patrick.net

Austerity is the boogeyman you can cling to and be angry at, but fair austerity actually takes more from the rich than from the poor. It is not much different from the deflationary forces during 2008 who brought wealth disparity down. If printing fiat = borrowing money from future generations and giving it to cronies (QE) would work, then Detroit and Zimbabwe would be prosperous paradises. Why not give everyone a printing press so they can print exactly the money they think they need, after all it's good for the economy! Welcome to Krugmeisters utopia ;)

Shabba says

I also think getting the US to invest in technologies is probably not a good idea either.

The problem is they have a very bad track record at picking technologies that are feasible and make economics sense. These technologies are almost always found by the private sector first. I don't think it is ALWAYS this way, but most of the time that is true.

MY guess is that the following research was govt subsidized. Good ol solar keeps marching right along.

http://phys.org/news/2013-09-stacked-solar-cells-energy-suns.html

Sure gov. has success in investing in tech. Do they have a lot of success compared to the amount of money they invest? Absolutely not. Why would the gov. be better at investing than the private sector? The gov has no incentive to spend wisely, the private sector does. If the private sector investor poorly they end up unemployed and broke. If the gov invests poorly they get re-elected by low info/low IQ voters like egads101.

mell says

but fair austerity actually takes more from the rich than from the poor. It is not much different from the deflationary forces during 2008 who brought wealth disparity down.

When did the wealth gap shrink?

Deflation only hurts those who are leveraged to the hilt, heavy in real estate and stocks with little cash. An example would be that dolt from "Queen of Versailles". It doesn't hurt at all the truly wealthy. They have armies of accountants and lawyers to escape consequences. They know that layers of shell corporations and so on protect them so they can dump underwater property they overpaid for, without ever paying a cent in penalties or taxes. Then they use their cash to buy "distressed" properties in quantity and ride it out.

Deflation hardly touches Richie Rich. However the "responsible" lower classes pull their heads into their shells and consequently miss out on nearly every opportunity to grow their own wealth.

You shouldn't be so hard on marcus over Zimmerman....

Call it Crazy says

Blurtman says

A common trap that we all get into is becoming so invested in a particular belief system that we become blinded to reality.

Wow, seems to be a common theme here on Patnet... Just read the other threads for verification....

David Losh says

The Fed creates a false sense of infusion by adding to the deficit.

When the fed buys teasury bonds and notes (not to be confused with their involvement in the short term TBill market) , two main things happen

1) Long term rates are allowed to be lower, because of this additional demand for bonds.

2) the fed takes those bonds as an asset into their portfolio (or in some cases in to the banking system).

The bonds and notes that were issued (that the fed buys)was debt that the government was taking on anyway, the fed is only affecting the price. In other cases mortgage backed or other securities were bought, to clean up the balance sheets of some of the too big to fail institutions. Some of these new assets put the banking system in a stronger position than they would otherwise be.

This is an oversimplification, but my point is that QE doesn't really add to the deficit. If anything it makes it a little lower than it would be if higher interest rates had to be paid for money the govt borrows.

So where does the money come from, that they buy all this with ? It's sort of like it's digitally printed. But the Fed says they will reverse the process when the economy is stronger.

marcus says

This is an oversimplification, but my point is that QE doesn't really add to the deficit. If anything it makes it a little lower than it would be if higher interest rates had to be paid for money the govt borrows.

So where does the money come from, that they buy all this with ? It's sort of like it's digitally printed. But the Fed says they will reverse the process when the economy is stronger.

That's great! So we can give everyone a digital printing press because it doesn't "really" add to the deficit and we can only come out stronger as a nation! Let's start with my printing press please, as soon as my personal economy is stronger I will reverse the process - I promise! ;)

Marcus,

Sorry, but you don't know what the hell you are talking about. The fed is printing money out of thin air and buying overpriced assets.

How does it get that money back when the price of its way overpriced assets falls? The fed has created a disaster.

StillLooking says

The fed is printing money out of thin air

The Federal Reserve is retiring bonds and issuing reserves.

Hello McFly, see the RESERVE there?

Many people confuse the Federal Reserve with a Federal agency that prints money. That is actually handled by a very different outfit.

.?????????????

Vicente says

StillLooking says

The fed is printing money out of thin air

The Federal Reserve is retiring bonds and issuing reserves.

Hello McFly, see the RESERVE there?

Many people confuse the Federal Reserve with a Federal agency that prints money. That is actually handled by a very different outfit.

marcus says

It's sort of like it's digitally printed.

It's actually numbers on a ledger sheet.

