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The "W" Recovery?

by ARGeezer Tue May 12th, 2009 at 02:32:40 AM EST

Leo Kolivakis of Pension Pulse posted a very long (17pp?) but meaty discourse, The "W" Recovery?, on the possible directions our economic future could take as a guest post on Naked Capitalism.  In the process he quotes several other economists and engages in typical "on the one hand and on the other hand" back and forth on topics such as inflation vs. deflation.  But in the end he makes an interesting case for a relatively long and strong bear market rally that will, at its peak, convince most market participants that it is genuine recovery, only to fall back to more recent lows and mostly stay there for another six or seven years.  He may or may not be correct in his forecast, but at least he provides a framework for consideration that is more detailed, better reasoned and more thoroughly considered than any I have seen to date and he assembles an intriguing ensemble of supporting arguments.  If you are so inclined, just click on the title above and go directly to Leo's post.  Below is a seriously abridged collection of the highlights with some comment and continuity by yours truly.

From the diaries - afew


After describing the necessity and benefits of a coming transition to a higher savings rate in the US, the benefits and the downside inherent in the paradox of wealth thrift, Leo cites a recent interview by TIME's Barbara Kiviat of Robert Shiller, the Yale University economist who helped create the home-price gauge.  Shiller doesn't think home prices have bottomed out, but has a couple of interesting ideas to mitigate a repeat of the real estate asset debacle.

People are talking about the housing market bottoming out. Do you believe it?

The conspicuous fact with our [Case-Shiller] data is that prices are still falling, although at a somewhat lower rate. There is also some sign of pick-up in pending-home sales. But to me the dominant fact is that prices are still falling. We've never seen a real estate market turn on a dime. For the longer horizon, though, it's possible that we are picking up. The other thing that is striking is that home prices have come down a lot, so they're no longer very overpriced.

If houses are no longer overpriced, but prices are still falling, does that mean we're overshooting?

That is the issue, whether we'll overshoot and end up being below, in inflation-adjusted terms, where we were in 1997. We're not quite down to where we were before, but we're getting close. Overshooting is typical in the stock market, but in the housing market, I don't know. We've never really had such a big, national bubble in the housing market before.

Are there structural changes we need to make so that we don't have this sort of craziness again?

Yes. This crisis was substantially caused by a failure to manage real estate risk. Notably, we got individual homeowners into a leveraged position typically with their entire life savings in real estate in one city, in one house. That's very risky. I have one proposal for continuous workout mortgages. Right now we think it's a great thing if banks will give struggling homeowners a workout. Why do we only want to come in after the fact? My vision for our future is that it should be planned for and priced into the initial mortgage. We could update mortgages in a way they protect people from things beyond their control-- like high national unemployment.

What else?

Home-equity insurance. We want to have homeowners' insurance, which protects against things like fires, updated so that it protects against a loss of market value. Fires were a big problem hundreds of years ago. Houses were burning down all the time. Now we've developed a different problem--the residential housing market has gotten much more volatile.

The company you started, MacroMarkets, just got approval for tradable securities linked to the Case-Shiller house-price index. How does that factor in?

One reason we have bubbles in the housing market is because there's been no way to short housing [that is, to make money when prices fall]. The ability to short is essential to an efficient market, otherwise there's nothing to stop zealots from pricing things abnormally high. If you buy one of these long securities, called UMM, it's like buying a house, except you don't have to go through the real estate agent, take possession of a property, maintain it, rent it out. But we also have the DMM, which is short housing. Markets like this will also create an infrastructure for products. For example, insurers could issue home-equity insurance and then hedge themselves by taking a position in this market.

Later he cites  Andy Kessler of the Weekly Standard on Putting the Toothpaste Back in the Tube:

A shadow banking system--Lehman, Bear Stearns, Merrill Lynch--was borrowing short-term in money markets at, say 2 percent, and instead of the classic 10:1 leverage of banks, they were levering up 30:1, sometimes 50:1, creating money out of thin air well beyond the intention of the Federal Reserve. It didn't show up in prices, mainly because of a huge and productive tech sector as well as the waves of cheap Chinese laborers who were providing cheap shoes and toys and furniture to Wal-Mart, "hiding" the over-creation of money. But it did create a shadow economy of home builders, linoleum layers, decorators, Home Depot Expo salesfolks, and on and on.

    And that was shadow wealth. The only real wealth is wealth that is productively created. The rest is just paper. After the collapse of the banking system, sunny and shadow, hoarding became the order of the day. The world rushed into U.S. Treasuries. Short-term rates as a result are almost zero. The dollar has been a safe harbor, jumping versus the euro and the yen. No one wants to spend money, on houses, on cars, or even, gasp, on big screen TVs. So the velocity of money has shrunk. To what? Well, no one really knows.

    So to make up for lower velocity, to keep the economy from shrinking like a raisin, the Fed has been increasing the monetary base to increase the amount of money in circulation. But it's hard. Even with TARP funds, banks don't want to lend, so their 10:1 increase of Fed money isn't happening, let alone 50:1 Bear Stearns-style money creation. Bernanke has therefore been buying U.S. Treasuries, with cash, to increase the money supply. Which is pretty funny since he is also selling U.S. Treasuries out the back door to fund the $787 billion stimulus package and the $1.3 trillion Obama budget deficit.

    The Fed can put all the cash it wants or thinks it needs into the economy, but someday, maybe soon, maybe in a year or two, the economy will start growing again. People will stop hoarding dollars. Their 2004 Taurus will be looking a little old. Baby needs a new pair of shoes. Banks will start lending again to businesses and maybe even to home buyers. As money starts getting spent, all that money's velocity starts increasing. Oops, there goes the price level. With so much money floating around, chasing too few goods, inflation is a-comin'. The Fed will have to start pulling all that extra money off the street and back into its vaults. And in just the right amount.

After discussing the possible reactions of China to dollar devaluation he cites Henry Blodget to substantiate his prediction of a "W" recovery.

Sorry, We're Still Screwed  


(Photo included in honor of afew's sig line.)

Yesterday, we explained why Jeremy Grantham, a former bear, is now a short-term bull.  Basically, he thinks the fire-hose of stimulus will drive stocks (if not the economy) up another 10%-20% by the end of the year.  But please note the emphasis on "short-term."

After our current rocket rally plays itself out, Grantham thinks, the market will once again crash and then stay in the dumps for at least seven years.

Why?

Because of the massive declines in our net worth, our debt problem, and compression of price-earnings ratios.  Specifically, we've lost our shirts and we feel poor--which isn't conducive to profligate spending.  We still need to get rid of $10-$12 trillion of debt.  This debt-reduction process will pressure profit margins (lower leverage) and pressure spending--because we'll have to save more instead of spending it.  We'll also need inflation to reduce the real burden of the debt.

Leo Kolivakis' final argument comes from Johns Hopkins professor Steve Hanke in his column in Forbes twin recessions.

"Investors watching the recent rally may think that the Fed has stabilized the markets and saved the day but its approach is fraught with danger," says Hanke.

"As the self-regenerative powers of the market system kick in, the demand for money will fall and the velocity of money will correspondingly go up.

"Unless the Fed shrinks its balance sheet by selling bonds and mopping up excess dollars, inflation will roar back with a vengeance."

Hanke fears the Fed will put off such decisions for at least two years, with congressional elections due and Bernanke's term due to expire in 2010, but will "eventually have to bite the bullet and shrink its balance sheet to fight inflation."

This could push up interest rates and cause a 'W' shaped recovery says Hanke.

The second "V" of this "W" appears to have a long bottom and a lazy right hand rise.  Seven years in the wilderness after the second crash?  

Display:
If you buy one of these long securities, called UMM, it's like buying a house, except you don't have to go through the real estate agent, take possession of a property, maintain it, rent it out. But we also have the DMM, which is short housing. Markets like this will also create an infrastructure for products. For example, insurers could issue home-equity insurance and then hedge themselves by taking a position in this market.

Hmm... I am skeptical. Divorcing the gains derived from price fluctuations from ownership and control of the underlying assets strikes me as a way to make crazy speculation easier, not harder.

If you don't want homeowners to leverage more than 5:1, then simply flat out outlaw mortgages with less than 20 % down payment, 10-15 years repayment schedule. And flat out outlaw all these casino mortgages.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon May 11th, 2009 at 03:38:46 AM EST
This

Kolivakis:

Home-equity insurance. We want to have homeowners' insurance, which protects against things like fires, updated so that it protects against a loss of market value.

is scary.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon May 11th, 2009 at 04:09:44 AM EST
[ Parent ]
Very.

I have been arguing for a long time that one's primary residence is not an investment and considering it so (as in, home equity withdrawals) is like gambling one's shirt.

These people are intent on propping up asset values but, who's going to insure the market value of a house? AIG?

Wikipedia: Portfolio insurance

Short selling index futures can offset any downturns, but it also hinders any gains.

The technique, invented by Hayne Leland and Mark Rubinstein in 1976, is often associated with the October 19th, 1987 stock market crash.

This is one of the strategies that can only work if only a small number of people engage in it. If it becomes standard, the "insurance" evaporates and people are left with a false sense of safety. Then the whole thing crashes.

The brainless should not be in banking. — Willem Buitler
by Migeru (migeru at eurotrib dot com) on Mon May 11th, 2009 at 04:25:58 AM EST
[ Parent ]
Dear Mr. Shiller,

Are you out of your mind?  Do you understand that's what hedge positions and CDSes really are?  Do you understand that treating your home, your next meal, and your children as fungible commodities to be leveraged and marketed is the problem, not the solution?

by rifek on Mon May 11th, 2009 at 09:20:13 AM EST
[ Parent ]
He understands that financial innovation is an unalloyed good.

The brainless should not be in banking. — Willem Buitler
by Migeru (migeru at eurotrib dot com) on Mon May 11th, 2009 at 09:36:08 AM EST
[ Parent ]
his point is that it's possible to bet on house prices rising, but not to bet on them falling, ie there is no one to limit housing bubbles (a bubble which he has been amongst the first to predict and describe and, finally, measure, through his now widely used index).

He's saying that with instruments allowing to bet that house prices are too high, there would have been less leveraged lending by financial players on house prices rising, because there would have been an explicit sign that prices were already too high, via these indexes.

Could the bubble have been any worse than it has been? Leverage was not limited. If you have a market that is able to signal this more effectively (ie by letting people bet against it), then you have something better than the current situation.

This is not about people betting their houses (they did). This is about having some market signals that tell banks that they can't lend more than a givne number against real estate.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Mon May 11th, 2009 at 01:43:56 PM EST
[ Parent ]
his point is that it's possible to bet on house prices rising, but not to bet on them falling, ie there is no one to limit housing bubbles

I can see that logic, and in a sense and with certain assumptions, it kinda sorta works.

But I'm not convinced. Remember the situation where the gamblers wanted people to short their horse manure paper, because every short position created a new long position for the gamblers to hold?

This is not about people betting their houses (they did). This is about having some market signals that tell banks that they can't lend more than a givne number against real estate.

What I don't see is what this instrument does that you can't accomplish with a blanket rule prohibiting any kind of financing of owner-occupiers that is not a vanilla 15-year fixed-rate mortgage with 20 % down payment.

I have yet to hear a single convincing reason that all these casino mortgages should even be legal in the first place, nevermind the derivatives madness built on top of them.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon May 11th, 2009 at 02:49:24 PM EST
[ Parent ]
The way I see it is that the problem isn't in the casino mortgages as much as it is in the undeserved bailouts of those who underwrote the mortgages and ran the derivatives madness.
by vladimir on Mon May 11th, 2009 at 03:59:01 PM EST
[ Parent ]
The casino mortgages are also a problem, because they drive up the market price of homes (primarily for home-owners, but you see rental price inflation during a housing bubble as well). Because the most irresponsibly leveraged players on the market will be able to out-bid more conservative homeowners.

