patrick.net

When I meant "banking system" I meant banking system

What my above chart was getting at was there was nothing to stop a years-long continued cross-default collapse other than the Fed being the borrower of last resort.

I can simplify it a bit:

http://research.stlouisfed.org/fred2/graph/?g=idb

showing the Fed stopped the crash halfway into it.

Interest rates are a tricky topic as we know, so I can't speak intelligently what the interest rate environment would look like, but the System needed tons of money and DC was dysfunctional for most of 2009 and 2010 due to the exceedingly tenuous control of the levers of power the Democrats had, especially "liberal", blue-state Democrats like Pelosi.

Obama was doing stupid shit like setting up the Bowles-Simpson committee, and Brown took over Kennedy's seat in early 2010, making all legislation after that having to pass one of the Princesses of Maine's approvals to move forward, barring removing the power to filibuster from the Republicans.

Politicians also had to look to Nov 2010, and the general stupidity of the electorate -- how easy it would be for Republicans to paint all Dems as big-spending liberals should more fiscal attempts be tried in 2010 (on top of ARRA).

http://research.stlouisfed.org/fred2/graph/?g=idd

shows the system wasn't going to collapse to 0 altogether in 2010 -- there's always reversals in every major down move, and census hiring, ARRA's hundreds of billions of social spending, tax cuts, and a general "Summer of Recovery" attitude got the economy out of collapse mode.

I don't pretend to fully understand what happened with the Fed's injection of trillions since 2009, but my general impression is that without it, things would be as bad as what FDR was facing in 1933 already.

This historic monetary intervention was NOT in my thesis in 2009, LOL.

Bellingham Bill says

well, if the Fed hadn't done the stick-save of 2009-2011, we wouldn't have any banking system now

That's just silly talk. New banks free from the burdens of previous mal-investments would have emerged. In fact, that's exactly what happened throughout the first 120+ years of American history before the FED founding in 1913. Big established banks came and went, displaced by new banks when old big banks were found to be riddled with mal-investments. It is no co-incidence that the biggest banks today were mostly founded at the end of the 19th century. That was the last time when there had been cleansing, before the FED was founded. The FED has been a gigantic incumbent entrenching device.

1920 was a lot different from 1929!

WW I inflation had been a bitch, for one

"In December 1919 the rate was raised from 4.75% to 5%. A month later it was raised to 6% and in June 1920 it was raised to 7% (the highest interest rates of any period except the 1970s and early 1980s)."

http://research.stlouisfed.org/fred2/graph/?g=ids

blue line is purchasing power (down is inflation), red is some Fed rate I found on FRED

shows the typical pre-Greenspan Fed pattern of fighting inflation until the economy hits recession

They did the same in 1928, but the rot in the system after the roaring 20s was a lot different from the position of the economy after 4 years of war economy (we were the arsenal of democracy prior to our 1917 entry).

1920s were before the SEC, LOL. Lassez faire!

Reality says

i.e. More excuses for why he doesn't want to live by his own rules first, but
would like to have the rules enforced on others first.

Nope--he would like the rules applied to everyone equally. That's the only way it would work.

Reality says

Another brain fart for simpletons. Buffet is one of the biggest beneficiaries
of government redistribution. Think the bailout of Wachovia and Wellsfargo,
along with Goldman Sachs.

Buffet was among the folks that LOANED money during the crisis. It's a bit misleading to imply that he wanted or needed government funds.

Reality says

No. Buffet enjoyed the government bailout, now he wants to stick the bill to
the taxpayers.

Complete and utter lie. Like a lot of what you post here.

Bellingham Bill says

"In December 1919 the rate was raised from 4.75% to 5%. A month later it was raised to 6% and in June 1920 it was raised to 7% (the highest interest rates of any period except the 1970s and early 1980s)."

http://research.stlouisfed.org/fred2/graph/?g=ids

blue line is purchasing power (down is inflation), red is some Fed rate I found on FRED

shows the typical pre-Greenspan Fed pattern of fighting inflation until the economy hits recession

The rates you quoted were not inflation rates, but interest rates raised by the FED. The steeper raise after WWI was the reason why the onset of the early 20's recession was much more severe.

