bchadwick Wrote: ------------------------------------------------------- > So as long as the rest of the world is down for > the count, inflating the economy with quantitative > easing (aka “printing”) still has a decent chance > of working. It also helps that our economy, even > when troubled, is still the largest in the world. > Even China at #2 is only about 1/3 the size of > ours. That means that even if money flows out of > the US to the rest of the world in a carry trade, > the rest of the world can’t absorb as much, so > some of it has to have an effect here. BCA, what do you say to those who claim Monetary Policy at this point can’t influence inflation at all? Unprecedented (times 10) printing has taken place already, and with all the efforts, M3 is turning negative, and the private sector deleveraging is really just in the 3rd inning. Thus, depending on some estimates, if we have $60 trillion in debt (some say $100 if you count in entitlements and the like) and say at least half of that needs to be dealt with (i.e., paid down, defaulted, written off), that the QE1 here and the QE2 there and the QE3 next, and on, will just get absorbed by the massive deleveraging and have little impact on the real economy… In other words, not to sound crazy, but is it possible that the Fed (and world) need to print somewhere in the range of $30 to $100 trillion in order to achieve your inflation scenario above? If so, that is politically impossible at this point. Although, anything can change if employment spikes up much higher and for much longer. Worst case risk for me is that the the printed money flows into commodities and real assets, driving them up, while the private sector remains in pay down mode and unemployment high. Imagine what would happen if Gas is $9 a gallon, and butter $4 a stick… and not through inflation. Just curious to hear your thoughts on this.
There’s a guy named richard c. koo, worked at the NY fed, that delivered a presentation at the cfai conference on fixed income in september’ish that was about fighting a balance sheet driven recession. Essentially he was saying that the stimulus is being used to effectively plug gdp while business and homes continue to delever at a macro level. He believes that without the plug of stimulus gdp contracts at about the same level of debt that is repaid and/ or abrogated on. Of course I’m grossly over simplifying here, and I should probably also state that this has nothing to do with a ‘multiplier effect’ before I get flamed. Not saying I advocate what he is saying necessarily just saying I think it is a well articulated and compelling argument. You can access those old conferences via webcasts on the cfai website, might be able to get a google or you tube video of him as well. I dunno I had just watched it originally through the CFAI portal.
BosyBillups Wrote: ------------------------------------------------------- > bchadwick Wrote: > -------------------------------------------------- > ----- > > So as long as the rest of the world is down for > > the count, inflating the economy with > quantitative > > easing (aka “printing”) still has a decent > chance > > of working. It also helps that our economy, > even > > when troubled, is still the largest in the > world. > > Even China at #2 is only about 1/3 the size of > > ours. That means that even if money flows out > of > > the US to the rest of the world in a carry > trade, > > the rest of the world can’t absorb as much, so > > some of it has to have an effect here. > > BCA, what do you say to those who claim Monetary > Policy at this point can’t influence inflation at > all? Unprecedented (times 10) printing has taken > place already, and with all the efforts, M3 is > turning negative, and the private sector > deleveraging is really just in the 3rd inning. > Thus, depending on some estimates, if we have $60 > trillion in debt (some say $100 if you count in > entitlements and the like) and say at least half > of that needs to be dealt with (i.e., paid down, > defaulted, written off), that the QE1 here and the > QE2 there and the QE3 next, and on, will just get > absorbed by the massive deleveraging and have > little impact on the real economy… > > In other words, not to sound crazy, but is it > possible that the Fed (and world) need to print > somewhere in the range of $30 to $100 trillion in > order to achieve your inflation scenario above? > If so, that is politically impossible at this > point. Although, anything can change if > employment spikes up much higher and for much > longer. > > Worst case risk for me is that the the printed > money flows into commodities and real assets, > driving them up, while the private sector remains > in pay down mode and unemployment high. Imagine > what would happen if Gas is $9 a gallon, and > butter $4 a stick… and not through inflation. > > > > > > Just curious to hear your thoughts on this. There will be 3 phases to deleveraging: 1) Consumers, 2) corporations and 3) governments. I believe the process for the first 2 are well on their way. Consumers have raised their savings rate from 0% to 6%. US corporations are rumored to be sitting on $1 trillion in cash right now. The financial companies are taking advantage of monetary policy by borrowing at abnormally low rates, not lending it, and investing it in equities, bonds and commodities. All those assets classes are rising. I believe there will be carry trade 2 from QE2. Most of the money will flow in emerging markets (where the growth truly is), and that will cause inflation over there. Hence, the US dollar will continue to decline. That will make 1) US exporters more competitive, 2) products from domestic firms less expensive vs imported products, 3) better profits for US corporations in emerging markets due to currency devaluation.