Additionally, there is nothing wrong with keeping two safety nets, just in case the first one proves to be insufficient...

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon May 11th, 2009 at 04:32:40 PM EST
[ Parent ]
If you get a win from casino mortgages macro-lending, and then get a huge bailout from the government for pretend losses, how is that a problem?

The somewhat obvious problem with any insurance scheme is that it would be unworkable. Realistic premiums wouldn't be affordable, which would mean that only rich people could afford them, which would make the whole thing a joke. (Although not any more of a joke than what happened recently.)

Or you could have unrealistic premiums which wouldn't provide useful cover because the insurer would go bust as soon as the market turned.

Perhaps there's some magic way to have realistic premiums and enough cash on hand to survive a massive downturn. But I don't understand how that would be possible - if the insurance isn't selective you'd be insuring the losses of the market in full, and that means collecting a huge pile of cash.

Of course if you can influence lending to make it minally risky then you're probably onto a nice little earner - for a while, at least.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon May 11th, 2009 at 04:42:46 PM EST
[ Parent ]
if the insurance isn't selective you'd be insuring the losses of the market in full, and that means collecting a huge pile of cash.

In which case you'd be draining so much cash from the housing market as to dampen the bubble.

Similarly to a scheme I suggested in reaction to the Easter European mortgages in strong foreign currencies: if Eastern European central banks cannot prevent capital flows and will be expected to deal with the inevitable collapse of their banking system under the weight of excessive lending in foreign currencies, they can always buy foreign reserves in an amount equal to the foreign currency credit exposure of the banks. The Hungarian banks lend €100M? Then the Hungarian central bank buys €100M with newly created fiat Forint. This depresses the exchande rate of the Forint by a bit. Eventually the central bank has depressed the currency to the point where the carry trade is no longer profitable and the banks stop lending in foreign currencies. And if the baks need to be rescued from their debt, the central bank has just the right amount of reserves on hand to unwind the positions and prevent a currency collapse.

So if someone collected realistic insurance premiums from house buyers and put the cash aside, you might have an automatic stabilizer. But a housing-index futures market-maker would use that cash to gamble elsewhere...


The brainless should not be in banking. — Willem Buitler

by Migeru (migeru at eurotrib dot com) on Mon May 11th, 2009 at 04:52:29 PM EST
[ Parent ]
If the bubble is dampened, there's no need for the insurance in the first place.

Which is more or less the point - you're not insuring against small losses in value, but against impossible losses created in a housing crash.

If the aim is to prevent a bubble/bust, there are better ways to do that.

If the aim is to make money from insurance, then you'll soon be in the health care situation, where premiums grow with no limit and housing becomes unaffordable.

If you're really cunning you'll be able to create a crash with no bubble, while shorting your own housing investments at the same time.

$$$profit!$$$ - but possibly not a sane way to run a housing market.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon May 11th, 2009 at 05:00:51 PM EST
[ Parent ]
Schiller doesn't advocate running the housing market but leaving it to its own devices...

The brainless should not be in banking. — Willem Buitler
by Migeru (migeru at eurotrib dot com) on Mon May 11th, 2009 at 05:04:26 PM EST
[ Parent ]
Does trading in stock index futures prevent or moderate stock market bubbles?

Since the answer is 'no', I don't see how the argument holds for houses.

In addition, as soon as a the housing market started to go down, people would break out the torces and pitchforks and ask for the lynching of those shorting the index futures.

The brainless should not be in banking. — Willem Buitler

by Migeru (migeru at eurotrib dot com) on Mon May 11th, 2009 at 03:40:40 PM EST
[ Parent ]
I can see some logic behind Shiller's proposals.  Providing a way to short the housing market could act to contain speculation.  But that it could does not mean that it will.  It depends on how it is implemented.  And to this point in the USA the prospects for a beneficial implementation seem scant.

Prior to unleashing such products on the market there should be an informed public discussion with lots of analysis and modeling of the impact.  And the nature and the appropriateness of the models and their use would have to be part of the discussion.  That would be a revolutionary change in how we implement regulation and is, IMO, unlikely at best.

The way we do things now is more likely to give rise to systems that have all of the downside features and few of the benefits.  

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

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon May 11th, 2009 at 05:39:08 PM EST
[ Parent ]
The logic behing Schiller's proposals is that to solve any problem you have to create a tradeable financial asset so the market can work its magic. Runaway greenhouse gas emissions? Cap and trade! Asset price bubbles? Asset price index futures!
Providing a way to short the housing market could act to contain speculation.
The point is not to provide a way to short the housing market. The point is to remove the market price risk from a house purchase. But if you're going to short the Case-Shiller index when you buy a house, you need someone else who's willing to take the long position in the future. That is, someone who will bet that house prices will increase by buying a liquid future, not an illiquid house.

Thinking about this, it seems like a total scam.

Ignore inflation for a minute (assume the futures are inflation-indexed). Suppose you buy a €100k house with 20% down payment and you want to insure against a drop in house prices. You need to take a short position in €100k-worth of house price index futures. This will cost you nothing but you'll have to post collateral into a margin account. Say you're required to post 10%. You post €10k into your margin account. Note that the house is now costing you €110k instead of €100k, so you probably had to have €22k down payment rather than €20k and borrow €88k rather than €80k. You will make Euribor on the collateral, which will partially offset your mortgage interest payments but on a gross basis you'll pay more interest than on the original €80k mortgage. The tax treatment of the mortgage and the margin may differ. Anyway, suppose your house goes up in value by 5% in a year. You now have a €105k-worth short position in the house index future, so you owe an additional €5k on the future contract at expiration. This is taken from your margin account, which is now down to €5k. You may get a margin call asking you to bring your margin back to 10% of notional so you now must post an additional €5.5k into your margin account. This is on top of your mortgage interest! If you can't post the margin your futures position is closed out and you lose the insurance.

This is insanity.

The flaw in the whole thing is to presume that a primary residence is an investment. It isn't. It's a home.

The brainless should not be in banking. — Willem Buitler

by Migeru (migeru at eurotrib dot com) on Tue May 12th, 2009 at 03:59:23 AM EST
[ Parent ]
Migeru:
The flaw in the whole thing is to presume that a primary residence is an investment. It isn't. It's a home.

The flaw in the whole thing is that his markets are based upon deficit ie claims over value, rather than upon value.

The right to occupy land/location over time has an intrinsic value in exchange. So has the right to use energy over time, and the right to use knowledge over time.

Units redeemable in these rights are valuable, and IMHO can and should form key elements in a coherent financial system.

A primary residence consists of capital invested in a location. The occupier has exclusive rights of use of both the capital, and the location.

It is also a home.

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

by ChrisCook (cojockathotmaildotcom) on Tue May 12th, 2009 at 04:43:32 AM EST
[ Parent ]
ChrisCook:
Units redeemable in these rights are valuable, and IMHO can and should form key elements in a coherent financial system.
In other words, securitisation of real estate is okay...
The flaw in the whole thing is that his markets are based upon deficit ie claims over value, rather than upon value.
Another flaw in Shiller's scheme is that, because houses are just about the most illiquid assets out there, and they can't be shorted, the Case-Shiller index futures market could decouple from the price of actual houses. So his argument that a liquid market in CS Index futures would provide better price discovery and dampen housing price bubbles is also faulty. A liquid market in oil futures does not prevent speculative bubbles.

For home equity insurance, it might be better to consider put options on the Case-shiller Index. But those would be expensive. And there couldn't be market-makers in that market because they can't hedge a short put position because you can't short houses and setting aside the necessary collateral would be too expensive. So the only "insurers" would be speculators "writing naked puts".

The brainless should not be in banking. — Willem Buitler

by Migeru (migeru at eurotrib dot com) on Tue May 12th, 2009 at 05:00:41 AM EST
[ Parent ]
Migeru:
In other words, securitisation of real estate is okay...

Not quite.

I would define securitisation as the packaging through financial claims made by financiers over assets owned by someone else.

eg loans secured by mortgages over land in individual, trust or corporate ownership.

I advocate unitisation, through the issue by the owner (or fractional owner) himself of units redeemable in rights of use.

Such direct investment does not require credit intermediaries.

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

by ChrisCook (cojockathotmaildotcom) on Tue May 12th, 2009 at 05:28:55 AM EST
[ Parent ]
Note the key difference here between the two: securitisation of mortgages addresses the lumpiness of mortgage assets by pooling mortgages and then issuing structured rights on the stream of income from those mortgages.

Where CDO's amplify systematic risks is when CDO's themselves are pooled, and structured rights on streams of income to the pool of CDO's are issued. There is no incentive to do this multi-layering with the most senior of the original CDO's, and so this is typically done with more junior grade CDO's to create two (or higher) layer CDO's resting on what is originally junk.

There has to be a middleman to form the pool.

By contrast, unitization breaks each of the mortgage income streams into pieces, allowing individual investors to form their own pool, by buying a diversified portfolio of units.

As with any portfolio, it would be possible for a mutual fund to do the same thing, with people buying into the mutual fund to participate in a more diversified pool than they could put together ... but the middleman is optional, not essential.

And since the units are unstructured, there is no amplification of systemic risk in the process of forming portfolios of units.


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 Tue May 12th, 2009 at 12:06:01 PM EST
[ Parent ]
Migeru:
Anyway, suppose your housethe Case-Shiller house price index goes up in value by 5% in a year.


The brainless should not be in banking. — Willem Buitler
by Migeru (migeru at eurotrib dot com) on Tue May 12th, 2009 at 06:23:25 AM EST
[ Parent ]
Do you understand that treating your home, your next meal, and your children as fungible commodities to be leveraged and marketed is the problem, not the solution?

If I want to play my home in a game of poker, why should the government stop me? It's a question of individual freedom that I've grown accustomed to appreciating... Next thing you know, they'll be telling me what to eat & drink - for my own sake. I don't believe that is government's role.

by vladimir on Mon May 11th, 2009 at 03:54:58 PM EST
[ Parent ]
The problem is that when lots of people lose their shirts in a housing crash they expect the government to come to the rescue.

The brainless should not be in banking. — Willem Buitler
by Migeru (migeru at eurotrib dot com) on Mon May 11th, 2009 at 04:05:33 PM EST
[ Parent ]
Yeah. The "solidarnost" thing isn't easy to manage if you also expect society to be responsible and accountable.
by vladimir on Mon May 11th, 2009 at 04:25:03 PM EST
[ Parent ]
... they undermine property values in the area where they played the game, and where there is a family involved, create social costs when they can no longer care for their dependents.


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 Tue May 12th, 2009 at 12:09:13 PM EST
[ Parent ]
vladimir:
If I want to play my home in a game of poker, why should the government stop me?

Because if everyone does it a few people will get rich and most people will be homeless.

It becomes a social game with destabilising consequences, rather than a risky bit of fun for four or five individuals.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Tue May 12th, 2009 at 06:22:16 AM EST
[ Parent ]
Everyone won't do it.
Those who will do it will be doing it to maximise their utility function.

Applying your logic to other activities if society would imply that :
> smoking & drinking should be banned (because a few are getting rich at the expense of the many who are dying... of cancer, of stroke, ...)
> gambling should be banned

And we can stretch the logic further and seek to regulate other aspects of society for the benefit of the masses:
> medical fees should be capped
> the price of medicine should be regulated
> the price of basic amenities should be capped
> in fact, all profiteering should be banned, whatever its form.

by vladimir on Tue May 12th, 2009 at 09:27:31 AM EST
[ Parent ]
vladimir:
in fact, all profiteering should be banned, whatever its form.

This would be wrong, why?

End-user medical and drug fees are capped in countries with socialised medicine. Given the quasi-eugenic disaster that is health care in the US, this is usually seen as a good thing.

Anti-social behaviour - including drinking and smoking - is limited, regulated and/or heavily taxed.

Profiteering is anti-social. I don't see a problem with limiting it.