Bellingham Bill says

They did the same in 1928, but the rot in the system after the roaring 20s was a lot different from the position of the economy after 4 years of war economy (we were the arsenal of democracy prior to our 1917 entry).

The clamp down by the FED was less severe in the late 20's, as illustrated by your own numbers above. What caused massive unemployment was Hoover's policy of forcing industries to maintain wage levels and price levels. The market stopped clearing at those artificial levels when the FED made money much more dear by raising interest rate. Unlike Hoover's policies, Harding administration simply let the prices drop and market clear, so the economy found bottom within 18 months in 1922, and recovered quickly. That's why we don't talk about a great depression in 1921-22; it was avoided because the market was allowed to clear without government "rescues."

tatupu70 says

Nope--he would like the rules applied to everyone equally. That's the only way it would work.

He claims to believe the rich is not paying their fair share, yet he refuses to voluntarily pay what he (allegedly) thinks is fair. There is absolutely nothing preventing him from pay more to the treasury department voluntarily, just like numerous universities in the country voluntarily pay the sum equal to property tax that would be due on their acreage even as those educational institutions have no property tax liability under the law. Not only that, Warren minimizes his tax bill by actively taking his pay into forms that would have the lower tax bills! That's why his income tax is less than 18% whereas a typical person making more than $390k wage income would be facing 35% tax bracket.

tatupu70 says

Buffet was among the folks that LOANED money during the crisis. It's a bit misleading to imply that he wanted or needed government funds.

Do you think Buffet gets his high returns by sitting on cash unleveraged? Buffet's empire is primarily an insurance business. The cash is pledged several times over as reserves against insurance policies that his empire underwrites. The most potentially damaging underwriting in 2008 were puts on SP500. If not for the massive government bailouts, Buffet's empire may well have collapsed.

tatupu70 says

No. Buffet enjoyed the government bailout, now he wants to stick the bill to

the taxpayers.

Complete and utter lie. Like a lot of what you post here.

How is that a lie? Buffet enjoyed enormous benefit via WellesFargo and Goldman-Sachs when government bailout not only saved those two institutions but also gave Wachovia to WellesFargo with massive subsidy.

Reality says

That's just silly talk. New banks free from the burdens of previous mal-investments would have emerged. In fact, that's exactly what happened throughout the first 120+ years of American history before the FED founding in 1913. Big established banks came and went, displaced by new banks when old big banks were found to be riddled with mal-investments. It is no co-incidence that the biggest banks today were mostly founded at the end of the 19th century. That was the last time when there had been cleansing, before the FED was founded. The FED has been a gigantic incumbent entrenching device.

Yep.

Reality says

Buffet's empire is primarily an insurance business. The cash is pledged several times over as reserves against insurance policies that his empire underwrites. The most potentially damaging underwriting in 2008 were puts on SP500. If not for the massive government bailouts, Buffet's empire may well have collapsed.

Yep, I think so too due to the high exposure to insurance.

Reality says

There is absolutely nothing preventing him from pay more to the treasury
department voluntarily

True. But his goal is the change the system. And giving his forture to the government wouldn't change the system.

Reality says

How is that a lie?

Because you said he wants to stick it to the US taxpayer.

Question:

The point of any economic school is to gain an understanding of scarce commodities that have alternative uses.

The proof of that understanding is how well it predicts the economy.

Which school predicts the economy?

indigenous says

You do know that the war started in Europe in 1939, right?

US exports were 4% of GDP before the War. It was cash and carry until Lend-Lease which was in 1941. Exports are now ~6% of GDP.

That means the war in Europe had little to no effect on the US economy, until the US entered it effectively in 1942.

http://www.econdataus.com/trade05.html

indigenous says

Earlier in this thread you and David made the point that there was no
correlation between the tax rate and economic growth. Now you are arguing the
opposite. I'm confused

Not true. I argued there was no correlation between lowering tax rates and increased economic growth. I made no argument for the other side of the coin...

