patrick.net

Reality says

Is that your own school of economics?

Nope--it's econ 101. Lower interest rates will encourage capital investment by making projects that don't generate enough return at high rates to be profitable at lower rates. Now, you have to factor risk into the equation--this is down by lowering the expected return based on the risk factor. Higher risk projects are discounted more than lower risk projects. So, lower interest rates will allow some higher risk projects to proceed, but only those that generate postive returns on average.

The only way you get a bubble is when people don't understand the risk/return of a project (or asset). Regardless of the interest rate. It can ONLY happen when the risk/return information is either not known or poorly calculated.

Reality says

The FED itself. The ponzi borrowers are the TBTF banks, the US government,
and the European banks and governments. We are talking about the 4 years since
2008.

OK-please elaborate on how the banks are Ponzi schemes. This should be interesting.

Reality says

If we want to talk about the 2005-2008 time period, the low lending standards
was due to expected bail-out.

Bullshit. Your theory is that the owners of the bank said--go ahead and lose billions of dollars. It's OK because we won't go bankrupt. That's how it went?? How did it work for IndyMac? or Wachovia? Or Lehman Bros?Reality says

The banks and Fannie/Freddie were politically pressured to lower lending
standards ever more, which they were all too happy to oblige with understanding
of future bailouts.

Again--that's BS.

Reality says

So how are the Cox-2 pain killer drugs doing?

Is Cox-2 pain killer a food? You really need to learn to stay on topic.

Reality says

In real life, the regulators are not all-knowing. Over time, the place
holders are bought off by the very industries that they regulate with expected
fat consulting fees after tenure. Regulators serve only to keep out competition
so the consumers have less choice, less safe goods at higher prices. Someone has
to pay for the bribery and the monopolistic rent . . . and that would be
you!

Of course--it's called regulatory capture and it's a well known phenomena. But, like I said earlier, just because regulation isn't 100% perfect doesn't mean you get rid of it. The good far outweighs the bad.

tatupu70 says

Is Cox-2 pain killer a food? You really need to learn to stay on topic.

No, it's a drug approved by your beloved FDA. I'm very much on topic. Drugs are what FDA's regulatory focus. Luckily for us, food is not as heavily regulated as drugs, for now.

Reality says

No, it's a drug approved by your beloved FDA. I'm very much on topic. Drugs
are what FDA's regulatory focus. Luckily for us, food is not as heavily
regulated as drugs, for now.

My beloved FDA--lol. Here is what the FDA does (from their own website)

What does FDA do?
En Español1

FDA is responsible for

Protecting the public health by assuring that foods are safe, wholesome, sanitary and properly labeled; human and veterinary drugs, and vaccines and other biological products and medical devices intended for human use are safe and effective
Protecting the public from electronic product radiation
Assuring cosmetics and dietary supplements are safe and properly labeled
Regulating tobacco products
Advancing the public health by helping to speed product innovations
Helping the public get the accurate science-based information they need to use medicines, devices, and foods to improve their health

Can we please put to bed your ridiculous notion that all they do is drugs?

Reality says

Luckily for us, food is not as heavily regulated as drugs, for now.

And I don't know where you get the idea that food isn't heavily regulated. That is 100% incorrect.

tatupu70 says

Nope--it's econ 101. Lower interest rates will encourage capital investment by making projects that don't generate enough return at high rates to be profitable at lower rates. Now, you have to factor risk into the equation--this is down by lowering the expected return based on the risk factor. Higher risk projects are discounted more than lower risk projects. So, lower interest rates will allow some higher risk projects to proceed, but only those that generate postive returns on average.

Apparently you took your Econ101 class at a Junior High or a really crappy High School. Did the teacher tell you the difference between nominal interest rate vs. real interest rate? Real interest rate can be less than Zero, and when that happens all sorts of ponzi borrowers emerge and can be profitable for a time until the bubble bursts.

The only way you get a bubble is when people don't understand the risk/return of a project (or asset). Regardless of the interest rate. It can ONLY happen when the risk/return information is either not known or poorly calculated.

Like I said, your economic education is really poor. Since when is risk/return information perfectly known and perfectly calculated in advance? Why would anyone sell you that asset if he and you both know the exact same perfect return into the future? When the future is perfectly known, everyone can be God, and God doesn't need to buy or sell anything. Every investment is speculative and has uncertainty. Bubble is the result of many people being misled by short-term information presented to them that would change after their investment decisions are made. Information imperfection is part of life, and the reason why life carries on.

What the FED does is bailing out the TBTF when the bubble is about to burst, making the bubble bigger so the TBTF can exit, transferring the cost of the bubble to others.

tatupu70 says

OK-please elaborate on how the banks are Ponzi schemes. This should be interesting.