As much as I like making long winded comments on this blog it is simply a matter of letting the private sector take over the economy.

The government could have spent twice as much, taken on twice as much debt against future earnings, and still all that would happen is deflation.

The consumer, globally, only has so much income. The higher price they pay to house themselves, eat, clothes, cars, or entertain comes directly out of the economy at this point because they don't have the money.

The consumer is using credit cards, savings, and home equity to pay for stuff.

It makes no difference how much cash is infused into the system, if the consumer doesn't get higher wages they are simply deficit spending ourselves into the poor house.

StillLooking says

Sorry, but you don't know what the hell you are talking about. The fed is printing money out of thin air and buying overpriced assets.

That doesn't contradict what I said in the slightest. I was breaking it down, because it had been suggested that it amounted to deficit spending. (Losh is the one who doesn't get this process - not that it's simple)

Even by your reckoning, the risk to the government (or the fed) is the amount that they lose when they unwind the assets at lower prices. Okay, well maybe they don't unwind just enough of the bonds and notes to cover their losses in all the rest. That would be the ultimate amount by which the monetary base was increased. THat is the amount of printed money that was PERMANENTLY added to the money supply

But it would not be affecting the deficit which was my point.

Vicente says

Many people confuse the Federal Reserve with a Federal agency that prints money.

Well, as an oversimplification, when the government sells bonds to itself (I know the fed isn't the fed govt - but for the sake of simplified argument), there is an asset and a liability, so nothing has happened ?

NO, the federal govt got the real money that it needs for operations or whatever. This is what I meant by digital printing. Yes, there are now securities in the hands of the fed (assets), which ultimately increase bank reserves.

Where does the fed get the money to buy the notes and bonds ?

The answer to that question is why some call this printing money. It's digital (no paper money) A number on a computer that is real as far as accountants are concerned.

marcus says

I was breaking it down, because it had been suggested that it amounted to deficit spending.

The thread changed to Fed policy rather than government spending.

The point of the thread is, for me, that the private sector should have been allowed to step in and buy failed assets, like houses, businesses, banks.

Then we went off on a tangent about QE 1,2, and 3.

Quantitative Easing is just another failed policy in a string of bail outs that the governments, globally, have paid for.

marcus says

It's digital (no paper money)

It's a promise to pay against future earnings.

To make it simple, it's like a mortgage without interest because it's borrowing your own money.

The end result is that the money needs to go back on the ledger sheet in future dollars. That is why everyone was hoping for inflated future dollars.

It just didn't happen.

David Losh says

The point of the thread is, for me, that the private sector should have been allowed to step in and buy failed assets, like houses, businesses, banks.

That's a legitimate argument to make. I don't know whether it's right or not.

Selfishly, as someone who has been "short" housing for a long time (renting), I would have liked to see "the market" being allowed to function without all the govt incentives, mortgage restructuring, and fake interest rates being used to support it.

But then I'm not surprised. virtually all of the people with any real wealth own real estate, so the government stepped in and supported housing.

As someone who does believe that markets often work as they should, it does make sense that there is a price to be paid by the government for stepping in and supporting the market the way that they did.

MY guess as to how that price is paid (totally a guess):

1) It comes out of those with money conservatively invested (when interest rates are artificially low).

2) It comes out of economic growth that is slower than it would have been. THat is it takes us longer to get back out of this high unemployment low interest rate (deflationary pressure), deleveraging, funk that we are in.

3) It ads to the wealth gap. AS investors buy housing with perceived zero risk (if the government can hold out with it's continued support of asset prices). The government is essentially saying to those with capital, "lean on me, load the boat. Your only risk is that we all (the entire country) lose. that is if we can't mange to bring back asset inflation."

Ultimately they succeed in bringing back that inflation, but without sufficient wage inflation.

I hate to be a pessimist. But I think you may be right.

David Losh says

The point of the thread is, for me, that the private sector should have been allowed to step in and buy failed assets, like houses, businesses, banks.

Should have been allowed? They were never barred from it. Lots of vulture funds bought lots of things, and the accretion of all real wealth to the 1% continued.

Mission Accomplished!

marcus says

I hate to be a pessimist. But I think you may be right.

But being right, that possibly the market should have been allowed to work, by allowing more businesses to fail, and allowing housing to find its bottom, is not the same as saying that Krugman is an idiot.

Also, the other side of the argument, that we could not actually afford to see how devastating it would have been (globally) to allow the markets to find bottom without intevention, also has merit.