There may be some problems defining the line between profiting from real innovation which is making a useful social contribution, and profiteering. But that's a rather different issue.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Tue May 12th, 2009 at 09:32:57 AM EST
[ Parent ]
We should also ban individual access to the stock market (good bye Boursorama, E-trade, Schwab, ...) because there is NO WAY individuals can compete with large banks... who are profiteering.

Although you may label profiteering as anti-social, it's what drives business today - and what has driven economic development for the past 5000 years.

The US health care system is in a shambles... for the lower echelons of society. That's a real problem. Although capping health care costs (like any costs) will provide a short term fix but will kill long term innovation.

by vladimir on Tue May 12th, 2009 at 10:32:54 AM EST
[ Parent ]
We should also ban individual access to the stock market (good bye Boursorama, E-trade, Schwab, ...)

Yes, suckers who don't know what they're doing should not be in the stock market. But not for the reason you suggest.

Although you may label profiteering as anti-social, it's what drives business today - and what has driven economic development for the past 5000 years.

That is highly debatable, even leaving to one side the highly non-trivial difference between seeking profit (i.e. return on capital investment) and profiteering (i.e. rent seeking, blackmail, abuse of monopoly power, etc.).

capping health care costs (like any costs) will provide a short term fix but will kill long term innovation.

[Citation Needed]

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue May 12th, 2009 at 12:15:54 PM EST
[ Parent ]
[Citation Needed]

All you need to do is look at the number of patents registered over the past 50 years per country. You will see that the US comes out on top - for a number of sectors, including medical & pharma. Yet... its healthcare system sucks for the ordinary citizen.

by vladimir on Wed May 13th, 2009 at 02:12:25 AM EST
[ Parent ]
The number of patents is not a very good measure of progress. Sometimes things are patented to prevent the competition from implementing them. And sometimes patents are granted for things that shouldn't be patentable.

The brainless should not be in banking. — Willem Buitler
by Migeru (migeru at eurotrib dot com) on Wed May 13th, 2009 at 04:02:32 AM EST
[ Parent ]
And, as I recall, the rules for patenting in the US have often been much looser than elsewhere, and there was a culture of claiming patents not necessarily present elsewhere.
by Colman (colman at eurotrib.com) on Wed May 13th, 2009 at 04:04:03 AM EST
[ Parent ]
Actually, has anyone seen any analysis of the factors that confound the naive comparison of patent statistics as a measure of innovation?
by Colman (colman at eurotrib.com) on Wed May 13th, 2009 at 04:10:08 AM EST
[ Parent ]
Socratic Economics diary?

The brainless should not be in banking. — Willem Buitler
by Migeru (migeru at eurotrib dot com) on Wed May 13th, 2009 at 04:23:17 AM EST
[ Parent ]
For example, tax deductions are not patentable anywhere else. Not that I know anyway.

Fortune Magazine (NEW YORK) - Aug. 30, 2006

NEW YORK (Fortune Magazine) -- The Internal Revenue Service has a surprising new enemy in the battle against abusive tax shelters: The United States Patent and Trademark Office.

In recent years, the Patent Office has begun granting patents to people who claim to have invented novel ways of avoiding taxes. The trend is part of a larger explosion in the number of patents granted to financial firms for so-called "business method" innovations.

So far, 48 patents for tax reduction strategies have been granted and at least another 61 applications are pending.



Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se
by A swedish kind of death on Wed May 13th, 2009 at 05:31:14 AM EST
[ Parent ]
Why is it an enemy? If you can't get someone on tax evasion, you can get them on patent violation. Maybe the IRS should take out some patents themselves to make the process easier.
by gk (gk (gk quattro due due sette @gmail.com)) on Wed May 13th, 2009 at 05:33:52 AM EST
[ Parent ]
Because Fortune needed an angle?

Actually, I like TechDirt's angel better:

I'm Sorry, You Can't Use That Deduction: It's Patented | Techdirt

I'm Sorry, You Can't Use That Deduction: It's Patented
from the say-what? dept

It's no secret that we have some problems with the way the patent system is set up, especially when it comes to things like business method patents. However, sometimes a situation comes along that so perfectly explains the problems with these types of patents, there's just not much to add.



Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se
by A swedish kind of death on Wed May 13th, 2009 at 06:31:49 AM EST
[ Parent ]
Certainly isn't a perfect indicator, but it's nevertheless a good measure of the innovations produced by a given society. The US economy, post WWII, has clearly been among the most innovative of all.
by vladimir on Wed May 13th, 2009 at 04:16:00 AM EST
[ Parent ]
I disagree: it seems to me that it's very likely a good measure if and only if you're trying to establish that the US economy is more innovative than others.

And that's before we start analysing who paid for the research behind most of those patents. What's the odds that most were actually funded by government money? Collectivism for the win!

by Colman (colman at eurotrib.com) on Wed May 13th, 2009 at 04:19:30 AM EST
[ Parent ]
No, it's not an indicator of anything, except the fact that US patent law is insane. Most of those patents would never have been granted in the EU.

Additionally, specific to the medical industry, the American patent system encourages "me-too" drugs, because it has over-zealous protection of patent holders, and laughably weak protection of prior art. So if you want to compare to European patent law standards (which frowns upon "me-too" drugs), you have to cut the US number by a quite considerable factor. I haven't done the math, but a factor of two or three would not surprise me.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed May 13th, 2009 at 04:51:48 AM EST
[ Parent ]
And how many of these were the result of research directly funded by the government?
by gk (gk (gk quattro due due sette @gmail.com)) on Wed May 13th, 2009 at 04:18:41 AM EST
[ Parent ]
US Government is on the bottom of the list.
Here's the data for 2005:
http://www.uspto.gov/go/taf/top05cos.htm

BUT... that doesn't mean that the public sector doesn't fund basic research. It does. In the health sector for example, it finances R&D through the NIH, which distributes funds to universities and private labs based on grant requests.

by vladimir on Wed May 13th, 2009 at 04:36:14 AM EST
[ Parent ]
Actually, the latter is what I had in mind - R&D financed by the government, that is then patented by the researchers or drug companies.

But your link intrigues me. I had no idea that the U.S government patents so many things directly. What sort of things do they patent, and why do they patent them rather than just publish the discoveries to put them in the public domain?

by gk (gk (gk quattro due due sette @gmail.com)) on Wed May 13th, 2009 at 04:45:19 AM EST
[ Parent ]
Because the "prior arts" clause in US patent law is a joke - it has loopholes you can drive a train through, when it is enforced at all (and it usually isn't).

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed May 13th, 2009 at 04:48:35 AM EST
[ Parent ]
Close to $80 billion government funding for R&D.
Here's the detailed breakdown:
http://www.nsf.gov/statistics/nsf07332/pdf/nsf07332.pdf
by vladimir on Wed May 13th, 2009 at 04:44:20 AM EST
[ Parent ]
Erratum. That's $143 billion per year funded by government. The breakdown per sector is on page 5 of the PDF document.
by vladimir on Wed May 13th, 2009 at 04:49:05 AM EST
[ Parent ]
Those 5000 years of economic development have a better than 50:50 chance of decimating the biosphere in the next century.

I don't see that as a win, or believe that a more intelligent and measured approach - free of self-serving pseudo-Darwinian nonsense like 'maximising utility' - isn't possible.

Sooner or later it becomes obvious that short term gain isn't synonymous with brave crusading free enterprise, but with strategically blinkered self-destructive animal stupidity.

Some limits are necessary now - or no one will enjoy the alternative.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Tue May 12th, 2009 at 03:49:56 PM EST
[ Parent ]
If I may... I think we're mixing up a couple of issues here. Mankind's problems with the degraded environment are the result of a very simple formula: population x consumption.

I see that you believe that man is not what man has proven to be throughout history... or that man can be changed. Indeed, that is a brave crusade. The Chinese have a good saying: "If you piss against the wind, you will be pissed upon".

by vladimir on Wed May 13th, 2009 at 02:04:29 AM EST
[ Parent ]
Pithy, but trite and wrong.

Of course man can be changed. Do you think humans still eat each other, or crap wherever they like with no thought of hygiene?

5000 years ago both of those were common. Now we find them revolting and barbarous.

Likewise with economic theory, which is just a less direct kind of cannibalism.

If you're worried about getting pissed on, I don't think the proponents of trickle down are the best people to be paying attention to.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed May 13th, 2009 at 02:41:07 AM EST
[ Parent ]
You're arguing against individual interest in favour of collective interest.

While I do see merit in a dose of collectivism, recent history has shown us that collective policy without regard for individual freedoms (read: economic freedom - or personal economic utility if you prefer) leads to a degradation of collective well being... and indeed, a degradation of collective wealth. Citation? Neither kolkhoz nor kibbutz ever made it to main stream social policy. Why? Because the values these systems offer don't correspond to man's desire to exercise individual freedom - at every level.

But you want to change man. Perhaps you would argue that this can be done through a benign period of "dictatorship of the proletariat".

Been there. Done it.

by vladimir on Wed May 13th, 2009 at 03:33:25 AM EST
[ Parent ]
I think he's arguing for balancing the two.

Turns out that the free-market types are all for it except when it will benefit them: collectivism is just fucking dandy when it's protecting their property from theft, not so good when it's stopping them externalising the costs of their activities onto other people, which is really the point here: the gamblers are not bearing all (even most?) of the costs of their activities.

by Colman (colman at eurotrib.com) on Wed May 13th, 2009 at 03:53:21 AM EST
[ Parent ]
Oh wow, I wrote a sentence with two colons. Coffee time.
by Colman (colman at eurotrib.com) on Wed May 13th, 2009 at 03:55:11 AM EST
[ Parent ]
I certainly agree with you. And as I said in a thread above:

...the problem isn't in the casino mortgages as much as it is in the undeserved bailouts of those who underwrote the mortgages and ran the derivatives madness.

by vladimir on Wed May 13th, 2009 at 03:57:42 AM EST
[ Parent ]
The main problem here is not people who gamble, lose their shirt and then expect to get bailed out.

The problem here is that leverage is pro-cyclical. When you take out a casino loan, you increase the cyclicality of the entire economy, which is a pretty frickin' serious externality.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed May 13th, 2009 at 05:18:38 AM EST
[ Parent ]
That's Rosa Luxembourg.
by vladimir on Wed May 13th, 2009 at 05:22:11 AM EST
[ Parent ]
She ended up assassinated by the Freikorps in January 1919...
by vladimir on Wed May 13th, 2009 at 05:24:08 AM EST
[ Parent ]
And the more you loan, the more political leverage you get. Which in turn increases possibility for bailout.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se
by A swedish kind of death on Wed May 13th, 2009 at 06:17:47 AM EST
[ Parent ]
Political leverage is obtained through a combination of promoting insiders to the appropriate political positions... and financing outsiders to gain influence (read: corruption).
by vladimir on Wed May 13th, 2009 at 06:26:08 AM EST
[ Parent ]
Or by being system-critical to maintaining the political economy (i.e. blackmail).

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed May 13th, 2009 at 06:37:43 AM EST
[ Parent ]
That's nothing that the banking regulator can't solve with a well-timed intervention.

The brainless should not be in banking. — Willem Buitler
by Migeru (migeru at eurotrib dot com) on Wed May 13th, 2009 at 06:38:58 AM EST
[ Parent ]
Nor is it anything that the anti-trust authorities can't solve with a well-timed intervention.

But if those interventions are theologically unpalatable, they won't happen.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed May 13th, 2009 at 06:44:24 AM EST
[ Parent ]
"Economic theory"=="Cannibalism"

Uh-huh.