The TBTF banks have been ponzi borrowers in the last few years since 2008 because their honest balance sheet wouldn't allow them to survive. So the FED has been lending money to them at 0% and letting them arbitrage the difference between that 0% vs. inflation, hoping the negative net worth that they have will get whittled down. That's the typical ponzi borrower: borrowing for asset appreciation.

tatupu70 says

Bullshit. Your theory is that the owners of the bank said--go ahead and lose billions of dollars.

Once again you fail to grasp the uncertainty regarding future when making financial/economic decisions. The banks lent to the ponzi home borrowers for short term gain (credit unworthy home borrowers pay higher interest), while statistically such loans will eventually have a very high risk of going bad.

It's OK because we won't go bankrupt. That's how it went?? How did it work for IndyMac? or Wachovia? Or Lehman Bros

IndyMac was a deliberate spin-off from CountryWide to do even higher risk loans. The owner of CountryWide had excellent political connection, and the company was eventually sold to Bank of America, with all the criminal actions somehow escaping prosecution. The take-down and merging of Wachovia, Bear-Stern and Lehman into other big Wall Street banks actually involved massive injection of money into those firms by the taxpayer.

tatupu70 says

Again--that's BS.

You are BS'ing. Fannie and Freddie were explicitly bailed out by taxpayers. The implicit guarantee was always there, now made explicit.

tatupu70 says

Of course--it's called regulatory capture and it's a well known phenomena. But, like I said earlier, just because regulation isn't 100% perfect doesn't mean you get rid of it. The good far outweighs the bad.

That's your assertion, with not a shred of evidence to prove it. You would have to postulate really dumb firms and really dumb consumers to believe that:

1. consumers wouldn't shop somewhere else if the producers screw them;

2. producers wouldn't capture the regulator regulating them.

The dumb do tend to project their own silliness onto others. In real life, most consumers and producers are not dumb.

Call it Crazy says

The problem was with Merck. The population that needs Cox-2 drugs is already health compromised and has other serious medical issues. The adverse reactions from Vioxx was in line with other drugs. ALL drugs have adverse reactions..

The reason why Merck marketed the drug to 65+ is because the drug has marginal benefit over existing pain killers such as Asprin. Only the Medicare recipients would likely cough up the difference via Medicare, making a $15/mo medical bill for generic Asprin into a $500-1000/mo medical bill for patent Cox-2 drugs, on taxpayers of course.

Reality says

Real interest rate can be less than Zero, and when that happens all sorts of
ponzi borrowers emerge and can be profitable for a time until the bubble bursts.

If that's the case, and I've seen no evidence from you that is was or is, then it's the lender's fault. The lender should know what the inflation rate is and always lend their money out at inflation + their risk spread. And to your original point--real interest rates have very little dependence on nominal interest rates. So there's no reason to think this would happen when interest rates are low.

Reality says

Since when is risk/return information perfectly known and perfectly calculated
in advance?

It's not. I didn't assume that it was. But you should have a best estimate. Sometimes it's off too high, sometimes too low, but it should average about right.

Reality says

Bubble is the result of many people being misled by short-term information
presented to them that would change after their investment decisions are made.

And we have a winner. Notice how the above statement has NOTHING whatsoever to do with interest rates?

tatupu70 says

Reality says

Luckily for us, food is not as heavily regulated as drugs, for now.

And I don't know where you get the idea that food isn't heavily regulated. That is 100% incorrect.

Shouldn't that be obvious? When was the last time you need a multi-year FDA trial process to introduce a new dish or new pizza? Of course, with dumb regulation-lovers being churned out by public schools everyday who can not take care of themselves and think nobody else can either, we may indeed get drug-like regulations on food someday.

Reality says

That's the typical ponzi borrower: borrowing for asset appreciation.

You need an education on what a Ponzi scheme is. Borrowing for appreciating is investing on margin. Not a Ponzi scheme.

Reality says

Once again you fail to grasp the uncertainty regarding future when making
financial/economic decisions. The banks lent to the ponzi home borrowers for
short term gain (credit unworthy home borrowers pay higher interest), while
statistically such loans will eventually have a very high risk of going bad.

Your misuse of Ponzi scheme again notwithstanding, most of what you say here is correct. But it doesn't square at all with your earlier statements. They ignored the high risk because they were making so much money. It had NOTHING to do with any implicit guarantee that they wouldn't go bankrupt.

Reality says

The take-down and merging of Wachovia, Bear-Stern and Lehman into other big Wall
Street banks actually involved massive injection of money into those firms by
the taxpayer.

Nice misdirection. The point is that there was obviously no implicit guarantee to those banks that they wouldn't go bankrupt.