Monetary policy is pushing on a string. You can make the cost of borrowing cheap, but if no one wants to borrow (lack of demand for a firm’s products and services) then borrowing does not pick up. At the same time your low rates reduce interest income to old ladies who buy bank CDs, which in turn reduces consumption. Fiscal stimulus works much better. You can simply cut taxes as long as that extra money will be spent by consumers. If people just sit on it and buy T bills, then the government has to directly spend it themselves to make fiscal stimulus work. Also, has anyone noticed that Grantham and Gross went from predicting tons of inflation to sounding the deflation alarm? Laffer has been pretty quiet after writing his hyperinflation editorial in the Journal almost 18 months ago. We’re still waiting Art!
Seems that corporations are more or less delevered already, sitting on piles of cash, with the exception of financial firms. If expanding the Fed’s balance sheet by $10 trillion or so is not going to have inflationary effects (because, presumably the velocity of money isn’t there), then you have to ask yourself: what’s wrong with expanding the balance sheet? If we just printed up a ton of cash and handed it to homeowners and they paid off their mortgages with it, it seems like it would be bad for the debtors, except that it’s only bad if you assume that there is inflation going on, which we’ve already assumed it isn’t. One thing that could be bad about massive QE like this is that the holders of dollar denominated assets might feel that the currency isn’t worth as much, and that could drive up real interest rates as they reallocate… …except that the currency not being worth as much would imply inflation. The real issue would be that the governing officials in the Fed might start to get too used to this method, and then apply it in situations where inflation really is a threat, or that velocity at some point will return and then it will be very difficult to reduce the money supply rapidly enough to avoid rapid inflation in the future. Helicopter Ben may need to live up to his nickname. It may not make sense to channel new money through the banks, as in a traditional recession, because the banks just sit on it and collect the spread on treasuries. It may literally need to be dropped out of helicopters. This is one of the reasons I am in favor of using fiscal policy, because fiscal policy can be targeted and monetary policy really cannot. Mohammed El-Arian at PIMCO likes to say “Structural problems require structural solutions” (or a very long - perhaps generational - wait) but the Fed really can’t do very much on its own to facilitate structural adjustment. — “Since when has the gov’t been good at spending money?” Are you suggesting that universal public education should not have been pursued? The creation of the interstate highway system? The initial development of the internet? Yes, the government has problems with spending money efficiently, but when the alternative is that there won’t be spending at all, and large numbers are unemployed, the government has a role to play to stimulate employment and productivity. Some of that may include allowing more buildings to become Triangle Shirt Factories so that businesses can get set up quickly, but much of it is making sure there is enough demand for goods and services so that people have a chance to make a living. Remember also that the private sector - as much as we like to worship it - is not a paragon of efficiency, particularly when there are barriers to entry, oligopolies, and such. Look how well the banking sector managed their risk on their own. I’m sure you can see enormous waste going on at offices, whether government or not. Governments are at least accountable to the people they rule. Corporations are pretty much only accountable to their shareholders, who may not be customers or even in the same vicinity of company operations. The key problem is really unemployment. Debt is a major aggravating factor, but if people were being tossed out of their homes but still had cash flow with which to move into cheaper digs and, as W so eloquently put it “put food on their family,” people wouldn’t be quite so upset about the housing crisis. It would be sad that people couldn’t stay in their nice homes, but it would not be tragic. What makes this tragic is that there are plenty of people that are looking at living on the street, and even if they may have made a dumb decision or let themselves be lured into an ARM that reset badly on them, the punishment does not fit the crime. And there are others who may have been perfectly responsible in handling their mortgage, but have been out of work for two years because of deals that third parties made with each other and who have used up savings. We like to look at people on the street and wonder “what dumb decision did they make to do that, boy they are dumb,” but most of the time, we don’t know if that person is on the street because they are a drug addict, or were made broke by an unexpected medical condition, or the industry they worked in (say, finance) isn’t going to exist anymore, or just bad luck. Once you are on the street or precariously close to it, you often get forced into situations that keep you there. There is another problem with large-scale unemployment. The price signals are very weak or nonexistent for suppliers to produce goods and services for people who can’t pay for them (weak in the sense that small numbers at small margins may attract a few suppliers). When income and assets are highly concentrated, the market responds by producing things for those people at the top. But the problem is that when concentration is so extreme, the extremely wealthy cannot consume enough to generate sufficient employment for the rest of us. Even the fraction of assets that is held as savings and investments cannot find sufficient attractive alternatives and are either gambled on highly risky ventures or simply invested for low, unsatisfying, but less risky returns. This is basically a Keynsian argument, but with a twist. It’s critical to get funds into the hands of consumers, particularly the low end of the scale, because without it, there will be no growth in businesses that produce things for that class of people, and without that, there will not be enough businesses to provide employment in the first place. We will regress to 18th century France, but with less tasty cake. The twist is that since we have structural issues, the main one being “what can the average american produce, cheaper and more productively than anyone