From here:

http://www.fee.org/the_freeman/detail/what-ended-the-great-depression#axzz2Sisv0oJ6

In short the Republicans and southern Democrats refused to give Truman his New Deal revival. Sometimes they emasculated his bills; other times they just killed them.

Senator Robert Taft of Ohio, one of the leaders of the Republican-southern Democrat coalition, explained why he voted against much of the program: “The problem now is to get production and employment. If we can get production, prices will come down by themselves to the lowest point justified by increased costs. If we hold prices at a point where no one can make a profit, there will be no expansion of existing industry and no new industry in that field.”

Robert Wason, president of the National Association of Manufacturers, simply said, “The problem of our domestic economy is the recovery of our freedom.”

Alfred Sloan, the chairman of General Motors, framed the question this way: “Is American business in the future as in the past to be conducted as a competitive system? He answered: “General Motors . . . will not participate voluntarily in what stands out crystal clear at the end of the road—a regimented economy.”

Taft, Wason, and Sloan reflected the views of most congressmen, who proceeded to squelch the New Deal revival. Instead they cut tax rates to encourage entrepreneurs to create jobs for the returning veterans.

After many years of confiscatory taxes, businessmen desperately needed incentives to expand. By 1945 the top marginal income tax rate was 94 percent on all income over $200,000. We also had a high excess-profits tax that had absorbed more than one-third of all corporate profits since 1943—and another corporate tax that reached as high as 40 percent on other profits.

In 1945 and 1946 Congress repealed the excess-profits tax, cut the corporate tax to a maximum 38 percent, and cut the top income tax rate to 86 percent. In 1948 Congress sliced the top marginal rate further, to 82 percent.

Those rates were still high, but they were the first cuts since the 1920s and sent the message that businesses could keep much of what they earned. The year 1946 was not without ups and downs in employment, occasional strikes, and rising prices. But the “regime certainty” of the 1920s had largely returned, and entrepreneurs believed they could invest again and be allowed to make money.

As Sears, Roebuck and Company Chairman Robert E. Wood observed, after the war “we were warned by private sources that a serious recession was impending. . . . I have never believed that any depression was in store for us.”

With freer markets, balanced budgets, and lower taxes, Wood was right. Unemployment was only 3.9 percent in 1946, and it remained at roughly that level during most of the next decade. The Great Depression was over.

indigenous says

Those goods that were sent overseas were produced by someone?
Is it just a
coincidence that unemployment dropped at the same time the war started in
Europe?

They were produced in the US. But they did not increase is a way significant enough to affect the larger economy until we entered Lend-Lease in 1941 and the War in 1942.

Yes, it is coincidence. We didn't increase exports.

C Boy says

Military personel are not considered as part of the labor force and were actually considered unemployed up until 1987 ( the reasoning is that they contribute nothing to the GDP).

Then what is the reason for Unemployment going down?

Is it possible that more people were employed in manufacturing weapons in the private sector?

Unfortunately cronyism can be part of any "ism" system. For example in soviet union the equivalent of cronyism was a word called "blat" which can loosely be translated as "hookup". The soviet gliterrati may not have been financially well off by western standards, but that nomentclatura lived in a parallel universe of luxuries compared to some downtrodden "worker". Communism was famous for shortages in basically everything that matters yet those with "blat" had access to food at discounted prices while a regular person was advised that there is no food at the so called "store". Same thing for getting dibs on some pathetic vehicles like moskvich. And then there's access to the best sanatoriums and the latest antibiotics...

dublin hillz says

Unfortunately cronyism can be part of any "ism" system.

Cronyism grows where there is monopolistic power. Market competition minimizes cronyism.

Worth noting is that the company that hires the CEO decides how much they want to pay the CEO. Cronyism definitely plays a part in the decision but that does excuse poor performance. Some might say that anyone could do the job but the reality is that very few are capable of this job. E.G. Rodger Smith almost destroy GM by stupid decisions or John Sculley decides Apple needs to fire Steve Jobs. The reason they pay so much to these guys is because they produce an organization that create many times more profit than the company pays him. In other words the company is not stupid on this subject.

