Post-Keynesian Observations

Understanding the Macroeconomy

Archive for February 2010

Whom Should We Bail Out?

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EDIT: It bothered me when I wrote it, but only now did I bother looking it up. I have changed to title to “Whom Should We Bail Out?” from “Who Should We Bail Out?” on the assumption that the who/whom takes the objective and not the subjective case. I think this is right now.

Since I mentioned my blog to my friends at the Breakfast Club this morning (thanks again for inviting me–it’s always a pleasure!), I figured I had better post an update! Just a quick thought (and I am not the first to mention this): if we were going to bail out the financial industry, why did we not do so by bailing out their debtors? Consider this.

Let’s say A owes B $500, B owes C $500, and C owes D $500. Think of A as a homeowner and B, C, and D financial institutions up the food chain. A finds they can’t make a payment, which impacts on B, C, and D. Further assume that this is widespread and of a magnitude high enough to put B, C, and D in danger of failing. Financial crisis.

So, the Bush and then Obama administrations decide to bail out B, C, and D (particularly D, at the top of the pyramid) so that we can restore liquidity and get the economy rolling again (the premise being that we need B, C, and D to loan money to firms and consumers if they are to buy goods and services and create employment).

Set aside any sense of moral outrage or accusations of blame for a moment and just consider this one act, the bailing out of the financial industry. What I cannot for the life of me understand is why we didn’t bail out A and not D. If you bail out A, then A repays B, B repays C, and C repays D–the same result as bailing out D, but in the process you wipe out a chain of debt that is otherwise acting as an anchor around the necks of those who need to get this economy going again. It’s true that given what we actually did, D has fewer financial problems, but it’s A that needs to go out and buy that new car, eat out, get new clothes (that last one is to help you, Laurin!), etc.. They can’t because of the burden of debt. I’m not sure why this would not have been easy enough to do. You could even still give the money directly to D, but then tell them that as a condition they had to count that money as writing off debt (it wouldn’t even have to be $1 for $1). As it stands, I’m worried that the shrinking middle class with its current debt burden cannot be the engine we need it to be.

I’m sure there’s something I’m missing here, but I just don’t get it.

Written by rommeldak

February 26, 2010 at 10:21 am

Dynamite Prize in Economics

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The results are finally in. Real-World Economics organized a vote to select the three economists most responsible for the current financial crisis. The “winners” were:

Alan Greenspan (5,061 votes): As Chairman of the Federal Reserve System from 1987 to 2006, Alan Greenspan both led the over expansion of money and credit that created the bubble that burst and aggressively promoted the view that financial markets are naturally efficient and in no need of regulation.

Milton Friedman (3,349 votes): Friedman propagated the delusion, through his misunderstanding of the scientific method, that an economy can be accurately modeled using counterfactual propositions about its nature. This, together with his simplistic model of money, encouraged the development of fantasy-based theories of economics and finance that facilitated the Global Financial Collapse.

Larry Summers (3,023 votes): As US Secretary of the Treasury (formerly an economist at Harvard and the World Bank), Summers worked successfully for the repeal of the Glass-Steagall Act, which since the Great Crash of 1929 had kept deposit banking separate from casino banking. He also helped Greenspan and Wall Street torpedo efforts to regulate derivatives.

You can find the discussion here:

Real-World Economics: Dynamite Prize in Economics

The basic idea behind the vote was that bad economic theory caused the collapse. Certain economists–unfortunately, those in positions of power in the government and academia–were pushing the idea that markets were rational and efficient to the extreme and should be left entirely to their own devices. We did, and then we had to bail them out because markets apparently thought that loaning lots of money to poor people was a good idea. I will leave you with some terrifying words from Keynes (last paragraph of the General Theory):

…the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas. Not, indeed, immediately, but after a certain interval; for in the field of economic and political philosophy there are not many who are influenced by new theories after they are twenty-five or thirty years of age, so that the ideas which civil servants and politicians and even agitators apply to current events are not likely to be the newest. But, soon or late, it is ideas, not vested interests, which are dangerous for good or evil.

Economists as the Trilateral Commission???

Written by rommeldak

February 22, 2010 at 2:13 pm

The Debt, Deficits, and “Fake” Jobs

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I have been terrified by the many calls for the reducing the debt and the deficit over the past several months. These very same calls were made in 1936, after we had reduced unemployment from around 25% to 14%, because of their horrible deficits (<== sarcasm–they were tiny by today’s standards). The government heeded them, and the economy slipped right back into recession. It took three more years to get back to 14% again.

I think the person on the street thinks that we owe the debt to some evil Mr. Potter in China:

Mr. Potter

As mentioned below, around 70 percent is owed to other Americans, and the bulk of that is owed to government agencies–our government agencies! The remainder is owed to foreign citizens, firms, and government agencies. It’s one of the many forms in which they hold their savings. Unless they suddenly decided not to save any more or they figured to shift into another asset, both of which are exceedingly unlikely, then it’s not something to get all hot and bothered about. The national debt has been much larger (120% of GDP during WWII, compared to around 75% now) and it certainly did not cause the US economy to collapse. Is it worth keeping an eye on? Sure. Should we pull the rug out from underneath the slight recovery we are experiencing? Lord no!

Here’s a nice piece by Eric Tymoigne on the debt and deficit:

Eric Tymoigne

And here is Mike Norman showing that our deficits actually haven’t been much different that under Bush:

Mike Norman

I don’t really care if they were or not, we need them (and I was arguing that the debt was no big deal under Bush, too, when the Democrats were complaining about it–politics!). But, I found it interesting.

Another thing that has concerned me is all this stuff about the rapid fourth-quarter growth being somehow artificial because it was created by the government. First off, what in the hell did these people think we were trying to do with the stimulus package?! Of course it was caused by the government, that was the point. Second, why is that “artificial?” That implies that a market system is somehow natural, which it is not. It evolved in western Europe, first taking hold in England (with the encouragement of a guy named Adam Smith; this is discussed in one of the other posts below). Furthermore, does this mean that we, on a regular basis, consider the employment of policemen, firemen, teachers, soldiers, sailors, airmen, librarians, etc. as somehow false because they are all part of that artificial government sector? Of course not. What those employed by the government create can be every bit as valuable (and useless) as what those employed in the market make. They provide goods and services, and in exchange for that they get to have some goods and services. That’s what I do, too, in my private-sector job. While we like to make fun of the government, most of those people are damn hard working and actually contribute to our lives in a more direct and tangible way than certain folks in the private sector. Just to take two of those government groups I listed, do you really begrudge the salaries earned by teachers and soldiers? Is what they do less valuable than the folks on Wall Street?

Written by rommeldak

February 5, 2010 at 8:49 am

Posted in Uncategorized

Summary of the “Lessons” Part of the Blog

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Sorry I haven’t been in here six months! I basically put this together so that I’d have a central location to put my explanation of what was going on in the economy. Once I was done, I moved on to other stuff. But, here’s a summary document of the first thirteen parts so that you don’t have to go back through and read it backwards anymore:

Written by rommeldak

February 4, 2010 at 10:56 pm