Did you mean that the prevailing pop version of free-market fundamentalism depends on externalising most of the costs of economic activity or do you think that you're a cannibal? You clearly have an economic theory.

by Colman (colman at eurotrib.com) on Wed May 13th, 2009 at 03:58:28 AM EST
[ Parent ]
vladimir:
I see that you believe that man is not what man has proven to be throughout history... or that man can be changed. Indeed, that is a brave crusade.

whenever does a meaningful life not include some elements of courage and faith in something empirically improbable?

does fear of the wind stop us pissing?

you make it sound (to me) like the wise chinese are patiently waiting for us to burn out trying to remake human nature into something better than hobbsian, and existence here something better than 'nasty, brutish and short'.

success never comes to those who quit at failure, and somethings are essentially worth working for even if we never, or rarely, personally experience the fruits ourselves.

there are so many things to appreciate and admire about china and its role in world history, but the bottom line remains that very few of us raised on notions of humans' eventual betterment (if not perfectibility,lol!) would be happy if we had to endure living under the present chinese administration, ours is shitty enough, even with our efforts at enlightenment.

i'm not trying to contradict you here, vladimir, just add another point of view.

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Wed May 13th, 2009 at 03:13:55 AM EST
[ Parent ]
melo:
whenever does a meaningful life not include some elements of courage and faith in something empirically improbable?
Please, not again...

The brainless should not be in banking. — Willem Buitler
by Migeru (migeru at eurotrib dot com) on Wed May 13th, 2009 at 05:39:47 AM EST
[ Parent ]
haha, but do you want to answer the question?

didn't you think vladimir's cynicism was a little absolute?

whatever...

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Wed May 13th, 2009 at 09:10:40 AM EST
[ Parent ]
melo:
do you want to answer the question?
The answer is: whenever - faith in the unprovable/improbable doesn't seem to me a prerequisite for a meaningful life.
didn't you think vladimir's cynicism was a little absolute?
No. I didn't think he was cynical - just took a particular position on the perfectibility of mankind.
whatever...
Precisely.

The brainless should not be in banking. — Willem Buitler
by Migeru (migeru at eurotrib dot com) on Wed May 13th, 2009 at 09:14:20 AM EST
[ Parent ]
Comment responses
The answer is: whenever - faith in the unprovable/improbable doesn't seem to me a prerequisite for a meaningful life.

and the blog offers you space to express that opinion, right?

since you answered my reply to vladimir, i will take that as an invitation to dialogue.

history does indeed point to the extreme improbability of man's perfectibility, and that had a somewhat dispiriting effect on me while reading it.

so i threw in my comment to attempt some balance, as i genuinely find it horrifying to contemplate that man is ever doomed to repeat history, tho' i'm the first to admit there is no hard evidence for believing otherwise, or maybe i should say thinking otherwise.

a belief can temporarily feel subjectively absolute, till a corollary thought comes along riding on its tail, reminding me that no matter how totally true something may feel, there's is always a chance of delusion.

sorry if i tweaked some old nerve!

peace out

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Wed May 13th, 2009 at 05:38:23 PM EST
[ Parent ]
You're saying that faith in the existence of something "better" is what helps you keep an open (sane?) mind... especially in light of evidence that "better" doesn't exist.

This is fine for personal comfort, but is counterproductive (outright dangerous) when formulating social policy.

Building social models on the assumption that man is not self-serving are doomed to fail... and history has proven this point. ThatBritGuy pointed out changes in human behavioural patterns over the past 5 000 years, and extrapolated them to some future point in time to say that man could very well one day become more socially generous.

I believe that although that may be true, it's a metamorphosis that's probably quite far off in time. Unless you believe in Orwellian manipulation techniques and "dictatorship of the proletariat" it's something that's likely to materialize through a bottom-up process rather than a top-down "project".

by vladimir on Thu May 14th, 2009 at 03:04:31 AM EST
[ Parent ]
I take it that you're not arguing that people are entirely self-serving?
by Colman (colman at eurotrib.com) on Thu May 14th, 2009 at 03:13:32 AM EST
[ Parent ]
No I'm not arguing that people are entirely self-serving. That's why we live and operate in communities. But I also believe that Maslow's assessment of human motivations is correct.
by vladimir on Thu May 14th, 2009 at 03:18:28 AM EST
[ Parent ]
Which? The hierarchy of needs thingy?
by Colman (colman at eurotrib.com) on Thu May 14th, 2009 at 03:46:11 AM EST
[ Parent ]
Yes, I think that man can only express his social needs once his "Maslowian-defined" needs have been satisfied.
by vladimir on Thu May 14th, 2009 at 04:11:25 AM EST
[ Parent ]
Then you're missing about 90% of the complexity of human behaviour.
by Colman (colman at eurotrib.com) on Thu May 14th, 2009 at 04:23:06 AM EST
[ Parent ]
I don't think so.
But I'm more than open to being enlightened.
by vladimir on Thu May 14th, 2009 at 04:39:05 AM EST
[ Parent ]
I once read a fable that I'd like to share with you.

A mercenary stands in front of three men. The first is a merchant, the second a high priest and the third is a king. The merchant says, "I will pay you more gold than you can carry if you will kill the other two." The priest says, "by the will of the gods, I command you to kill the other two." The king says, "I am your king, and I command you to kill the other two."

What does the mercenary do?

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu May 14th, 2009 at 06:05:31 AM EST
[ Parent ]
He's a mercenary, he takes the gold.

The brainless should not be in banking. — Willem Buitler
by Migeru (migeru at eurotrib dot com) on Thu May 14th, 2009 at 06:08:08 AM EST
[ Parent ]
Assuming he's not pious or patriotic.
by Colman (colman at eurotrib.com) on Thu May 14th, 2009 at 06:11:53 AM EST
[ Parent ]
He's not a paladin or a knight. :-P

The brainless should not be in banking. — Willem Buitler
by Migeru (migeru at eurotrib dot com) on Thu May 14th, 2009 at 06:12:45 AM EST
[ Parent ]
Most Western(TM) armies are mercenaries too. Glorified mercenaries, to be sure, but mercenaries. A lot of our political life is contingent upon the assumption that they follow the prime minister (the king, in our fable).

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu May 14th, 2009 at 08:09:37 AM EST
[ Parent ]
First, he kills the merchant, takes his money and pays the king to raise an army which he uses to conquer other lands and create even more profit for himself. Dunno what he does with the priest.
by vladimir on Thu May 14th, 2009 at 07:14:42 AM EST
[ Parent ]
Pays the priest to keep the people ignorant and compliant in domestic matters, while in external affairs fanatic in the defence of the empire.
by afew (afew(a in a circle)eurotrib_dot_com) on Thu May 14th, 2009 at 07:38:00 AM EST
[ Parent ]
And there we have it. Proof that mercenaries are running the whole damned show!
by vladimir on Thu May 14th, 2009 at 07:56:47 AM EST
[ Parent ]
Out of all the possible scenarios that I can think of, that one strikes me as the least likely.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu May 14th, 2009 at 08:11:33 AM EST
[ Parent ]
The mercenary kills the priest and the merchant, the king confiscates the merchant's estate on grounds of treason and gives the mercenary the money the merchant promised him anyway.

The brainless should not be in banking. — Willem Buitler
by Migeru (migeru at eurotrib dot com) on Thu May 14th, 2009 at 08:58:16 AM EST
[ Parent ]
That sounds a lot more plausible.

Of course, the canonical answer is "it depends on who the mercenary is." And the morale of the story is that it is dangerous to construct simple, single-factor explanations of human actions (it's ideology! No, it's profit-motive! No, it's religious conviction! No, it's [insert favourite hobby horse]!).

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu May 14th, 2009 at 09:35:10 AM EST
[ Parent ]
Er - those are all the same explanation.

Just saying. :)

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu May 14th, 2009 at 09:50:38 AM EST
[ Parent ]
Well, it would depend on whether the merchant had with him more gold than the mercenary could carry, (show me the gold), and whether the merchant had his own mercenaries, on whether the king had with him a contingent of guards more formidable than the mercenary and his associates, if any, on the security of succession in that kingdom and whether the mercenary deemed it probable that either he could make it out of the kingdom with the gold or successfully take over the kingdom, and last, whether the mercenary deemed it probable that the priest had the ability to be of any use to his ambitions and had any guards or retinue in attendence.  In other words a real answer would depend on unstated variables.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu May 14th, 2009 at 01:32:48 PM EST
[ Parent ]
Building social models on the assumption that man is not self-serving are doomed to fail... and history has proven this point.

  • "Proof" is for mathematicians and distillers, not historians.

  • You still fail to distinguish between profit (which is actually a relatively recent concept, but nevermind that for now...) and profiteering.

  • The items under discussion in this subthread;

And we can stretch the logic further and seek to regulate other aspects of society for the benefit of the masses:
> medical fees should be capped
> the price of medicine should be regulated
> the price of basic amenities should be capped
> in fact, all profiteering should be banned, whatever its form.

do not assume that humans are not self-serving. In fact, the whole point of the exercise is to contain and minimise the damage done by people with power acting in a self-serving way.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu May 14th, 2009 at 04:00:53 AM EST
[ Parent ]
"Proof" is for mathematicians and distillers, not historians.

How now?

You still fail to distinguish between profit (which is actually a relatively recent concept, but nevermind that for now...) and profiteering.

Let's just call it the "quest for profit"... which to my mind is NOT a relatively recent concept. Goes back thousands of years to the Greek merchants... the Jewish money lenders... and most if not all imperial endeavours. The exercise always boiled down to two questions: I buy for how much? I sell for how much? Delta = my profit. It was as true of Asian spices as it was for entire armies of conquering men.

In fact, the whole point of the exercise is to contain and minimise the damage done by people with power acting in a self-serving way.

ThatBritGuy's comment assumed that man could be changed to being less (not) self serving... which is a point I disagree with.

The only way to contain and minimise the damage done by people with power acting in a self-serving way is to remove them from power... but even then, you'll end up putting other people in power who'll also start acting in a self-serving way. That's human nature... and that seems to be where our point of contention is.

by vladimir on Thu May 14th, 2009 at 04:24:25 AM EST
[ Parent ]
"Proof" is for mathematicians and distillers, not historians.

How now?

"Proof" implies a conclusion that is rather more ironclad than most historical evidence - even most historical meta-analysis - can support.

Let's just call it the "quest for profit"... which to my mind is NOT a relatively recent concept. Goes back thousands of years to the Greek merchants... the Jewish money lenders... and most if not all imperial endeavours.

Which is a pretty narrow class of human endeavours, with a strong cultural component. Generalising the culture of money-lenders and imperial warlords to become the defining feature of humanity strikes me as a leap of logic...

The only way to contain and minimise the damage done by people with power acting in a self-serving way is to remove them from power...

Or you can design a system that prevents them from damaging society with their self-dealing. Democracy is a reasonably good way of going about that (except that the commercial press is possibly even more broken than the financial sector).

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu May 14th, 2009 at 06:01:46 AM EST
[ Parent ]
"Proof" implies a conclusion that is rather more ironclad than most historical evidence - even most historical meta-analysis - can support.

That depends on who it is using the word. As my old swedish history professor told me, "proof" is in history (the academic discipline that is) reserved for factual occurances, not causation. And an occurance is considered proven if there are at least two indirect, independent sources resonably close to the occurance (in time and space and culture) and without obvious reasons to lie OR if you have at least one direct source.

Say that the question is the nature of a specific law. Two letters by different people who you think has not read the other letter, mentioning the same law and written in the same era as the law was supposed to have been in effect would count. Unless it is a seize-and-desist, cause then they reason to lie. A direct source would be a written proclamation of the law, a verdict or a law book.

So you prove your datapoints and then apply a perspective / theory / model and hopefully you will get some new causations as conclusions. Then you can expand the result as far as you think it will hold and hopefully you will get something interesting. But there is no proof and the debate is never finally settled.

History tends to be a rather local discipline as sources are language-based and stored locally. So there might be variation. But unless shown it I will assume this is universal.