The most important cronyism in CEO hiring is not whether the CEO knows someone on the board, but whether the CEO gets the job because he/she has connection to the government regulators. That's what makes the Crony CEO especially worthwhile to the shareholders.

Reality says

Cronyism grows where there is monopolistic power. Market competition minimizes
cronyism

This is interesting. So by inference, market competition minimizes monopolistic power?

Reality says

The most important cronyism in CEO hiring is not whether the CEO knows someone on the board, but whether the CEO gets the job because he/she has connection to the government regulators. That's what makes the CEO especially worthwhile to the shareholders.

You would appear to underestimate the potential gain or loss from the actions of the CEO?

david1 says

Reality says

Cronyism grows where there is monopolistic power. Market competition minimizes

cronyism

This is interesting. So by inference, market competition minimizes monopolistic power?

Minimizing monopoly is the very definition of market competition (i.e. giving consumer choice). Now you are probably going to bring up the old canard "natural monopoly"; there is nothing natural about alleged "natural monopolies," which usually are results of government licenses. Economies of scale and scaling in a competitive market place is usually disrupted by new technology breakthroughs sooner or later (usually sooner). That's why Stalinistic white elephants (or that of Henry Ford's) always became money losers without government bailouts.

indigenous says

You would appear to underestimate the potential gain or loss from the actions of the CEO?

There are indeed visionary CEO's who are worth every penny they ever got from the board or shareholders; the late Steve Jobs was a classic example of that. However, there are also many CEO's chosen due to political connections. That's what I was addressing. The former kind tend to take equity positions instead of enormous salary (like Jobs' $1 salary, and hundreds of millions in stock appreciation), whereas the latter kind tend to be more interested in guaranteed pay during the stint, before moving on and pillaging somewhere else.

Edit: re-read my previous post, and added the word "Crony": that (political connection) is what makes the Crony CEO especially valuable to shareholders. Just to avoid the confusion whether the statement was addressing all CEO's or a particular type of CEO's chosen for their political connections.

Reality says

There are indeed visionary CEO's who are worth every penny they ever got from the board or shareholders; the late Steve Jobs was a classic example of that. However, there are also many CEO's chosen due to political connections. That's what I was addressing. The former kind tend to take equity positions instead of enormous salary (like Jobs' $1 salary), whereas the latter kind tend to be more interested in guaranteed pay during the stint, before moving on and pillaging somewhere else.

Fair enough. I suppose that speaks to the skills of those doing hiring

Reality says

Now you are probably going to bring up the old canard "natural monopoly"; there
is nothing natural about alleged "natural monopolies," which usually are results
of government licenses.

In the case of AT&T, yes. In the case of Standard Oil, not at all. The fact remains certains markets are inherently prone to monopoly "naturally." Oil is such a market because of where it is mostly, and to a lesser extent (at this point) how much of it remains. One cannot increase competition in oil by putting a well in an area without oil deposits.

Reality says

Economies of scale and scaling in a competitive market place is usually
disrupted by new technology breakthroughs. That's why Stalinistic white
elephants (or that of Henry Ford's) always became money losers without
government bailouts.

Christ why do you talk like this? Stalinistic white elephants? Do you think if you say something like that in the second sentence I will be too afraid to respond to the first?

So, to the first - when? Show an example of the free marketplace disrupting economies of scale. You said it "usually" happens due to new technology breakthroughs - in a market dominated by a monopoly. Kodak doesn't count - that was a competitive marketplace. US automakers? Plenty of competition there.

Lets chose a modern monopoly - the NFL. Ask Vince McMahon and Donald Trump how their "breakthroughs" did against that monopoly.

Honestly I cannot think on one monopoly that was broken up by the free market. One could argue US Steel I suppose but 65% market share is not really a monopoly...

david1 says

Hpnestly I cannot think on one monopoly that was broken up by the free market.