Reality says

Shouldn't that be obvious? When was the last time you need a multi-year FDA
trial process to introduce a new dish or new pizza? Of course, with dumb
regulation-lovers being churned out by public schools everyday who can not take
care of themselves and think nobody else can either, we may indeed get drug-like
regulations on food someday.

Regulation involves more than just trials. You need to look at the bigger picture. Like I said--go to any FDA regulated plant and ask them if they are heavily regulated. I guarantee you that their answer will be a resounding yes.

What has been happening prior to 2013 is that for the most part since 2008 the "retail investors" have actually been yanking money from stock funds and putting money into the bond funds. And the difference was in hundreds of billions of dollars. In fact, the increase in stock prices largely benefited the institutional investors no the retail investors due to this issue. I don't believe that the Fed was actively trying to promote a bond bubble. Yes they wanted lower interest rates to stimulate the economy and to increase stock prices, however the increase in bond prices appears to be incidental since bond prices rise as interest rates fall and vice versa. And the retail investors have exacerbated the "bond bubble" as they have been putting money into the bond funds during the stock market run up from march 2009 - present. Most likely the "retail investor" has been suffering from stock market PTSD due to nasdaq burst in 2000 and the 50% collapse from highs of 2007 to 2009 march lows.

Reality says

tatupu70 says

Reality says

Luckily for us, food is not as heavily regulated as drugs, for now.

And I don't know where you get the idea that food isn't heavily regulated. That is 100% incorrect.

Shouldn't that be obvious? When was the last time you need a multi-year FDA trial process to introduce a new dish or new pizza? Of course, with dumb regulation-lovers being churned out by public schools everyday who can not take care of themselves and think nobody else can either, we may indeed get drug-like regulations on food someday.

Actually we can argue that there's not enough regulation in regards to what is available. In fact it's so bad that I don't really trust many of food providers. I stopped buying frozen "lunch and dinners" years ago because I don't trust the chemical crap that they put in there. I haven't gone to mcdonalds and burger king for years because in my opinion they are poison on wheels. I am not saying that government should ban them but I don't think that there's enough education out there for the masses to educate them on potential and actual dangers that stem from these products.

tatupu70 says

If that's the case, and I've seen no evidence from you that is was or is, then it's the lender's fault. The lender should know what the inflation rate is and always lend their money out at inflation + their risk spread. And to your original point--real interest rates have very little dependence on nominal interest rates. So there's no reason to think this would happen when interest rates are low.

Of course bad loans are fundamentally the lender's fault. However to say that the lender should always know what the inflation rate is goes to show how bad your economics education is. You do realize a loan is made to be paid back in the future, don't you? In fact, proper economics education should have taught you that inflation rate number even at the present is very much disputed, never mind the future. That being said, it does not exculpate the bankster making the loan, as the bank is in the risk assessment business, and that includes future as well as present inflation uncertainty.

Real interest rate is a function of nominal interest rate and money supply. It is not however an independent function of the two without memory of immediate previous state, but a stochastic process with very strong memory of the immediate preceding state . . . because people, the actor in economics, has memory.

Economics is not simply mathematical formula, but the understanding of (likely) human action. Mathematical formula are useful for modeling in some hypothetical steady state, but breaks down in detail and especially at turns. If life were steady state, there wouldn't be trade because there wouldn't be profit at all to motivate trade or getting people out of bed in the morning.

tatupu70 says

It's not. I didn't assume that it was. But you should have a best estimate. Sometimes it's off too high, sometimes too low, but it should average about right.

Don't you just love that averages? Tell the bankruptcy judge the next time you were once rich, and ask him to average it for you.

Comes to think of it, aren't the derivative bombs result of people winding themselves too tightly on "averages"?

tatupu70 says

Reality says

Bubble is the result of many people being misled by short-term information

presented to them that would change after their investment decisions are made.

And we have a winner. Notice how the above statement has NOTHING whatsoever to do with interest rates?

Interest rate is one of the most important pieces of short-term information mentioned above. For example, most of those bought their homes at the top of the bubble were motivated by the availability of low adjustable rate mortgages, and thought they'd be able to roll over the mortgages when adjustment comes, and for a few years it was indeed possible as the FED worked on bailing out the stock market (bailing out the banks that made bad loans to dot-coms and stock portfolio). Then the roll over became impossible in the mid-to-late 2000's.

dublin hillz says

Actually we can argue that there's not enough regulation in regards to what is available. In fact it's so bad that I don't really trust many of food providers. I stopped buying frozen "lunch and dinners" years ago because I don't trust the chemical crap that they put in there. I haven't gone to mcdonalds and burger king for years because in my opinion they are poison on wheels. I am not saying that government should ban them but I don't think that there's enough education out there for the masses to educate them on potential and actual dangers that stem from these products.