This is my longwinded way of saying that I agree with you in the argument, but not in the presentation of it :)

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Sat May 16th, 2009 at 07:27:43 PM EST
[ Parent ]
vladimir:
ThatBritGuy's comment assumed that man could be changed to being less (not) self serving... which is a point I disagree with.

I'd be more convinced by this disagreement if you disagreed with my examples.

Do humans still eat each other? Do they ignore poor hygiene and blame the gods for plagues and poor weather?

Sometimes yes, but mostly not as much as happened a long time ago.

You're making the fundamental make of assuming that human nature essentially is something self-interested.

Which it is - but only up to the point of being able to model that self-interest accurately.

In resource and nutrition terms, cannibalism is perfectly self-interested. You're not only feeding yourself and possibly your family, you're also removing a competitor.

So if we're purely self-interested, why don't we allow it any more?

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu May 14th, 2009 at 09:55:13 AM EST
[ Parent ]
Because of the taste?
by vladimir on Thu May 14th, 2009 at 01:40:04 PM EST
[ Parent ]
Humans have roughly the same biological makeup as pigs do, and pigs are eaten with considerable delight in many cultures...

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu May 14th, 2009 at 02:22:29 PM EST
[ Parent ]
Now seriously... what makes you think mankind has stopped engaging in cannibalism? He hasn't.
Take a look at the video which was posted on ET a couple of days ago about the Stuff Economy (http://www.storyofstuff.com/). Aren't we cannibalising all those human beings that we exploit... from China to India to South America? From sweat shops to dumping toxic waste on foreign lands? To wars in Iraq which have claimed anywhere from 200K to 1M innocent victims? What is that if not modern day cannibalism?
by vladimir on Thu May 14th, 2009 at 02:30:12 PM EST
[ Parent ]
Did I miss a change in definition?

Cannibalism: the practice of eating the flesh of your own kind

What is that if not modern day cannibalism?

Something else.
by Colman (colman at eurotrib.com) on Thu May 14th, 2009 at 02:34:13 PM EST
[ Parent ]
We ARE eating their flesh. But OK, let's avoid using metaphors.

First of all, cannibalism was most frequent among Neanderthals. Later, it was practiced by minority groups of homo-sapiens. Never was it mainstream among homo sapiens. Documented cases of isolated cannibalism among humans go right up to recent history.

So let's say that cannibalism has almost disappeared since Neanderthals evolved to homo sapiens. Does that prove that a political project can change man's self-centred nature to a more socially conscious and responsible one? Hardly. Does it prove that, in the longer term, man may (MAY) evolve to become more socially conscious and responsible? Perhaps.

by vladimir on Thu May 14th, 2009 at 02:53:52 PM EST
[ Parent ]
since Neanderthals evolved to homo sapiens

something that may never have happened.

The brainless should not be in banking. — Willem Buitler

by Migeru (migeru at eurotrib dot com) on Thu May 14th, 2009 at 04:53:51 PM EST
[ Parent ]
The archaeological evidence is thin for the time period in question, but there is evidence that Homo Sapiens Sapiens colonies did indulge in cannibalism.

AFAIK, there is little evidence that the taboo against cannibalism is an evolutionary development.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu May 14th, 2009 at 04:56:05 PM EST
[ Parent ]
No, as far as I can tell it's cultural. Well, there might be an instinctive bias against eating your in-group, but a lot of the ritual stuff is based around funeral rites or human sacrifice, isn't it?

But it's a good taboo, since eating people seems to be a pretty unhealthy passtime.

by Colman (colman at eurotrib.com) on Thu May 14th, 2009 at 05:01:18 PM EST
[ Parent ]
The difference is the same as the difference between murdering a child with a knife, and murdering her with a cluster bomb launched from a cruise missile a hundred kilometers away...

Murdering kids in the former fashion is considered the most abysmal barbarism. Murdering kids the latter way is considered a deed of high honour.

Humans are weird that way.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu May 14th, 2009 at 02:36:43 PM EST
[ Parent ]
Murdering kids in the former fashion is considered the most abysmal barbarism. Murdering kids the latter way is considered a deed of high honour.

You ARE being cynical, aren't you?

by vladimir on Thu May 14th, 2009 at 02:55:29 PM EST
[ Parent ]
I'm afraid not.

To take just a fairly trivial example, former American president Lyndon B. Johnson is widely considered a respectable human being and a reasonably honourable progressive politician.

He authorised a bombing campaign in Viet Nam that, over the cause of around three years, dropped an amount of destructive power on Viet Nam comparable to a couple of dozen Little Boys.

If he had made a mixture of glycerin and paraffin in his kitchen sink, and used it to burn the face off a little child, he would have been universally reviled as an abomination upon humanity. Logically - ethically - authorising air strikes with napalm on defenceless villages should raise even harsher condemnation - after all, it is not just a single child whose skin was burned off; they numbered in the tens of thousands. But it does not. Because they're just faceless strangers in a far-off place. And, after all, he didn't do the deed "himself."

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu May 14th, 2009 at 04:51:51 PM EST
[ Parent ]
JakeS:
Because they're just faceless strangers in a far-off place. And, after all, he didn't do the deed "himself."

Nor did he shoot JFK himself, but the best, most pithy, explanation I have seen of

Who Shot JFK

is by Robin Ramsay and is to the effect that LBJ and the local oil mafia and military industrial complex were the principal beneficiaries.

LBJ and the Assassination of John F. Kennedy - The Education Forum

It is true that Lyndon Johnson had the best motive for wanting JFK dead. The testimony given by Don Reynolds to the Senate Rules Committee on the day that JFK died would have resulted in the impeachment of LBJ if he had survived. We also know from Evelyn Lincoln that JFK was going to drop LBJ as vice president for the 1964 presidential election. We also know that Carl Curtis, LBJ's main critic on the Senate Rules Committee, that he was getting his information on LBJ and Bobby Baker from John Williams, who in turn was getting some of it from Robert Kennedy. Once he became president, LBJ was able to control the story by using Hoover and the media to smear his critics and to cover-up the Bobby Baker scandal.

LBJ not only had the motive for arranging the assassination of JFK but also organizing the cover-up. However, LBJ needed help from other powerful people in order to achieve this.


"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Thu May 14th, 2009 at 05:54:52 PM EST
[ Parent ]
vladimir:
it's something that's likely to materialize through a bottom-up process rather than a top-down "project".

i think that's the bottom line, we're probably all free of any contention there, in fact isn't that what we're flailing around trying to do here?

arguing about man's possible perfectibility or declaiming such as unrealistic will get us nowhere, methinks, since only the future will tell us that.

i guess where i'm coming from is yes, it is a way of 'getting through the night' to opt to believe possible what you hope for in your heart, and work towards in actions.

it's freedom to believe that everything is made of energy in the universe, including the shape of one's belief.

words too have energy to inspire or dispirit, and baldly stating that man will always be primarily self-serving is pretending to know the future.

tbg summed it up best. history makes it obvious we can change in all manner of ways once probably deemed impossible at the time...

balancing selfishness and altruism is a daily juggle, as we all know. extremes of either are not helpful to the common weal, though extreme altruism has gratifyingly immediate effects, before burnout follows.

extreme selfishness leads to loneliness and alienation, urge to merge is both symptom and cure...

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Thu May 14th, 2009 at 07:19:17 AM EST
[ Parent ]
We should also ban individual access to the stock market (good bye Boursorama, E-trade, Schwab, ...) because there is NO WAY individuals can compete with large banks... who are profiteering.

Actually, that's a great idea.

Stock markets used to have high barriers to entry. Those were removed so that ordinary people could be swindled out of their money by institutional money managers.

The brainless should not be in banking. — Willem Buitler

by Migeru (migeru at eurotrib dot com) on Tue May 12th, 2009 at 04:16:34 PM EST
[ Parent ]
Actually, on-line brokers allow the individual to cut-out the intermediary (the money manager in this case).
by vladimir on Tue May 12th, 2009 at 04:25:15 PM EST
[ Parent ]
But they do nothing to prevent you from being fleeced by the other market participants...

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue May 12th, 2009 at 04:40:04 PM EST
[ Parent ]
They do lower the barriers to entry.

The brainless should not be in banking. — Willem Buitler
by Migeru (migeru at eurotrib dot com) on Wed May 13th, 2009 at 01:34:22 AM EST
[ Parent ]
I'm not talking about people's own fund manager.

To make them safe for widows and orphans, mutual funds' behaviour is regulated to the point that they behave like widows and orphans. They are so large, slow and predictable that they get fleeced by more nimble players.

The brainless should not be in banking. — Willem Buitler

by Migeru (migeru at eurotrib dot com) on Wed May 13th, 2009 at 01:31:02 AM EST
[ Parent ]
From the General Theory (just after the famous "casino" paragraph).
These tendencies are a scarcely avoidable outcome of our having successfully organised "liquid" investment markets. It is usually agreed that casinos should, in the public interest, be inaccessible and expensive. And perhaps the same is true of Stock Exchanges. That the sins of the London Stock Exchange are less than those of Wall Street may be due, not so much to differences in national character, as to the fact that to the average Englishman Throgmorton Street is, compared with Wall Street to the average American, inaccessible and very expensive.
How things have changed...
by gk (gk (gk quattro due due sette @gmail.com)) on Tue May 12th, 2009 at 05:52:04 PM EST
[ Parent ]
For an extended quotation, see my diary of September 10, 2006.

The brainless should not be in banking. — Willem Buitler
by Migeru (migeru at eurotrib dot com) on Wed May 13th, 2009 at 01:34:00 AM EST
[ Parent ]
Those who will do it will be doing it to maximise their utility function.

That's crazy talk. Model, meet real-world.
by Colman (colman at eurotrib.com) on Tue May 12th, 2009 at 09:34:35 AM EST
[ Parent ]
If I want to buy a large house and am willing to bet that my future earnings will allow me to finance increasing interest payments... then the bank that offers me a service to match this need is helping me to maximise my utility function.

Supposing that I'm a healthy, sane adult, I don't see why the state should be my baby sitter.

Ain't nothin' crazy about this real-world example.

by vladimir on Tue May 12th, 2009 at 10:38:00 AM EST
[ Parent ]
... you don't behave according to the results of maximizing a utility function.


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 Tue May 12th, 2009 at 12:10:20 PM EST
[ Parent ]
You do. Maximising a personal utility function is like seeking to maximise happiness. In terms of consumption, its seeking to maximise satisfaction from your purchase. You do it all the time: when you're in a supermarket, when you're buying music CDs or when you're selecting investment funds based on their advertised risk-return profile.
by vladimir on Tue May 12th, 2009 at 04:09:43 PM EST
[ Parent ]
It may be like seeking to maximize happiness, but if so, it is for a being other than a human being.

So it would not be a person seeking happiness.

Of course, framing it as seeking to maximize happiness is quite clever, since it begs the question of whether human choice can be effectively and universally understood as a maximizing process. That is right up there with human behavior as an incessant decision making process as one of the biggest hurdles between utility maximization and serious social science.


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 Tue May 12th, 2009 at 04:53:57 PM EST
[ Parent ]
If you are allowed to take out a casino mortgage on a house you want to buy, you will drive up prices for the rest of the buyers, because you'll be able to bid higher than you otherwise could, given your current cash flow.

Once a perceptible fraction of homebuyers do this, people with more traditional risk profiles will get priced out, rendering the entire real estate market less stable.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue May 12th, 2009 at 12:27:33 PM EST
[ Parent ]
Here's another real life example. I own a house in which I have 70% equity. I need cash. Why shouldn't I be able to go to the bank and trade in another 20% of my home's equity for a cash loan? In countries where this type of transaction isn't allowed, it simply forces the home owner to take another road to ... satisfying his utility function, and that's selling his home, renting a flat & using the extra cash for whatever he needs it for.
by vladimir on Tue May 12th, 2009 at 11:01:51 AM EST
[ Parent ]
You keep saying "utility function" as if it's relevant to the real world example you're using.
by Colman (colman at eurotrib.com) on Tue May 12th, 2009 at 12:26:42 PM EST
[ Parent ]
That's because it is.
by vladimir on Tue May 12th, 2009 at 04:11:02 PM EST
[ Parent ]
Except utility-based economics is known (by economists) to be a load of tosh.

