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for one misleading aspect of it.  The relative sizes of the boxes give the impression that F.I.R.E is a lot more important to the economy than it really is.  The employee/consumer and producer/employer boxes should be much larger in size to prevent a reader from coming away with an exaggerated impression of the how critical FIRE is supporting to human living conditions in an economy.  Credit institutions are important, but not critical, to the functioning of an economy.
by santiago on Sun Jul 12th, 2009 at 04:14:04 PM EST
You are correct in your description of what the relative sizes of the boxes ought to be.  Sadly, the diagram better represents the actual sizes.  When the USA did manufacturing in US facilities the relative sizes were different.  FIRE has become a giant parasite on the body politic, like a giant leach.  But this leach has captured the brain of its host.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Jul 12th, 2009 at 04:33:23 PM EST
[ Parent ]
The FIRE sector crashed the rest of the economy. On its own.

How much more important would you like it to be?

by ThatBritGuy (thatbritguy (at) googlemail.com) on Sun Jul 12th, 2009 at 04:37:33 PM EST
[ Parent ]
Well, the two are not mutually exclusive: The FIRE sector crashed the economy because it got bigger than its economic function merited.

It depends on whether you think of the picture as a picture of a healthy economy, or a picture of an unhealthy one. (Or as a schematic of the part of the model with which the paper is concerned - drawing the part of the setup which is the focus of a paper to a disproportionate scale/detail is fairly common.)

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Jul 12th, 2009 at 05:08:30 PM EST
[ Parent ]
...and here's what it's up against.....



"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sun Jul 12th, 2009 at 05:33:28 PM EST
[ Parent ]
And the FIRE sector goes into the boxes "Money supply" and "Rental prices of capital," no?

For that matter, there is another serious defect: There should be a political variable for "Profit levels" just as there is a political variable for "Private hourly compensation" - both of these go into the "Unit Costs."

And in my naivety, I thought that the rental price of capital (which is not, in the mature corporation, the same thing as the profit extraction variable) also had a direct influence on unit price in capital-intensive companies. At least if they have "efficient" balance sheets...

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Jul 12th, 2009 at 05:42:26 PM EST
[ Parent ]
I think the FIRE sector goes in a special box with flames coming out of it. Next to the desk with the pile of coke on it.

Is this model really being taught by the so-called experts? It's just a little - well - wrong, isn't it?

by ThatBritGuy (thatbritguy (at) googlemail.com) on Sun Jul 12th, 2009 at 06:02:35 PM EST
[ Parent ]
... which is more important. Being a modern macroeconomist involves a trained incapacity to understand that money is not neutral ... not in the short period nor in the long period.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Sun Jul 12th, 2009 at 07:13:00 PM EST
[ Parent ]
Actually, only the commercial banking sector is in the "money supply" box, and the money supply box involves pretending that the money supply is exogenous, so it is "money supply including the banking system assuming that the banking system acts as a passive transmitter of Central Bank policy.

And while FIRE transactions are heavily involve in determining "rental prices of capital" ... in a model like the above, that's a functional model of price, so there's no actual FIRE sector representation ... their place is taken by falsified black box models acting as proxies.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Sun Jul 12th, 2009 at 07:10:59 PM EST
[ Parent ]
It's true. FIRE did break the economy, and recessions caused by financial system failures are always much worse than when caused by declines in other sectors.  However, as at least one of the economists in the list in this diary have shown -- Schiller -- the reason that FIRE can do so much damage to the economy is precisely because people think it is much more critical than it really is. When the farming sectors faces trouble, the rest of the economy doesn't worry, even though it potentially means a threat to local food supplies.  But when banking goes bad, everyone goes crazy, even though the worst thing that can happen is that some people won't get their loans repaid.  Go figure.
by santiago on Sun Jul 12th, 2009 at 10:13:41 PM EST
[ Parent ]
When the farming sectors faces trouble, the rest of the economy doesn't worry, even though it potentially means a threat to local food supplies.  But when banking goes bad, everyone goes crazy, even though the worst thing that can happen is that some people won't get their loans repaid.

Our government and society is no longer organized for the benefit of farmers.  For more than a century our society and government have been organized for the benefit of those with lots of wealth, call them the capitalists.  That organizing effort has increasingly come to be exercised through the big banks.  That organization extends to media and to educational institutions.  So we have been conditioned to see a danger to the banks as a danger to the society, whether it is or not, and we have been conditioned so as not to be able to imagine a society not dominated by the wealthy through big banks.

A grave threat to our agricultural sector would not be perceived as being nearly as significant as a less serious threat to the banks.  In fact our response to such a threat to agriculture will probably be like that of the frog that fails to jump out of a pot of water that is being heated while it still retains the ability to do so.  

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Jul 12th, 2009 at 11:38:33 PM EST
[ Parent ]
In a monetary production economy, when the commercial banking system goes crazy, the worst thing that can happen is that nothing is produced and everyone starves ... since in a monetary production economy, money is the institution that is used by going concerns to claim control of productive resources in advance in order for production to proceed, and banks are responsible for the creation of the majority of the money supply.

Indeed, while the farming sector was already in trouble in 1930, the bank collapses of 1930, 1931 and 1932 certainly made that worse.

Which is why the major reform of the First New Deal that stands with the multiple reforms of the Second New Deal is Glass-Steagall, which did not allow commercial banking to play with the dangerous part of FIRE. The very same FIREwalls that the commercial banking system has been engaged in tearing down ever since.

If Glass-Steagall does not work over the long term in a financial-market dominated system, because of the ongoing efforts of commercial banks to act as middlemen for the financial markets, that seems to imply that a financial-market dominated system itself is untenable.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Mon Jul 13th, 2009 at 12:31:25 AM EST
[ Parent ]

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