Montgomery Ward begat Sears begat Walmart maybe begat Amazon

You might say they were are not a monopoly but I would 65% market share qualifies as a monopoly

GM would not exist now if not for Obama they have been eclipsed by Toyota

Sooner or later Microsoft will also decline

indigenous says

You might say they were not monopolies but I would 65% market share qualifies
as a monopoly

They weren't (aren't). They do not control prices, they had (have) competitive advantage that allow them to have lower marginal cost, therefore they can set prices lower to increase market share.

They are not large enough, however, to set prices above marginal cost without suffering in the marketplace by losing market share.

david1 says

In the case of AT&T, yes. In the case of Standard Oil, not at all. The fact remains certains markets are inherently prone to monopoly "naturally." Oil is such a market because of where it is mostly, and to a lesser extent (at this point) how much of it remains. One cannot increases competition in oil by putting a well in an area without oil deposits.

What do you think oil exploration companies do? What do you think Occidental did in the Lybian desert in the 1960's? What do you think the drilling of Siberia and Alaska was about? Unless you think Rockerfeller could buy up all the land in the world, someone is bound to find oil on land not owned by Standard Oil. What's truly ironic is that, after the break-up of Standard Oil, the pieces have been merging back in recent decades, now down to two big pieces: Exxon-Mobil and Chevron-Texaco. What's more, Rockerfeller and Morgan interest finally realized that the biggest monopoly is the government, and they teamed up to form the FED, which actually does have the potential of buying all the land in the world! LOL

david1 says

So, to the first - when? Show an example of the free marketplace disrupting economies of scale.

At one time, Model T accounted for more than half of all cars existed on the planet! Not just in production! Henry Ford built the River Rouge plant (more like a city) in order to capture the ultimate economy of scale. Yet, it turned out to be a financial disaster for Ford . . . technology and consumer taste moved much faster than the fixed capital investment could account for. Not sure why the cussing when the white elephants were mentioned.

david1 says

Lets chose a modern monopoly - the NFL. Ask Vince McMahon and Donald Trump how their "breakthoughs" did against that monopoly.

What technology breakthrough? NFL by itself is hardly a complete market. The next technology breakthrough will probably be the discovery of long term effect from concussion, and eventually putting the league out of business, due to law suits and youths avoiding the sport.

david1 says

Hpnestly I cannot think on one monopoly that was broken up by the free market.

Ford's fall from overwhelmingly dominant market position in the late 1920's and 30's;

Kodak's demise;

IBM losing dominance computer manufacturing market;

MSFT losing dominance over OS (what is OS anyway in a google world?)

Just to name a few.

http://mygeologypage.ucdavis.edu/cowen/~gel115/115CH14aluminum.html

Reality says

Unless you think Rockerfeller could buy up all the land in the world, someone is bound to find oil on land not owned by Standard Oil.

you don't understand Rockefeller's game all that much then.

Do some reading outside your Austrian crap.

Reality says

What's truly ironic is that, after the break-up of Standard Oil, the pieces have
been merging back in recent decades, now down to two big pieces: Exxon-Mobil and
Chevron-Texaco.

Hence the nature of the oil market towards natural monopoly.

The rest of the examples are not monopolies - they cannot set prices above marginal costs without suffering market share.

Market dominance is not a monopoly. You need all three properties of a color to build houses.

The NFL has 100% of the professional football market. That is a monopoly. The USFL and XFL tried to market professional football in the offseason of the NFL. McMahon also tried to tweek the rules to enhance fan enjoyment of the game. Those were the innovations.

What's really funny is in the time of hard currency and laissez-faire capitalism you yearn for, monopolies were more prevalent...

david1 says

They weren't (aren't). They do not control prices, they had (have) competitive advantage that allow them to have lower marginal cost, therefore they can set prices lower to increase market share.

By that definition who is/was a monopoly?

Bellingham Bill says

Do some reading outside your Austrian crap.