The brainless should not be in banking. — Willem Buitler
by Migeru (migeru at eurotrib dot com) on Tue May 12th, 2009 at 04:14:03 PM EST
[ Parent ]
You may as well cite a religious text.
by Colman (colman at eurotrib.com) on Wed May 13th, 2009 at 03:18:22 AM EST
[ Parent ]
In countries where this type of transaction isn't allowed, it simply forces the home owner to take another road to ... satisfying his utility function, and that's selling his home, renting a flat & using the extra cash for whatever he needs it for.

Yes. That is a feature, not a bug.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue May 12th, 2009 at 12:29:41 PM EST
[ Parent ]
Now why would something that reduces the individual's economic freedom be a feature to you?
by vladimir on Tue May 12th, 2009 at 04:12:37 PM EST
[ Parent ]
A sell-to-rent scenario is preferable to a home equity withdrawal scenario for (at least) three reasons.

First, the sell-to-rent scenario involves actually selling the house. This may seem like a trivial point, but it means that you actually have to find somebody who is willing to pay what you and your bank think the house is worth. This prevents you from borrowing against "equity" that only exists because nobody tries to realise it. It does not, in and of itself, prevent a bubble, but it does dampen it.

Second, it creates a practical and psychological barrier against increasing aggregate leverage in the real estate sector. Since leverage is inherently pro-cyclical, this is A Good Thing.

Third, all else being equal, it moves people from home-ownership into rental. That is A Good Thing in and of itself, for a variety of reasons.

The individual's "economic freedom" (a newspeak term if there ever was one) is incidental to the issue.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue May 12th, 2009 at 04:57:16 PM EST
[ Parent ]
Whaddayamean crazy? Isn't that what Alan Greenspan thought too?

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue May 12th, 2009 at 12:17:46 PM EST
[ Parent ]
> smoking & drinking should be banned (because a few are getting rich at the expense of the many who are dying... of cancer, of stroke, ...)

The fact that you smoke and drink does not cause any problem for people on the other side of the city, nevermind the other side of the continent. While there are externalities to smoking and drinking, they affect only or mostly your immediate environs. Using the real estate market as a gambling hall affects people on the other side of the city, country, even the continent. That is a rather crucial difference. (In no small part because localised externalities usually scale linearly or slower than linearly with the number of participants, whereas global externalities can, and often do, scale faster than linearly.)

> gambling should be banned

I have no problem with gambling, as long as it takes place in a casino, not on a stock exchange, and assuming that it is properly taxed, and that steps are taken to prevent gambling addictions.

Personally, I view gambling as a tax on people who fail to comprehend probability theory.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue May 12th, 2009 at 12:08:42 PM EST
[ Parent ]
Exactly. 2 years as a weekend football coupon checker in the 60s quashed any interest in 'pool' gambling - though I do enjoy poker and backgammon for small stakes ;-)

You can't be me, I'm taken
by Sven Triloqvist on Tue May 12th, 2009 at 12:31:45 PM EST
[ Parent ]
Then again, they are games of skill, not gambling per se.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue May 12th, 2009 at 12:45:21 PM EST
[ Parent ]
My enjoyment of them is based on the fact that they are sociable games, involve some knowledge of probabilities, and a great deal of understanding of behaviour ;-)

You can't be me, I'm taken
by Sven Triloqvist on Tue May 12th, 2009 at 02:50:27 PM EST
[ Parent ]
What did cause the financial meltdown is that the regulator allowed major banks to invest capital leveraged up to 50x their equity on something that was clearly a bubble.

The availability of exotic mortgages per se did not cause this.

by vladimir on Tue May 12th, 2009 at 04:22:18 PM EST
[ Parent ]
Also regulatory arbitrage via off-balance sheet vehicles.

The brainless should not be in banking. — Willem Buitler
by Migeru (migeru at eurotrib dot com) on Tue May 12th, 2009 at 04:25:50 PM EST
[ Parent ]
Leverage causes bubbles, and whether it's on or off balance sheet is a matter of transparency.

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Tue May 12th, 2009 at 04:46:34 PM EST
[ Parent ]
Well, in this case transparency was a big problem.

But also, because of the regulatory arbitrage, money was created way in excess of what the central banks' official monetary policy would have allowed.

The brainless should not be in banking. — Willem Buitler

by Migeru (migeru at eurotrib dot com) on Wed May 13th, 2009 at 01:28:21 AM EST
[ Parent ]
But they did drive up housing prices, which hit the real economy in three ways: It reduced ordinary people's purchasing power, by driving up the price they paid to simply have a roof over their head; it diverted this purchasing power to an increasingly unproductive financial sector; and it made it possible to drive down the real median wage, by creating largely fictional home equity to "compensate."

In other words, if there had not been a housing bubble, ordinary people would have been richer, Wall Street would have been poorer and there would have been a backlash against union busting and wage suppression in '02-'03 instead of now. Maybe not soon enough to prevent a Republican Congress in the '02 midterms, but certainly soon enough to make Bush the Lesser a one-term president.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue May 12th, 2009 at 05:06:43 PM EST
[ Parent ]
Sure Jake. But so does credit. Any credit. Even the simplest, linear form of 5, 10 or 20 year credit.

Are you suggesting the Modern Progressive Movement find inspiration in Rosa Luxembourg's ideas and campaign for an end to financial intermediation?

by vladimir on Wed May 13th, 2009 at 01:57:19 AM EST
[ Parent ]
Chris Cook never tires of claiming credit intermediaries are obsolete...

The brainless should not be in banking. — Willem Buitler
by Migeru (migeru at eurotrib dot com) on Wed May 13th, 2009 at 03:59:34 AM EST
[ Parent ]
Yup.

The key is undated credit issued in respect of value (eg location value, energy value, knowledge value) to be provided by the issuer.

Within a mutual framework of trust, of course, supported as necessary by provisions into a pool held in common.

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

by ChrisCook (cojockathotmaildotcom) on Wed May 13th, 2009 at 04:39:12 AM EST
[ Parent ]
When companies issue equity or debt, they usually enlist a major bank to underwrite, market and place the issue. That kind of intermediation is still available to banks under your model. Are they still obsolete in that role?

The brainless should not be in banking. — Willem Buitler
by Migeru (migeru at eurotrib dot com) on Wed May 13th, 2009 at 05:11:18 AM EST
[ Parent ]
Advice; facilitation; liquidity provision; both through introduction or by putting capital at risk: all of these are value added services.

Provision of a guarantee is also valuable, and in fact the implicit guarantee of borrowers' credit is what the banks role currently is as a credit intermediary. The problem is that they no longer have the capital to support the necessary level of credit

Underwriting an issue is a form of guarantee, and therefore valuable.

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

by ChrisCook (cojockathotmaildotcom) on Wed May 13th, 2009 at 06:37:35 AM EST
[ Parent ]
Sure Jake. But so does credit. Any credit. Even the simplest, linear form of 5, 10 or 20 year credit.

Only in the same sense and to the same extent that slingshots and assault rifles are both projectile weapons...

Are you suggesting the Modern Progressive Movement find inspiration in Rosa Luxembourg's ideas and campaign for an end to financial intermediation?

I'm not familiar with Luxembourg's ideas, so I can't vouch for them.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed May 13th, 2009 at 05:01:27 AM EST
[ Parent ]
To make a long story short... Rosa Luxembourg was a German Marxist who argued that credit was a tool used by capitalists to take over the productive assets (factories) from their "rightful owners"...
by vladimir on Wed May 13th, 2009 at 05:14:25 AM EST
[ Parent ]
I probably would not put it in quite such stark terms, but there is a good case for limiting access to credit.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed May 13th, 2009 at 05:26:20 AM EST
[ Parent ]
Supposedly the financial markets put a price on credit that will limit access to credit if the demand for it is too high.

We know how well that works in practice.

The brainless should not be in banking. — Willem Buitler

by Migeru (migeru at eurotrib dot com) on Wed May 13th, 2009 at 05:32:30 AM EST
[ Parent ]
My usual response to that kind of reasoning is "yeah, that's what Alan Greenspan thought too."

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed May 13th, 2009 at 05:39:31 AM EST
[ Parent ]
... while I do not have any objection to gambling, per se, I do think that it belongs in a casino, not on an exchange, or at a real estate agent's office...

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue May 12th, 2009 at 06:51:54 AM EST
[ Parent ]
Yup. I also found this a little worrying.
One reason we have bubbles in the housing market is because there's been no way to short housing [that is, to make money when prices fall]. The ability to short is essential to an efficient market, otherwise there's nothing to stop zealots from pricing things abnormally high.
If this index becomes liquid it will increase the volatility of the market and the ability to leverage which is the key factor in inflating a bubble.

The brainless should not be in banking. — Willem Buitler
by Migeru (migeru at eurotrib dot com) on Mon May 11th, 2009 at 04:21:31 AM EST
[ Parent ]
Yes, I found Shiller's analysis very interesting.  I was wondering if he might be more properly named were he to drop the last two letters of his last name.  Seemed like more "hair of the dog" to me.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon May 11th, 2009 at 12:49:55 PM EST
[ Parent ]
Excellent analysis. I've been predicting inflation for over 3-4 years now... and it just hasn't been showing. People don't believe me any more.
by vladimir on Mon May 11th, 2009 at 03:44:36 AM EST
... inflation in the past year, on the back of a massive meltdown in Effective Demand and a collapse of the total amount of money in the system?

Cost push inflation from crude oil price shocks? But that tends to be self-limiting, as a big enough cost shock leads to recession rather than runaway inflation.

Surely not on the basis of the creation of Reserves and Reserve Notes ... that's a small component of the total money supply, and only has a substantial impact on the total when banks are actively leveraging the reserves ... which is to say in conditions where there are stable or declining mark-ups of loan interest rates over the bank's cost of funds, and an appreciable interest-rate elasticity to the quantity of loans demanded.

There's the "collapse of the US$" scenario, but that's mostly just inflation for the US itself. It will be an inconvenience for the rest of the world, but beyond North America and the Caribbean Basin, its not clear that the consequence will be inflationary rather than recessionary.


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 May 11th, 2009 at 01:18:08 PM EST
[ Parent ]
Well, if he predicts inflation every year he'll be right eventually.
by Colman (colman at eurotrib.com) on Mon May 11th, 2009 at 01:28:46 PM EST
[ Parent ]
We now have $12 Trillion of evaporated "assets" on the books of banks.  We had been watching the real estate and financial industry "bubble" expand for years up to 2008.  We have been seeing a massive trade imbalance with China for several years.  I felt in my gut that this would eventually create a situation the easiest solution for which would be dollar inflation.  I live in the USA.  The problem I have been facing is trying to get my mind around the timing.  

Make any bold moves with your savings but get the timing wrong and you just flushed your savings.  What I found particularly appealing about Leo's post was that it described and provided arguments to support a specific sequence of events that I found plausible.  Had I converted my dollars to euros in early 2008 I would be hurting.  Now, probably not so much.  If you are aware of any other similarly detailed scenarios for the course of events over the next eight or ten years I would be very interested in them.

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

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon May 11th, 2009 at 02:09:29 PM EST
[ Parent ]
Being detailed is a necessary but not sufficient condition. It also has to be reasonably correct.

Me, I'm a fan of the good, old Keynes quib about how the market can stay irrational longer than you can stay solvent.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon May 11th, 2009 at 02:52:28 PM EST
[ Parent ]
... of events over the next eight to ten years are future historical fiction.