I'm all for people putting together education material for the masses to learn more about their food. In fact, I think that has been taking place in recent years, to the degree that even McD's has to emphasis their salad offerings. Regulation however is a whole different manner: the strong arms of the government would only drive out the innovative food vendors who bring forth better food and would have a strong interest in educating the public, and leave the field to huge industrial food vendors that stick to bureaucratic standards therefore boast the government seal of approval while continuously figure out ways to substitute. Just look at the pink slime sold to public school lunch programs and prison systems, all with government bureaucratic approval of course!

Reality says

You do realize a loan is made to be paid back in the future, don't you? In fact,
proper economics education should have taught you that inflation rate number
even at the present is very much disputed, never mind the future

We're not talking about the future. We're talking about investing in the present time using borrowed funds. Please try to stay on topic.

Reality says

For example, most of those bought their homes at the top of the bubble were
motivated by the availability of low adjustable rate mortgages,

Teaser mortgages are not a reflection of the overall interest rate. It's simly a sales gimmick. The false information was that housing only goes up. And that could be the case no matter what the interest rates were.

tatupu70 says

You need an education on what a Ponzi scheme is. Borrowing for appreciating is investing on margin. Not a Ponzi scheme.

I never said Ponzi Scheme itself, but "Ponzi Borrower" You should read up what it is before you tell others to get an education. A business that can not generate enough productive return to service a loan but has to rely on appreciation of the purchased asset to pay off the loan is by definition a "Ponzi Borrower"

tatupu70 says

Your misuse of Ponzi scheme again notwithstanding, most of what you say here is correct. But it doesn't square at all with your earlier statements. They ignored the high risk because they were making so much money. It had NOTHING to do with any implicit guarantee that they wouldn't go bankrupt.

Once again, you need to read up on what "Ponzi borrower" is. As Hyman Minsky laid out, there are 3 types of borrowers: hedge borrowers, speculative borrowers, and Ponzi borrowers. Those who have to rely on (borrowed money purchased) asset appreciation to service loans is by definition Ponzi borrower. There is a market dynamic reason for that name as a gathering of Ponzi borrowers automatically create a Ponzi-scheme like financial trap.

The frenzy of lending to sub-prime NINJA loans had everything to do with the FED:
1. the artificially low interest forced savers all over the world to look for higher yield in risky borrowers
2. the money for those NINJA loans ultimately were from or funneled through the big Wall Street banks backed by the FED. That's how they were found to be leveraged 50:1 or 500:1 when the bubble burst.

tatupu70 says

Nice misdirection. The point is that there was obviously no implicit guarantee to those banks that they wouldn't go bankrupt.

Of course there is. That's why the Lehman event was such a big surprise and shock to the financial industry. More importantly, even through bankruptcy, most ex-Lehman employees and managers came through just fine, and kept their ill-gotten gains, and moved onto similar firms that got extra money and have extra bonus to hand out as a result of Lehman event giving the industry billions of bailout money. The average shareholders who got screwed never had a say in the daily operation of the firms anyway. It's the mangers' own risk/reward that matters in corporate decision making at those firms.

tatupu70 says

We're not talking about the future. We're talking about investing in the present time using borrowed funds. Please try to stay on topic.

"Future" as in the time after the loan is made. Every loan involves estimate of the "future." The "future" for a loan made on January 2nd, 2006 starts on March 1st, 2006, when the first payment is due.

tatupu70 says

Teaser mortgages are not a reflection of the overall interest rate. It's simly a sales gimmick. The false information was that housing only goes up. And that could be the case no matter what the interest rates were.

I'm not talking about negative amortization loans, but adjustable rate loans. For about the same time, people could jump from one credit card to another taking advantage of their 1yr 0% interest rate period. Young people based on that real life experience had good reason to believe they'd be able to roll over loans 3 or 5 years in the "future" when the adjustment comes.

The housing price keep going up in the early 2000's was very much the result of FED keeping interest rate low to bail out the big banks from the dot-com bubble. The dot-com and stock market bubble got as bad as it did in 1999 and early year 2000 because the FED kept interest artificially low to bail out the big banks that had too much exposure in the 1997 Russian credit default and "contagion" in Southeast Asia and Latin America.

Reality says

More importantly, even through bankruptcy, most ex-Lehman employees and managers
came through just fine, and kept their ill-gotten gains, and moved onto similar
firms that got extra money and have extra bonus to hand out as a result of
Lehman event giving the industry billions of bailout money.

How Wall St. firms treat their managers is a private issue. If other firms chose to pay Lehman employees handsomely with money they were loaned is their own business. I don't think you are right, but it's not important. The owners of the firms should be the ones policing that activity. And if they have perverse incentive plans for their managers, it's something the owners should fix.

Reality says

I never said Ponzi Scheme itself, but "Ponzi Borrower" You should read up what
it is before you tell others to get an education.