I might say the same about Keynesian crap besides it is better alliteration

What is reader digest version of your link above?

david1 says

Hence the nature of the oil market towards natural monopoly.

Hardly the case. It's just another industry with high fixed cost, and low variable cost. Incumbents would like to have some kind of cartel arrangement for price fixing, but inevitably disrupted by new and cheaper sources of supply in a competitive market place with new opportunities.

The rest of the examples are not monopolies - they cannot set prices above marginal costs without suffering market share.

Then Standard Oil couldn't have been considered a monopoly either even before the break-up. It was often cutting prices to below marginal cost in order to expand market share.

The NFL has 100% of the professional football market.

Professional football is not much a complete market. Audience can easily tune to something else for entertainment, not just football.

What's really funny is in the time of hard currency and laissez-faire capitalism you yearn for, monopolies were more prevalent

How did you come to that conclusion? Neither US Steel nor Standard Oil could be considered monopolies by your own definition: one didn't have enough market share, the other had to cut price below marginal cost to expand market share. Monopoly in its original definition means government-granted privilege to be the exclusive purveyor of certain goods/services. That kind of government granted license is by definition not laissez-faire capitalism.

indigenous says

Of course the banks were effected but since the S & L s had long term loans out with high inflation they were much more subject to the problem.

Simple high inflation, S & L s stuck with loans that paid a low interest rate. Is that hard to understand?

Reality says

How did you come to that conclusion? Neither US Steel nor Standard Oil could be considered monopolies by your own definition: one didn't have enough market share, the other had to cut price below marginal cost to expand market share.

I already said US Steel was not a Monopoly. Sherman did not break it up. Standard Oil was a monopoly and reached this status by cutting prices. Rockefeller held 90% market share for 25 years - you really think he was undercutting prices over those years? He was dictating the market price.

His anti-competitive practices slowed down after Standard Ohio and New Jersey we split off - he saw the writing on the wall after that and Sherman and tried to prevent the eventual break-up.

But make no mistake, starting to undercut his competition in the late 1860s led to his 90% market share by 1879. From there he made hefty profits for the rest of the century.

Had Sherman not been passed in 1890 and Rockefeller backed off his anti-competitive tactics to avoid breakup, they would still be dominant in the marketplace.

indigenous says

The way it was predicted was though the use of praxeology.

LOL. I have said it before - I am not smart enough to follow Hayek in the abstract but I can add the numbers myself.

david1 says

indigenous says

The way it was predicted was though the use of praxeology.

LOL. I have said it before - I am not smart enough to follow Hayek in the abstract but I can add the numbers myself.

But you can follow Krugman?

indigenous says

But you can follow Krugman?

The numbers back Krugman.

david1 says

The numbers back Krugman.

that and the NY Times but after that...

david1 says

Rockefeller held 90% market share for 25 years - you really think he was undercutting prices over those years? He was dictating the market price.

Standard Oil was not founded until 1870. It was simply an superbly managed early mover in a brand new industry at the time. Kerosene was the primary product before 1911 (when the breakup was ordered), and kerosene price was cut by more than 70% in those decades. On the even of the breakup, Standard Oil only controlled 11% of oil exploration and crude production. While it did account for 90% of refining, half of the refined products were exports, and Standard Oil was more or less the only major exporter of refined oil products (kerosene) as it had literally created the kerosene lamp market in the far east.

At a time when most oil refiners tossed away gasoline, Standard was using the waste fuel for running its own machinery and heating. It also launched the petrochemical industry in the US, making highly profitable consumer products from crude oil that enabled it to under-price competition for kerosene, the main refined product from crude oil at that time.

The whole anti-trust litigation against Standard Oil was rather similar to the government case against IBM in the 70's and against MSFT in the 90's . . . companies that had experienced early mover advantages in a new and rapidly growing industry, and were just about to be eclipsed by new technological development as the industry matured. In the case of Standard, it lost dominance in the world market to much cheaper Russian production at the end of 19th century, just before the government brought the anti-trust case that eventually led to the break-up.