For the US, there are three clear options on the table:

  • A lost decade, bouncing back and forth between crude oil price shock recessions and stagnation
  • A collapse of the US$ and hyperinflation in the face of our unsustainable structural current account deficit
  • strong public investment toward energy independence, catching up on the public investment backlog of the past three decades and restoring our investment in infrastructure to something more like our historical norm, and recovery of our current account deficit to sustainable levels.

Putting likelihoods on the options is not political activism, its passively sitting on the sidelines betting on the score of the game ... in addition to requiring that we ignore the fact that decisions that have not yet been made and events that have not yet taken place will play a dominant role in determining which option is chosen.


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 May 11th, 2009 at 03:16:59 PM EST
[ Parent ]
Of your three options, only the last one requires massive investment. It's the best option... but the least likely to occur given the structural deficits of the US system.
by vladimir on Mon May 11th, 2009 at 03:46:32 PM EST
[ Parent ]
... resources. The US has substantial labor resources available, and still has substantial resources of productive equipment (but declining, as productive equipment does when it is not put to use. And of course roughly twice the world average biocapacity per capita.

The missing resource is energy, but if there is a strong up-front focus on energy saving investment, the energy resource input could be self-funding over a few years and the program could be yielding a net energy surplus after that.


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 May 11th, 2009 at 04:11:59 PM EST
[ Parent ]
BruceMcF:
The missing resource is energy

The missing resource is a pathological inability to deal with reality. Also missing is any serious political will to think strategically about an economy which benefits everyone rather than a minority.

This is why default is very likely - it's the cheapest way for that minority to avoid paying its debts.

Resources, labour, capital, all of that, are tangential to what is really a problem of empire and oligarchy.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon May 11th, 2009 at 04:51:34 PM EST
[ Parent ]
... a disqualifier for gaining and maintaining a position in a position of power in the US for quite a while. As for some other Anglo-disease nations.

As I read it, however, vladimir is not arguing about the prospects of anyone getting in a position of authority that is ready, willing and able to pursue that option, but about the constraints facing that option if there was an effort to pursue it, and arguing that the need to arrange finance is an insurmountable hurdle.


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 May 11th, 2009 at 11:46:02 PM EST
[ Parent ]
For the US, there are three clear options on the table:

  • A lost decade, bouncing back and forth between   crude oil price shock recessions and stagnation

  • A collapse of the US$ and hyperinflation in the face of our unsustainable structural current account deficit

  • strong public investment toward energy independence, catching up on the public investment backlog of the past three decades and restoring our investment in infrastructure to something more like our historical norm, and recovery of our current account deficit to sustainable levels.

These sorts of possible futures, along with the conditions that render each more or less probable, are largely what has been ignored in the public discourse to this point.  I suspect that this is for reasons along the lines of TBG's comment on this same post, as they apply to the framing of discussions in the MSM.  In order to facilitate the ongoing looting it is best to keep the public focused on some immediate, pending doom, the preventive for which consists of giving ever more money to the perpetrators.  That has been the pattern to date.  

A defensible path to a much better future for the vast majority, similar to what Henry George supplied 130 years ago, could be explosive in the current environment, and would be highly detrimental to the interests of those few benefiting from the existing system.  We need such a plan and an able, bullet-proof and compelling figure to serve as the exponent for such a plan and provide a viable alternative to the existing miasma.

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

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon May 11th, 2009 at 06:16:29 PM EST
[ Parent ]
... and Barak Obama doesn't seem to be that bullet-proof and compelling figure. so... we're f****d.
by vladimir on Tue May 12th, 2009 at 02:46:54 AM EST
[ Parent ]
BruceMcF:
strong public investment toward energy independence, catching up on the public investment backlog of the past three decades and restoring our investment in infrastructure to something more like our historical norm, and recovery of our current account deficit to sustainable levels.

...and done in two years, before the Republicans get their act together, a la the Gingrich Revolution doing in Clinton's potential.

Never underestimate their intelligence, always underestimate their knowledge.

Frank Delaney ~ Ireland

by siegestate (siegestate or beyondwarispeace.com) on Tue May 12th, 2009 at 06:42:17 AM EST
[ Parent ]
The $3 billion a day deficit (current account + government + private deficits) the US has been running for the past I don't know how many years is enough for the simple man to see that something must give.
by vladimir on Mon May 11th, 2009 at 03:48:36 PM EST
[ Parent ]
... but as it turned out, not in a way that generated a big inflationary impulse.


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 May 11th, 2009 at 04:12:59 PM EST
[ Parent ]
Inflation will come when the Fed realises nobody will buy back the toxic waste it has been gobbling up.

The brainless should not be in banking. — Willem Buitler
by Migeru (migeru at eurotrib dot com) on Mon May 11th, 2009 at 04:18:44 PM EST
[ Parent ]
That's one possibility, but of course if the economy is limping along there may be no need for a contractionary monetary policy for five or ten years. And an ongoing policy of a cash rate of 0.1% would give ample opportunity to periodically dump some of the trash and clean up its balance sheet.


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 May 11th, 2009 at 10:32:58 PM EST
[ Parent ]
It also depends on the maturity of the toxic waste. But in the case of subprime mortgage CDOs that's too long for comfort.

The brainless should not be in banking. — Willem Buitler
by Migeru (migeru at eurotrib dot com) on Tue May 12th, 2009 at 01:51:23 AM EST
[ Parent ]
That is something to check, but I have the impression that the focus of the Bernanke experiment is on accumulating long term crap, rather than on accumulating short term crap.


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 Tue May 12th, 2009 at 04:56:12 PM EST
[ Parent ]
That would make sense in a liquidity crisis.

The brainless should not be in banking. — Willem Buitler
by Migeru (migeru at eurotrib dot com) on Wed May 13th, 2009 at 01:32:02 AM EST
[ Parent ]
BruceMcF:
focus of the Bernanke experiment is on accumulating long term crap, rather than on accumulating short term crap.

yup because shit turns to fertiliser if you give it time...

and pigs may sprout wings and fly, aiding enormously with distribution!

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Wed May 13th, 2009 at 03:23:28 AM EST
[ Parent ]
melo:
because shit turns to fertiliser if you give it time...
Only in the presence of saprophytic bacteria...

The brainless should not be in banking. — Willem Buitler
by Migeru (migeru at eurotrib dot com) on Wed May 13th, 2009 at 04:21:07 AM EST
[ Parent ]
saprophytic bacteria...

that would be those hard working little fellas who keep the production plants going even when owed back pay, yeah?


'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Wed May 13th, 2009 at 09:07:32 AM EST
[ Parent ]
Yup, and those two year college teachers willing to work 8 hours per class per week even though being paid for 5 hours work per class per week.

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 Wed May 13th, 2009 at 11:43:28 AM EST
[ Parent ]
See? That's the genius of piece-rate work!

What's not to like?

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed May 13th, 2009 at 05:36:01 PM EST
[ Parent ]
Piece rate work nothing! Its honest per hour wage work ... the sweaty end of the white collar spectrum ... albeit with contractual responsibilities that cannot possibly be met working those hours.

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 Wed May 13th, 2009 at 05:59:42 PM EST
[ Parent ]
albeit with contractual responsibilities that cannot possibly be met working those hours.

Precisely.

You could call it "unpaid overtime" or similar euphemisms, but basically it boils down to the fact that you have to teach a class adequately, and you're paid a certain amount of money for it, based on political decision about how long it's supposed to take - an estimate that can range from the generous to being straight out of la-la-land.

That looks a lot like piece-rate work to me.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu May 14th, 2009 at 03:52:55 AM EST
[ Parent ]
... the other thing about piece-rate work is that the piece is the piece is normally the thing or a part of the thing that the company is selling.

If I were paid per contact hour per student ... now that would be piece-rate work.

But, no, its the same rate whether its five students or forty.


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 Thu May 14th, 2009 at 11:22:15 AM EST
[ Parent ]
not in a way that generated a big inflationary impulse.

YET.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon May 11th, 2009 at 06:19:24 PM EST
[ Parent ]
Quite. Broad unemployment has reached 15.8% of the population ... even after setting aside the hidden unemployment incarcerated in the "Home of the Free to Imprison" ... obviously the economy is just a month or two away from passing below the "natural rate of unemployment" into the Inflation Accelerating Rate of Unemployment range.


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 May 11th, 2009 at 11:49:20 PM EST
[ Parent ]
European Tribune - The "W" Recovery?
A shadow banking system--Lehman, Bear Stearns, Merrill Lynch--Everybody and their mother was borrowing short-term in money markets at, say 2 percent, and instead of the classic 10:1 leverage of banks, they were levering up 30:1, sometimes 50:1, creating money out of thin air well beyond the intention of the Federal Reserve.
When has this become conventional wisdom? Apart from the edit (blame the failed institutions for the behaviour the survivors also engaged in: dead men tell no tales) we've been saying the same for about 2 years on this blog but we appeared shrill...

The brainless should not be in banking. — Willem Buitler
by Migeru (migeru at eurotrib dot com) on Mon May 11th, 2009 at 04:14:40 AM EST
we've been saying the same for about 2 years on this blog but we appeared shrill...

Not shrill but prematurely prescient, to mangle Tom Hayden's phrase about Vietnam war protesters.

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

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon May 11th, 2009 at 12:58:22 PM EST
[ Parent ]
Oddly shaped W.  I would submit we're in a dead cat bounce fueled by players and sharps running a final big con before the real flop.  Roll up for the Mystery Tour.
by rifek on Mon May 11th, 2009 at 09:13:43 AM EST
Agreed.  We don't have a letter that would be more appropriate for the second "V", unless it would be the letter "L".

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon May 11th, 2009 at 12:52:51 PM EST
[ Parent ]
We have to use an Arabian script, I guess.
by das monde on Thu May 14th, 2009 at 01:18:03 AM EST
[ Parent ]
... two U recessions back to back.

Written by someone who drags out the second half of the w.

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 May 11th, 2009 at 01:04:27 PM EST
[ Parent ]
Where does the EU stand in its structural current account deficit?

The quoted article states in breathless terms as if it is a new discovery the fact that the Fed does not create the bulk of the money supply ... the banking system does. And so, when the banks are not lending, pumping fiat money into the system is leaning against the wind.

It also discovers in breathless terms that there is no separation between Fed monetary policy and the current fiscal positions ... so we can normally usefully simplify by treating all national government spending as the creation of fiat money, all national government taxation as the destruction of fiat money, with the Fed acting to regulate the cash rate by buying and selling securities in order to inject or withdraw fiat currency from the finance sector.

Ordinarily, the withdrawal of reserves as the economy picks up would be an automatic process. And the breathless concern at the discovery that withdrawal of reserves will be needed would, ordinarily, be silly, since the FOMC can buy and sell Treasury securities at a much more rapid pace than the finance can be provided to expand the expenditure side of the expenditure-income loop.

Ordinarily.

But here is where the reckless policy of Bernanke to inject reserves by lending against and buying junk financial assets raises a serious concern, which is what happens when the normal operation of monetary policy would require selling financial instruments in order to withdraw reserves from the finance sector?

What share of Fed assets will be junk of little or no market value, and what share will be Treasury Securities?

After all, the funding of the Federal Reserve system operates via covering costs (including fixed face value dividends to the banks that own it) out of interest income on its assets, with the balance returned to the Treasury account.

The financial junk will not be generating substantial income. And (not coincidentally), if it is sold, it will be at a substantial discount to its book value, so that the Fed will have to account a loss on the transaction, which it will have to make good out of its interest income. Indeed, the sale of the junk at a loss ought to lead to a revaluation of the same junk still on its books, so even a small sale could lead to a realization of a massive loss (of course, this is realizing the loss that was made as soon as the junk was acquired at a grossly inflated book value).