You're right--I didn't know you were using obscure terms like Ponzi borrower. My mistake.

Reality says

The frenzy of lending to sub-prime NINJA loans had everything to do with the
FED:
1. the artificially low interest forced savers all over the world to
look for higher yield in risky borrowers

Again--low interest rates do allow for riskier investments, but they don't create bubbles. I've already explained how it works. As rates are lower, you can slightly increase the risk of the loans and allow slightly lower credit ratings. Lower interest rates don't create ninja loans. The loss of all underwriting standards was not caused by lower interest rates.

Reality says

I'm not talking about negative amortization loans, but adjustable rate loans.
Young people based on
that real life experience had good reason to believe they'd be able to roll over
loans 3 or 5 years in the "future" when the adjustment comes.

Sure and that could happen whether interet rates were 2%, 4%, or 10%. Adjustable rates are almost always lower than fixed rates.

Reality says

Just look at the pink slime sold to public school lunch programs and prison systems, all with government bureaucratic approval of course!

And pretty all ground beef sold. And the Meatpackers fight like hell to stop implementation of any National Origin mandates. How the hell can I reasonably ascertain where my food is from?

Trust the seller implicitly? That never ends well, see Irish Horsemeat burgers.

And I thought we were criticizing Japan for trying to do the exactly the same. But our QE is more than 10 times what they are doing. So I guess this argument doesn't hold.

I hope you guys understand the devaluation of dollar would mean that there will more polarization between 1% and the rest. There is one good news. Perhaps we can compete for the manufacturing jobs with China. Ooops, wait a minute, China is pegging their currency. So I guess middle class is screwed anyway.

thunderlips11 says

And pretty all ground beef sold.

Not true. Pink slime can only go into ground products. It's not physically possible to mix that into a steak or even soup chunks. Costco never put pink slime in its ground beef, nor did Wholefoods, even before the Pink slime scandal broke out.

And the Meatpackers fight like hell to stop implementation of any National Origin mandates. How the hell can I reasonably ascertain where my food is from?

There's nothing preventing you from buying from one that does label its origin, or even a meat vendor that delivers meat from a local farm to you while the meat is still warm from the body temperature of the slaughtered animal!

Regulations are far more likely to put those local operations out of business . . . just like we are unable to buy unpatuerized milk in most parts of the country because of federal regulation pushed by big milk producers that run national distribution networks and know their pastuerized milk doesn't taste as good as fresh milk from the cows and goats!

Trust the seller implicitly? That never ends well, see Irish Horsemeat burgers.

It's not like the Irish (or should the real case be UK?) don't have their FDA.

tatupu70 says

How Wall St. firms treat their managers is a private issue. If other firms chose to pay Lehman employees handsomely with money they were loaned is their own business. I don't think you are right, but it's not important. The owners of the firms should be the ones policing that activity. And if they have perverse incentive plans for their managers, it's something the owners should fix.

The top executives at Wall Street firms are paid due to their government connections. Ever heard of Rubin? Corzine? That's why the ratio of CEO pay to worker pay is so out of wack! The ultimate fount of that corruption is the FED printing machine.

People often see only the surface of the problems, then propose and support "solutions" that make it worse. "Solutions" that remove individual freedom to enrich big governemnt-industry combines.

tatupu70 says

You're right--I didn't know you were using obscure terms like Ponzi borrower. My mistake.

You are very gracious. I'm very impressed by your integrity shown in that sentence, and went back to modify the above parapgraph and made it less "heated."

tatupu70 says

Again--low interest rates do allow for riskier investments, but they don't create bubbles. I've already explained how it works. As rates are lower, you can slightly increase the risk of the loans and allow slightly lower credit ratings. Lower interest rates don't create ninja loans. The loss of all underwriting standards was not caused by lower interest rates.

Notice there were two points in my previous post:
1. low interest rate cap imposed on savers by the FED
2. FED bailout "lender of last resort" standing at the ready

The two combined, especially the latter, make NINJA loans profitable propositions, especially in what appeared to be a one-way market higher (even the Money-Czar himself said nation wide drop unlikely)

Artificially low interest rate creates bubbles because low interest rate is not sustainable in the long run (due the natural time preference of the population). As soon as the rates go up, any and all investment decisions counting on the previously existing low interest continuing are revealed to be bubble decisions.

To claim that wages increase proportionally in lockstep with inflation utterly and completely defies reality. Unless you are talking about banksta bonuses which can arguably be defined as "wages".

Let me give you 2 concrete examples:

A multi-property landlord leverages the cheap interest rates to snap up some more properties with a million dollar credit and eek out some decent gains by renting them out (as rents rise with inflation until they don't).

