debt would have decreased their future spending power by more than they would have gained in loan [because of interest] so less money now means more money not paid in interest. The consumer will be richer..
I appreciate that the leverage in the banking system makes it very unstable for decreases. That is purely an issue with bad regulation standards.
If only municipal governments were forced to apply this obvious fact to property taxes.