I prefer Krugman's type of intervention, massive stimulus and govt work programs (building and repairing real things), over the type of intervention we did - through the finance world - supporting real estate and other asset prices.

marcus says

But being right, that possibly the market should have been allowed to work, by allowing more businesses to fail, and allowing housing to find it's bottom, is not the same as saying that Krugman is an idiot.

It baffles me that people think this is any kind of natural result "if things were just allowed to work".

Back when there were financial crises every decade or two, what happened? Wealth concentration over time, right through Gilded Age & Robber Barons.

What happens when there's a financial crisis, is the little guy pulls his horns in while Big Money buys everything in sight. It is a mistaken notion that the little guy can taken advantage of downturns, they are typically either not positioned or not inclined to it.

It is not in society's interest to have the "creative destruction" of periodic financial collapse. Back in the 1930's we seemed to have figured that out, and built a system that led to a period of incredible stability and prosperity and decreasing inequality. Until the free market zealots who sell the idea of "just let things work themselves out on their own" conned us into deregulation & megabanking and here we are. Trickle down and deregulation are frauds, yet many millions still worship them.

I suppose we could imagine some world where Big Money is barred from buying up blocks of foreclosures, or mergers and acquisitions by vampire squids are discouraged. In favor of letting the Little Guy have a turn, and established Big Players booted to the curb for the lousy job they did. But that would favor wealth redistribution downward, and be labelled Socialism or Communism and discounted.

Vicente says

It is a mistaken notion that the little guy can taken advantage of downturns, they are typically either not positioned or not inclined to it.

What's more fair ?

1) The market does it's thing, nobody including the big capital know how low it will go. Some big money moves in too soon, taking alot of heat when things go lower etc.......

2) Things get low enough that the big money can clean up if they buy here (with a near guarantee that prices aren't going lower) AND all those with real assets don't have to take the heat of things going lower, if the government steps in attempting to cause a definitive bottom, basically going all in, in support of a bottom at a specific level?

Also, I'm a little guy that would have bought if things had gone a little lower (in overpriced LA), I even had offers in in 2011.

marcus says

Some big money moves in too soon, taking alot of heat when things go lower etc.......

Irrelevant, they don't feel the effects like you do. Carl Icahn is never going to lose his limo, much less miss a meal. If you borrow against your house to buy a floundering restaurant and screw it up, you may end up dumpster diving for your dinner. It is irrelevant if one Richie Rich becomes not-so-Richie Rich, on average they win. During downturns wealth moves upward, unless there is a French Revolution or similar in play.

Vicente says

I suppose we could imagine some world where Big Money is barred from buying up blocks of foreclosures, or mergers and acquisitions by vampire squids are discouraged.

I'm not for that. But I am also not for the government stepping in to support a bottom in prices, in a sense saying to those big investors, "you're safe buying here. We've got your back."

Vicente says

Irrelevant

Okay, my last attempt. Maybe we're in two separate conversations.

I used to be a floor trader. Pit traders love it when they have someone to "lean on." Say a broker representing some huge concerns has a bid in to buy infinite contracts at a certain price. Buying just above that price is called "leaning" on that guy. Great upside potential, with a near guarantee that prices can't go below that huge bid. (it's way different in the sense that it's a liquid market and the trader can take a quick small loss if needed - at or below the price of the guy they are leaning on).

The feds policies, buying long term securities, and the mortgage modification programs, and other incentives from the government essentially gave a floor, or a technical bottom to real estate prices that gave all those big investors confidence to buy at prices higher than they other wise would have.

Otherwise some would have been buying too soon, and it would have been riskier, and the bottoming process would have been one that ultimately would have been more erratic shaking out more investors (flippers) and causing more walk aways, bank failures and so on.

It may ultimately have led to a healthier and more real recovery.

marcus says

It may ultimately have led to a healthier and more real recovery.

We will never know how your hypothetical would have played out.

We KNOW what happened after the last Great Depression. The Treasurer was a a proponent of purging:

"liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate... it will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people." - Andrew Mellon

Mellon is an interesting character, because while he believed in low taxes & trickle down, he also thought it OBVIOUS you should tax wages at a lower rate than parasitic finance activities.

The "leave it alone liquidationist" thesis didn't work and the Great Depression dragged on until morons like this got the boot. It APPEALS to people because they want to see turnover, the little guy getting his shot. It is an attractive sounding theory, but IT DOESN'T WORK! You have a mental model and anecdotes of how things "should" work, but in fact it demonstrably doesn't follow the script.

John Rockefeller singlehandedly financed a 14-building complex called Rockefeller Center during the heart of the Great Depression, and came out the other side richer than ever.