Joe "barely getting by" Schmoe gets a 10K loan to pay down bills and pay for rising food and energy prices. He doesn't get any leverage or returns from that and the cheaper interest rate is offset by rising prices.

There may be a tipping point where the currency devaluation does benefit some (at least as long as there is no currency crisis), but that tipping point is very high up in the wealth pyramid and for most defined as "middle-class" (and all of the poor) completely out of reach.

dublin hillz says

OK, but the responsible saver who was not in debt would still get punished as their currency is devalued. And the saver who would get hurt the most would be the one who does not "invest" in assets. In essense, the individual who is the most risk averse (holds their assets in currency) would get hurt the most which is truly ironic but nonethess is what they mean by "inflation risk" in the investment community.

Yep, exactly - we usually don't even talk about them in our debt-addicted society, they are marginalized.

mell says

dublin hillz says

OK, but the responsible saver who was not in debt would still get punished as their currency is devalued. And the saver who would get hurt the most would be the one who does not "invest" in assets. In essense, the individual who is the most risk averse (holds their assets in currency) would get hurt the most which is truly ironic but nonethess is what they mean by "inflation risk" in the investment community.

Yep, exactly - we usually don't even talk about them in our debt-addicted society, they are marginalized.

A big part of the problem for why savers are pariahs in america is because performance in corporations is judged by growth and so is the job security/bonuses of execs so they rely on things like housing bubbles to extract home equity via loans so that people go a buy shit and make it look like economy is growing - that's what 2002-2006 were all about.

Reality says

Notice there were two points in my previous post:

1. low interest rate cap imposed on savers by the FED

2. FED bailout "lender of last resort" standing at the ready

Both of your points are incorrect. The Federal Reserve most definitely does not set rate caps on savings accounts. The free market sets savings rates.

And, second, we've been over illogical your bailout theory is. #1 not all banks got bailed out. #2 even the banks that got loans still lost huge sums of money

Reality says

Artificially low interest rate creates bubbles because low interest rate is not sustainable in the long run (due the natural time preference of the population). As soon as the rates go up, any and all investment decisions counting on the previously existing low interest continuing are revealed to be bubble decisions.

With each post, you seem to change your reasoning as to how low interest rates cause a bubble. You had it right earlier. It's an information and behavioral problem that is more likely correlated with low interest rates rather than caused by them. Low interest rates occur when there is lots of money around with nowhere to go--like now--and those times are ideal for bubble creation.

tatupu70 says

Both of your points are incorrect. The Federal Reserve most definitely does not set rate caps on savings accounts. The free market sets savings rates.

Of course it does, by setting overnight lending rate. If the TBTF bank can borrow at less than 0.25% for as much money as needed at the FED window, why would it pay any deposit much more than that rate.

And, second, we've been over illogical your bailout theory is. #1 not all banks got bailed out. #2 even the banks that got loans still lost huge sums of money

Of course not all banks get bailed out. Only the TBTF gets bailed out; that's the point in having a cartel. Also the TBTF field gets more and more concentrated under the Federal Reserve's 100 year history. I'm not sure what you are trying to say regarding the banks getting the loans still lost huge sums of money. Of course banks lose money when they bet wrong. Without the bailouts some of them would be out of business, and their counter party would also be out of the alleged winning. Artificial construct of lost money in some cases is the deliberate effort at getting taxpayer money. e.g. the AIG case, the real bailout beneficiary is not AIG but GS.

tatupu70 says

With each post, you seem to change your reasoning as to how low interest rates cause a bubble. You had it right earlier. It's an information and behavioral problem that is more likely correlated with low interest rates rather than caused by them. Low interest rates occur when there is lots of money around with nowhere to go--like now--and those times are ideal for bubble creation.

I didn't change my reasoning at all. The most important piece of mistaken information in bubble decision making is regarding the interest rate. The mistake maker assumes the FED would continue with the lower interest rate for even longer. When we are talking about Federal Reserve Notes as money, when there is lots of money around is not exactly a naturally occurring or random event, but a controlled event by the FED.

Reality says

Of course it does, by setting overnight lending rate. If the TBTF bank can
borrow at less than 0.25% for as much money as needed at the FED window, why
would it pay any deposit much more than that rate.

I will admit that I'm not an expert on how banks can manipulate the reserve requirements, but I find it hard to believe that they can overtly mock them by using the overnight lending window each night to meet the requirement.

Reality says

Of course not all banks get bailed out. Only the TBTF gets bailed out;

lol--it's impossible to know beforehand whether you are one of the TBTF banks. So you can't make decisions based on it. I'm sure Lehman thought they were TBTF.

Reality says

I'm not sure what you are trying to say regarding the banks getting the loans
still lost huge sums of money. Of course banks lose money when they bet wrong.