Yet, if it can only sell a limited amount of junk ... if it has to, for example, find a class of junk that it can unload all at once, so there is only the loss on the transaction ... that means withdrawing reserves from the system will require selling Treasury securities, which will reduce its income stream.

Normally, that is no problem ... but will Bernanke, in support of the lifestyles of senior executives in the large money center banks, plunder the balance sheet of the Fed to such an extent that engaging in ordinary FOMC transactions will put it in a financial squeeze of its own?

Given that the Banks elect 2/3 of the boards of directors of the Federal Reserve Banks (1/3 to represent the banks, and 1/3 to 'represent' the public), with 1/3 selected by the Board of Governors who were generally nominated to placate the Banks (the only ones normally watching who is nominated to the Fed BOG) ... and they select the FRB bank presidents who make up 5/12 of the Federal Open Market Committee, with the balance made of the aforementioned Fed BOG ... so that the majority of the "watchdogs" in the system are from the executives and boards of the big finance companies ... it certainly is plausible. It'd be more of the same style of watchdogging they did over the past twenty years that led up to the (ongoing) Panic of 2008.

What this means is that the US is at serious risk of not just inflation, but hyperinflation as capital inflows into the US collapse and we are forced to face our unsustainable structural current account deficit (averaging in excess of the average rate of GDP growth for over a decade).

Unless, of course, the US is already far enough along the process of closing that hole when the scandal at the Fed breaks.

Which is why I pose the question ... how does the EU stand with respect to its structural current account position? If its at a structural current account deficit of less than its average GDP growth rate, and the Eurozone comes through the next business cycle to the next oil price shock recession without the scandal that is hanging over the Fed, then it would seem that financial leadership in the "Western World" would be quite likely to shift to the Eurozone.


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 May 11th, 2009 at 11:16:41 AM EST
It seems that the Eurozone's balance of payments is positive though not overwhelmingly so (source: ECB). Assuming I'm reading the data correctly.

But what do you mean by "structural" current account position?

The brainless should not be in banking. — Willem Buitler

by Migeru (migeru at eurotrib dot com) on Mon May 11th, 2009 at 11:44:31 AM EST
[ Parent ]
There is a cyclical component of the current account deficit, driven primarily by the trade account component, where some nations that are more reliance on cyclically sensitive exports and have less cyclically sensitive imports move toward deficit in a downturn, and some nations with the reverse move toward surplus in a downturn.

Just like the structural government budget or surplus, the structural current account deficit might be defined as the current account deficit at full employment ... except there's a problem there, in that a stronger level of economic activity than the world average will push a nation / economy toward deficit.

Of course, a precisely measure is unlikely to be an accurate measure, since precise measurement will require a model of the world economy that is sufficiently simple to be analytically tractable, which would therefore be a counterfactual model.

But as a rough cut, the five year moving average would filter out a lot of the cyclical component. Of course it will also increase the recognition lag between changes in the structural component occurring and changes, so the second draft would regress the trade account position against capacity utilization or full employment output gap to get a rough correction to apply to the current current account deficit.


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 May 11th, 2009 at 11:58:33 AM EST
[ Parent ]
It appears the range of the cyclical component is not enough to make the balance negative over the past 10 years...

But the last quarter of 2008 is visible as a sharp drop in both imports and exports signalling a dislocation - so who knows what things will look like on the other side.

The brainless should not be in banking. — Willem Buitler

by Migeru (migeru at eurotrib dot com) on Mon May 11th, 2009 at 12:22:32 PM EST
[ Parent ]
Getting beyond the rough estimate requires getting into the structural trade relationships and an estimate of the strength of various trade partners, and I reckon that'd be either based on guesswork or heroic assumptions.

In any event, if the EU has had a netted out trade balance or slight surplus over the past decade, and given that the trade surplus countries want to avoid having the global reserve currency, it would seem to point in the direction of the "big shift" back across the Atlantic unless the US starts getting our house in order.


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 May 11th, 2009 at 01:02:59 PM EST
[ Parent ]
I can post the relevant charts now... (again, the source is the ECB)

One can see that the trade balance in both goods and services separately can go from slightly negative to appreciably positive over a business cycle. This is what I meant by

It appears the range of the cyclical component is not enough to make the balance negative over the past 10 years...
There are between one and two business cycles in the 10 years spanned by the chart. So, your condition
if the EU has had a netted out trade balance or slight surplus over the past decade
obtains...

I find this ambiguous

it would seem to point in the direction of the "big shift" back across the Atlantic unless the US starts getting our house in order.
Which direction is "back across the Atlantic"?

The brainless should not be in banking. — Willem Buitler
by Migeru (migeru at eurotrib dot com) on Mon May 11th, 2009 at 03:52:21 PM EST
[ Parent ]
Back across the Atlantic is west to east ... the big shift east to west occurred during the 1940's and 1950's.

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 May 11th, 2009 at 10:34:58 PM EST
[ Parent ]
... that is to say, in a global downturn.

Most nations will move toward deficit in an unsynchronized upturn and toward surplus in an unsynchronized downturn ... but, for example, in a synchronized global downturn, an economy like China will move toward deficit and an economy like the US will move toward surplus.

So, especially for a nation with an unsustainable structural current account deficit like the US, a synchronized global downturn can mask the longer term structural problem.


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 May 11th, 2009 at 12:22:56 PM EST
[ Parent ]
Well, the guy is a pension fund analyst and wrote this first for that market and then posted it as a guest post on Naked Capitalism.  Perhaps the prospect of posting such prognostications of pending doom for pensioners took his breath away. Perhaps he has come late to the realization of just how disastrous the policies of the last 30 years have been, not to mention current policies.  Or perhaps he was originally writing for an audience he knew to be generally unaware of those factors.  

Non-the-less, he has put a fine edge on concerns I have had since October.  Seems to me that the situation would be bad enough solely on account of all of the private capital going deep into hiding.  Massive stimulus could be accommodated PROVIDED it was spent on useful projects.  But with the Fed loading up on toxic assets, when the time comes to  remove capital from the system to prevent massive inflation the Fed is likely to be struck with a severe, if not fatal, case of toxic shock syndrome.

I don't see Bernanke or Giethner reforming anything.  They are classic beneficiaries of the existing system occupying positions at the top of the pyramid in terms of influence, if not wealth.  They will be the last ones to acknowledge fundamental flaws.  The best hope for reform is if the leading edge of the second "V" for the market comes well before Bernanke is up for re-nomination and just as the congressional mid-terms  heat up.

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

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon May 11th, 2009 at 01:26:00 PM EST
[ Parent ]
... chair is one vote on the FOMC. Absent a political movement that rattles the bars unless it gets its way with each appointment to the Fed BOG, and absent a rebellion by the medium and small banks, it seems highly likely that the plundering of the Fed to the benefit of the large money center banks will continue.


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 May 11th, 2009 at 01:45:28 PM EST
[ Parent ]
There is significant reason for the small and medium sized banks to band together to oppose the present direction of policy.  An association of local and regional banks could be a credible force were they to engage forcefully in the ongoing debate by pointing out how one sided, self defeating and inherently unjust the current direction of policy is.  They also have the moral and economic advantage of being relatively un-tainted by the sins of the recent past.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon May 11th, 2009 at 06:27:56 PM EST
[ Parent ]
The three "public" representatives elected by the banks and the three bank representatives themselves are tiered ... one each from big, medium, and small banks in the FRB district

So a coalition of a majority of small and a majority of medium banks in an FRB district would be one of the BOG "public representatives" away from a majority of the board of the FRB bank in that district.


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 May 11th, 2009 at 10:39:20 PM EST
[ Parent ]
the Banks elect 2/3 of the boards of directors of the Federal Reserve Banks (1/3 to represent the banks, and 1/3 to 'represent' the public)

This is worse than the ancien regime...

Why shouldn't elected representatives do it instead?

The brainless should not be in banking. — Willem Buitler

by Migeru (migeru at eurotrib dot com) on Tue May 12th, 2009 at 01:54:42 AM EST
[ Parent ]
Elected representatives pick the Federal Reserve Board of Governors, which is the primary board governing the actions of Federal Reserve Board banks ... their corporate boards play second fiddly to the BOG. And the Fed BOG is 7/12 of the Federal Open Market Committee, so in principle in a mere 7 years a committed political movement could wrest control from the Finance Sector, if it were not for the fact that the Finance Sector owns the Senate.

And the Federal BOG selects 1/3 of the Boards of each of the FRB banks.

And the FRB bank presidents in rotation ... always FRB-NY, FRB-Cleveland and FRB-Chitown in alternate years, and then one each from the East Coast (Boston/Philadelphia/Richmond), Southern (Atlanta/St. Louis/Dallas) and Western (Minneapolis/Kansas City/San Francisco) triads.

As to why the layered indirect representation, that would be the same reason that the Teamsters once relied on layered indirect representation ... it makes it easier for the thugs and crime bosses to run the joint.


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 Tue May 12th, 2009 at 05:02:29 PM EST
[ Parent ]
make up the other five members of the Federal Open Market Committee, in rotation (as listed above)

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 Tue May 12th, 2009 at 05:42:18 PM EST
[ Parent ]
Corrected a mis-write in the first sentence below the "fold".

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon May 11th, 2009 at 01:57:34 PM EST
Shiller:
Are there structural changes we need to make so that we don't have this sort of craziness again?

Yes. This crisis was substantially caused by a failure to manage real estate risk. Notably, we got individual homeowners into a leveraged position typically with their entire life savings in real estate in one city, in one house. That's very risky. I have one proposal for continuous workout mortgages. Right now we think it's a great thing if banks will give struggling homeowners a workout. Why do we only want to come in after the fact? My vision for our future is that it should be planned for and priced into the initial mortgage. We could update mortgages in a way they protect people from things beyond their control-- like high national unemployment.

This may be a good idea: have the mortgage principal indexed to the Case-Shiller index.
What else?

Home-equity insurance. We want to have homeowners' insurance, which protects against things like fires, updated so that it protects against a loss of market value. Fires were a big problem hundreds of years ago. Houses were burning down all the time. Now we've developed a different problem--the residential housing market has gotten much more volatile.

This is a bad idea: unless I_m missing something, an individual doesn't have the liquidity or credit to take advantage of Case-Shiller futures or options to hedge the value of their home equity against housing price fluctuations. see (my example, which may also work as a counterargument for indexing a mortgage principal to the Case-Shiller index but I think is not quite the same)
The company you started, MacroMarkets, just got approval for tradable securities linked to the Case-Shiller house-price index. How does that factor in?

One reason we have bubbles in the housing market is because there's been no way to short housing [that is, to make money when prices fall]. The ability to short is essential to an efficient market, otherwise there's nothing to stop zealots from pricing things abnormally high. If you buy one of these long securities, called UMM, it's like buying a house, except you don't have to go through the real estate agent, take possession of a property, maintain it, rent it out. But we also have the DMM, which is short housing. Markets like this will also create an infrastructure for products. For example, insurers could issue home-equity insurance and then hedge themselves by taking a position in this market.

This is just trying to create a speculative market so he can make money out of his index.

The brainless should not be in banking. — Willem Buitler
by Migeru (migeru at eurotrib dot com) on Wed May 13th, 2009 at 01:50:29 AM EST
(my example, which may also work as a counterargument for indexing a mortgage principal to the Case-Shiller index but I think is not quite the same)

That would create a different set of issues, because it would mean that during a bubble, your mortgage payments disappear down a black hole.

A better solution would be to make home-equity withdrawals (assuming that you make them legal at all in the first place, which I think is A Bad Idea) indexed to Case-Shiller.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed May 13th, 2009 at 05:11:48 AM EST
[ Parent ]
The question is whether that's the same black hole that they disappear into if you hedge your house with a short position in CS Index futures.

The brainless should not be in banking. — Willem Buitler
by Migeru (migeru at eurotrib dot com) on Wed May 13th, 2009 at 05:14:06 AM EST
[ Parent ]


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