As a trader you probably know this one: "picking up pennies in front of a steamroller". That's exactly what small fish would be doing, trying to pick up distressed assets during a financial crisis. Some get squished over a few pennies. The cunning shark picked over the best coins before the steamroller came, and he also sweeps through the surviving schools of fish, and has a nice meal.

I have no problem with government spending. The problem is crony capitalism and waste. We were paying people money to junk perfectly good cars. We spent trillions on folks that paid too much for their house And then start crying.

What do we have to show for all the spending? We should have at least built a high-speed rail system. We spent trillions of dollars With nothing to show for it. Wasting money only helps those on the receiving end of the government handouts.

Many assumptions there that I don't agree with. What you miss is the degree to which the investor class takes a hit, with some of them bailing before the bottom. With many buying too soon. The natural course is for markets to overdo it in both directions, not to only over do it to the upside, and then to have the government come in a protect a lot of interests from the market over doing it on the downside.

But I totally understand the federal government putting a floor under housing at a certain point. This is a case where the investor class(1%) gets a policy that all the regular holders of real estate can go along with. Since a majority own a home, it was natural that these policies that favor the rich would be allowed.

Hey a majority of people have some kind of hedge in place(they own their homes). There is that I guess.

Vicente says

John Rockefeller singlehandedly financed a 14-building complex called Rockefeller Center during the heart of the Great Depression, and came out the other side richer than ever.

As a trader you probably know this one: "picking up pennies in front of a steamroller". That's exactly what small fish would be doing, trying to pick up distressed assets during a financial crisis. Some get squished over a few pennies. The cunning shark picked over the best coins before the steamroller came, and he also sweeps through the surviving schools of fish, and has a nice meal.

Trust me the big guys are doing just fine this time around if and when asset inflation comes back. THe fact that they didn't get to buy lower, with more foreclosures is more than offset by the fact that they had the US government and the fed putting a floor on prices right below where the prices that they did buy at. This floor was not just a floor on new purchases, it was a floor on all the assets that they (and ALSO THE BANKS) were already holding. We're talking all real estate assets !!

Vicente says

Mission Accomplished!

The Mission was Too Big To Fail, that means banks.

Then we did the tax credit, and Cash for Clunkers, to go along with our bail out of the Auto Industry.

The big money was made by knowing that the government would stand behind a Fed policy that in theory should have sparked inflation.

If you want to go back to the Great Depression it was WWI that started it, and WWII that ended it.

We lost a chance at globalization in WWI, and were guaranteed oil in WWII, that lead to a new Industrial Revolution.

Now what? What have we got now? The Bushs already tried the war gambit, and that failed. Obama gave away socialist sounding dollars, and that failed also.

So, now what?

David Losh says

The Mission was Too Big To Fail, that means banks.

You make $150,000/year. You have excellent credit, and so you get the gold carpet treatment at Vegas. But you leave owing $10 million. Jumping Jesus! You have three kids in college, your stay at home trophy wife has carte blanche at Nordstroms, you are leasing three Mercedes, have a $1 million dollar mortgage. You really didn't need to lose $10 million in Vegas.

What do you do? Do you:

1.) Declare bankruptcy?

2.) Take out even more loans to keep making the growing debt payments? You assume that you can get the big promo and double your salary. Plus, you're wife's dad ain't getting any younger, and she is an only child.

Blurtman says

What do you do?

OK, OK, OK, you and Bob are looking at my finances and know I just don't pay the debt. There is no law against it.

There is no law that says you have to fulfill your promise to pay. The banks have legal recourse, but they have to go through you first.

It depends on the lien position and what the lender can take in exchange for the debt.

Well, as we all know I'm mortgaged to the gills, and owe everybody so I have nothing for the lenders to go after.

So the real question is, what does the lender do? What does the casino do? We are past the time of breaking legs, because I have legal recourse.

It's all a matter of negotiation my friend, nothing more.

David Losh says

Well, as we all know I'm mortgaged to the gills, and owe everybody so I have nothing for the lenders to go after.

Number 2.) So you take out another loan to keep paying your debts. But you don't get the promo. And your wife's dad marries a 25 year old Vegas show girl, and no pre-nup.

Are you better off or worse off than if you pursued option 1.) and declared bankruptcy?

Blurtman says

David Losh says

The Mission was Too Big To Fail, that means banks.

You make $150,000/year. You have excellent credit, and so you get the gold carpet treatment at Vegas. But you leave owing $10 million. Jumping Jesus! You have three kids in college, your stay at home trophy wife has carte blanche at Nordstroms, you are leasing three Mercedes, have a $1 million dollar mortgage. You really didn't need to lose $10 million in Vegas.