You're arguing moral hazard. I'm saying--how is it moral hazard when they lost huge?

Reality says

The mistake maker assumes the FED would continue with the lower interest rate
for even longer.

The bubble didn't burst because of higher interest rates. Even if rates continued low, housing went have tanked. It was lack of underwriting standards, and that was a time bomb no matter what the rates were.

Reality says

Not true. Pink slime can only go into ground products. It's not physically possible to mix that into a steak or even soup chunks. Costco never put pink slime in its ground beef, nor did Wholefoods, even before the Pink slime scandal broke out.

Uh, Ground Beef is ground, no? It sure looks like it went through the mill to me.

I'm damn sure that the low grade beef sold as "Grade A" in supermarkets is trash, simple test, cook two patties next to each other, one "Grade A Pink Slime" and the other Grass-Fed Beef, same fat content. I think you'll notice very obvious results. Cows are meant to eat leafy green plants, not just corn kernels.

Competition isn't necessarily done by Robert's Rules. Companies compete by any means necessary, including trying to regulate their competitors out of business or at least trying to regulate away their ability to communicate the quality of their product to the consumer.

The COOL law is a battle between importers who want to source the cheapest meat from Chernobyl and Mukden farms and slap a "Grade A" sticker on it, without telling the customer about it. While whiny US rancher-millionaires-on-subsidies want to peddle sickly monotonously-corn-fed cattle as "Grade A".

How come companies don't want to inform the consumer? Usually if it's a good thing, they like to brag. They don't want to tell the consumer because they know many people will not pick up ground beef labelled "Mix of healthy beef from delightful Northern China."

And regulation without enforcement is useless. How many people you know have been arrested for removing the mattress tag from their bed?

Just because crap got by regulators, doesn't mean we shouldn't have regulators.

That's like saying because the police don't make an arrest for every murder or robbery, we shouldn't bother with police at all.

Pink Slime still used in over-the-counter Walmart meat sales:
http://ayzha.wordpress.com/2012/06/02/walmartsams-club-continues-to-use-pink-slime-in-ground-beef/

Pink and White Slime is "Grade A" though!

And I imagine others are doing ditto.

Just to add, most companies only want consumers to know the good shit they want to tell them about their product, not the bad shit.

For example, meat glue or collagulant. Meatpackers and restauranteurs want this little tidbit hidden from the consumer, not disclosed except under the misleading name of "formed meat" which means nothing to the ordinary public. Allows them to charge a premium price for sub-par meat.
http://www.youtube.com/watch?feature=player_embedded&v=S6BAspR3LPo
http://www.dailymail.co.uk/news/article-2144981/How-chefs-use-meat-glue-pig-blood-stick-steaks-together.html#axzz2KJoWTxFb
http://abclocal.go.com/kgo/story?section=news/iteam&id=8888921

How to identify "Meat Glue":

They should be forced to call it what it is, "transgluminase". Not by an industry-approved bullshit term carefully tested in front of focus groups.

thunderlips11 says

Pink Slime still used in over-the-counter Walmart meat sales:

http://ayzha.wordpress.com/2012/06/02/walmartsams-club-continues-to-use-pink-slime-in-ground-beef/

Pink and White Slime is "Grade A" though!

And I imagine others are doing ditto.

Just to add, most companies only want consumers to know the good shit they want to tell them about their product, not the bad shit.

Yet Costco and Whole Foods never put any pink slime or white slime in any of ground meet products. That's the beauty of the Free Market, or more precisely Freedom of Choice! If you want better quality meat, you can go to Costco and Whole Foods, even local farms where you can buy warm meat within hours of slaughter! If you are going through a phase of life when low price is more important, Walmart is also available as a choice without requiring you to catch mice or squirrels just to put some meat on the dinner table.

In places where the government bureaucrats are in charge, the standard issue ground beef in the school lunch program and in the prison system all have pink slime! In fact, they apparently buy the least expensive ground beef most heavily loaded with pink slime! That's how the pink slime issue was discovered as the cooks thought the meat was contaminated with ammonia . . . when in fact that's fully compliant with government regulations!

In fact, if we get more regulations, it's far more likely to see the local farms banned from selling truly fresh meat, just like fresh milk is banned due to Big Milk corporations don't want more tasty and more nutritious competition to their pastuerized milk that can travel on national distribution networks.

tatupu70 says

I will admit that I'm not an expert on how banks can manipulate the reserve requirements, but I find it hard to believe that they can overtly mock them by using the overnight lending window each night to meet the requirement.

That's what "lender of last resort" means. The window is not open when not needed, but open every night when needed, just like the old joke about listening to the husband when the two agrees but listening to the wife when they don't agree. The "reserve requirement" is lowered to Zero on most bank deposits during crunch. Heck, they even forced FASB to suspend honest accounting rules.

tatupu70 says

lol--it's impossible to know beforehand whether you are one of the TBTF banks. So you can't make decisions based on it. I'm sure Lehman thought they were TBTF.