What do you do? Do you:

1.) Declare bankruptcy?

2.) Take out even more loans to keep making the growing debt payments? You assume that you can get the big promo and double your salary. Plus, you're wife's dad ain't getting any younger, and she is an only child.

Option 3, goto Ghana and try to mine enough gold to pay off your debts. Have you seen "Jungle Gold" yet? It's amazing.

Blurtman says

Are you better off or worse off than if you pursued option 1.) and declared bankruptcy?

Follow the thought process:

The borrower, the gambler, holds all the cards.

The casino gave the borrower money, the lenders gave the borrower money; it's a gift with a promise to pay.

I think what you are trying to say is that the government is the casino, the consumer is the lender, and the banks are the player.

The banks said screw you, we aren't going to pay, take your best shot at our assets.

The assets are worthless, and all the money is in reserves that if the casino takes the banks will be off the hook, and never pay the difference.

All any lender can do is take the assets. If the assets have no value then the lender is screwed, that means you, and me, and all the people who bought into the idea that debt is wealth.

So it came down to the lender, the consumer, to cash out, send the property back to the banks, and the banks to make lemonade out of lemons, which they did, and are doing.

There is nothing illegal in any of what you say, and no need for bankruptcy. There are no laws forbidding any one from saying screw you, come get me.

The player does nothing, and it's up to the casino to negotiate new terms.

David Losh says

There is nothing illegal in any of what you say, and no need for bankruptcy. There are no laws forbidding any one from saying screw you, come get me.

OK. So you go for option 1. Your gambling debt is gone. But you lose your Mercedes' as no one will lease $80,000 cars to a deadbeat. Your kids drop out of Harvard, Brown and Yale, as no one will loan money to a deadbeat, and they enroll in community college. Your wife loses her Nordstrom privileges, and you are sleeping on the couch. But you are still working, paying the mortgage, and saving money.

In the short term, are you better or worse off choosing option 1., bankruptcy, versus option 2., more and more debt? And what about in the long term?

David Losh says

If you want to go back to the Great Depression it was WWI that started it, and WWII that ended it.

WWII was from economic perspective a large deficit spending program, massive government debts were run up exceeding those now. I'd prefer we not engage in such a wasteful enterprise again. Domestic stimulus is better.

Blurtman says

In the short term, are you better or worse off choosing option 1., bankruptcy, versus option 2., more and more debt? And what about in the long term?

The first thing is to eliminate the debt. You do what you have to get the debt behind you. The second thing is to build a cash reserve to take advantage of investment opportunities.

You are presenting two options that have no place in the solution.

Vicente says

WWII was from economic perspective a large deficit spending program,

In the case of WWII we came out of it owning the Middle East, and the oil that was beneath it.

In the Bushs case we came away with debt, and nothing to show for it.

David Losh says

Blurtman says

In the short term, are you better or worse off choosing option 1., bankruptcy, versus option 2., more and more debt? And what about in the long term?

The first thing is to eliminate the debt. You do what you have to get the debt behind you. The second thing is to build a cash reserve to take advantage of investment opportunities.

You are presenting two options that have no place in the solution.

OK. But if you chose 1, your wife, your kids and the casino would hate you. So if you kicked the can down the road, your wife, your kids, the casino, and the bank that you took out more loans from would love you.

So how could politicians let the TBTF's go BK? The stock market would crash, RE would further crash, businesses would crash, and unemployment would rocket up. Obama probably would not have been re-elected. Incumbents who backed his policy would probably not have been re-elected. And since the Repubs would not have backed the policy, the Dems would have suffered greatly. So we are where we are.

Blurtman says

Obama probably would not have been re-elected.

Obama could have blamed Bush for the mess, which is correct, and done nothing. There was no need for a Trillion dollars worth of government cash in a failed economy, there is no upside for it. Had Obama, and Congress added more money to the economy we would be in worse shape than we are now.

We are in really bad shape. The Too Big To Fail banks have added billions in cash reserves while pilfering billions more from emerging markets.

The investments made in failed companies all come back to one big mess of jobs that will be gone as soon as the Fed unwinds it's failed Quantitative Easing scheme.

I think we can agree that the banks should have been allowed to fail. We need to clean up those ledger sheets with default rather than more debt.

We are simply sinking further, and further into debt, both public, and private.

David Losh says

I think we can agree that the banks should have been allowed to fail. We need to clean up those ledger sheets with default rather than more debt.

Sure, but that would likely have been political suicide, especially in today's climate, and so did not happen.