Only a small clique of oligopolies qualify as TBTF. If the opportunity arises for further consolidation within the group, they will, further tighten the grip by reducing competition even within that clique. That's how a cartel works. It's not a disarmament agreement or non-aggression agreement. It's a cartel for keeping others out.

tatupu70 says

You're arguing moral hazard. I'm saying--how is it moral hazard when they lost huge?

The actual decision makers do not lose huge. Angelo Mozillo took home hundreds of millions. Dick Fuld took home tens of millions over the bubble years. Most Lehman Brother executives found employment with the remaining more concentrated clique.

tatupu70 says

The bubble didn't burst because of higher interest rates. Even if rates continued low, housing went have tanked. It was lack of underwriting standards, and that was a time bomb no matter what the rates were.

The bubble was caused by unsustainably low interest rates. The inability by Speculative Borrowers and Ponzi Borrowers to roll over debt when the artificially low rate period was over led to the bubble burst. The underwriting standards issue is a big fig leaf: it's just another phrase for lending to the wrong people on wrong terms. The reality is that from a bubble to a bust someone making $100k a year building houses in a bubble can easily make $0 during the bust! Someone still making $100k a year may also opt to walk away from his home which has dropped from $500k to $200k! There is no bureaucratic lending standards that can guarantee ahead of time people not lose jobs or choose strategic default, unless we are talking about down payment requirement in the 50%+ range. The political class obviously wouldn't let happen, nor would the fiat banking industry bent on rent-seeking on the society via lending as much conjured up money as possible. Don't be naive. Most of what the mainstream media tells you is probably someone's "advertisement"/propaganda including the Money Czar Bernanke's own pronouncement about there being no housing bubble in 2007 and housing market wouldn't collapse in 2008.

Reality says

The underwriting standards issue is a big fig leaf: it's just another phrase for
lending to the wrong people on wrong terms

Of course. That's basically what underwriting standards mean. Reality says

The reality is that from a bubble to a bust no consistent underwriting standards
would work: someone making $100k a year building houses in a bubble can easily
make $0 during the bust! Someone still making $100k a year may also opt to walk
away from his home which has dropped from $500k to $200k!

You're missing the point. The bubble never gets blown up without the abandonment of underwriting standards. You're looking at the bust--you need to look at the why the bubble occurred in the first place. And it wasn't because of low interest rates. It was because of liar loans, neg. amortization loans, teaser loans, etc.. The abandonment of underwriting standards.

thunderlips11 says

Uh, Ground Beef is ground, no? It sure looks like it went through the mill to me.

Costco and Whole Foods grind their own ground beef from chunks. Whole Foods even pack their own sausage. They have been doing that for decades, in order to ensure quality.

thunderlips11 says

I think you'll notice very obvious results. Cows are meant to eat leafy green plants, not just corn kernels.

I can certainly tell the difference. However, there was also a time in my life when cheaper beef was more important. If every cow has to have two acres of grazing ground for 3-5 years instead of 1 acre of corn for 8-12 months, a lot of Americans would have to do without eating beef every day or even once a week. Morally, that decisions should be left to the
individuals consumers instead of some self-appointed know-it-all.

thunderlips11 says

Competition isn't necessarily done by Robert's Rules. Companies compete by any means necessary, including trying to regulate their competitors out of business or at least trying to regulate away their ability to communicate the quality of their product to the consumer.

And your love for regulation plays right into the hands of wannabe monopolists. Regulation creates a power center over-riding consumer choice, and that power center is ripe for capture by the monopolists.

thunderlips11 says

And regulation without enforcement is useless.

The cost of enforcement is yet another argument against regulation.

thunderlips11 says

Just because crap got by regulators, doesn't mean we shouldn't have regulators.

That's like saying because the police don't make an arrest for every murder or robbery, we shouldn't bother with police at all.

If you want to use that analogy, then the failure of most regulations is not failure to arrest criminals but the "police" commiting criminal behavior themselves or "police" being criminal gangs in cop uniforms. BTW, even the real police usually fail to live up to the for-children version description; in real life, most police departments in the world become hopelessly corrupt and need thorough "reform" every generation or two. Just look at the police shooting of innocent people without pretense of investigative work in LA this week. Power corrupts. Over time, even police become caring about nobody but only their own safety, and doing a piss poor job of it, like the broad pattern spray and pray shooting they did. That's why disarming a population and relegating protection responsibility to the police (or regulators) lead to much higher crime rate.

You have to take responsibility for yourself, simply because ultimately you are the one who cares the most about yourself and knows your own situation the best.