else in the world, that will justify compensation sufficient to finance a middle class lifestyle” Until we answer that question, we will be a declining power descending into Russian-style oligarchy. We need to get money into the hands of people who will spend it and provide demand for businesses, and preferably small businesses. And since we have a number of declining industries and no clear rising ones, while we are spending this money, we need to figure out how and where America can compete in the future. I’m not sure what that is going to be, but I think that facilitating experimentation is important here, both from a demand facilitation perspective and from an industrial policy perspective. How did China develop its industries? There was very much industrial policy there. Brazilian ethanol? Petrobras? Embraer? Vale do Rio Doce? Industrial Policy. South Korea? Industrial policy. The US did not need industrial policy when we were the biggest sellers to ourselves and we were the cheapest and most efficient economy on the planet. We knew what we wanted and we knew how to make it for ourselves. Now we have to try to think ahead. We need to think about what Europeans would want from us, what Indians and Brazilians and Chinese would want from us, and we need to learn how to make it. If our kids are just playing video games all the time, then someone else needs to provide some seeding to get the country on a track like that. And yes, there will be plenty of stories about how money is wasted on something that didn’t end up working. You get those kinds of stories from angel investors as well. So in order to get money into the hands of entrepreneurs, we need fiscal policy. We have a number of zombie banks now, maybe we need what in emerging markets are often called “Development Banks.” Perhaps carve one out of AIG, since the government already owns it. Or take those banks that are in receivership already, recapitalize and merge them to be national development banks with a mandate to fund startup businesses like Video Gamers Anonymous, or even help fund the fireproofing of buildings. Now, normally I am not in favor of huge spending programs. But these are not normal times. Normally I am very anti-consumerism, because the environmental consequences of consumerism are horrific, not to mention what it does to the human spirit, but if there is ever a time to be pro-consumer, it is now. I’m not advocating spending and fiscal policy as a long-term program, and forcing programs to sunset is politically difficult. I’m not in favor of big government for big government’s sake, but again, this is a genuine crisis, and people are getting caught by it whether they were house pigs, yield pigs, or not. Apologies… since it’s late, I know that I am not writing as coherently as normal.
bchadwick Wrote: ------------------------------------------------------- > I’m sure you can see enormous waste going on > at offices, whether government or not. govt is the most inefficient beast on the planet > Governments are at least accountable to the people they rule. really, then why can’t you sue one? > Corporations are pretty much only > accountable to their shareholders, who may not be > customers or even in the same vicinity of company operations. corporations are accountable to everyone; shareholders, stakeholders (community, employees, environment, etc.) and of course their customers. JDV already pointed out the massive ‘red-tape’ associated with simply trying to open an office. All of these provisions exist because of the ‘responsibilities’ the business has as a public-facing entity. of course we all know there is no magic wand here to kick-start the economy or to get people’s jobs back. i would just like to see the govt stop strapping debt on instead of re-working trade rules or making it easier for businesses to operate. (when i think of the new stimulus i remember that ibm commercial where the medieval guys are attacking something with a catapult and they decide to fill it with money -> http://www.youtube.com/watch?v=CZmHDEa0Y20)
bchadwick Wrote: ------------------------------------------------------- > We need to get money into the hands of people who > will spend it and provide demand for businesses, > and preferably small businesses. And since we > have a number of declining industries and no clear > rising ones, while we are spending this money, we > need to figure out how and where America can > compete in the future. I’m not sure what that is > going to be, but I think that facilitating > experimentation is important here, both from a > demand facilitation perspective and from an > industrial policy perspective. the simple answer to funding people used to be to extend their credit… i would like to say that we should be building all industries to remain competitive across the board. my reasoning is that we need industry and should not be reliable on the world for all production needs in case of catastrophe, war and also to have a balanced economy. this may take some defensive policies, but i think we’ll still be a net importer in most areas.
I haven’t read the article, but figured I’d post the link for those interested… http://www.economist.com/node/17361344
sjv1030 Wrote: ------------------------------------------------------- > I haven’t read the article, but figured I’d post > the link for those interested… > > http://www.economist.com/node/17361344 i agree we need to maintain the stability the first qe provided. how to manage the debt is the next question.
“This is one of the reasons I am in favor of using fiscal policy, because fiscal policy can be targeted and monetary policy really cannot.” I agree 110%. What concerns me is that fiscal policy requires political will. Now looks like the house and senate is certain to be broken up, with Obama looking at 2012 next and start to focus on budgets and deficits. The tea party movement will do their best to stop all spending programs. 2012 is now in sights. I remember reading a hedge fund manager say that it’s fiscal policy what we need now, but the question is, have we gone through enough pain for the public and politicians to accept it? At this point, it’s debatable. Although, a bright spot is that if things get considerably worse, I think all will be ready for the helicopter drop and fiscal policy tsunami. Also, ironically, if things also get considerably worse, the dollar would become very strong and commodities weak, which would give them more ammo to do what they need to do. This game is rigged, lol!
Good discussion that has a lot of elements whizzing over my head. Two things: * About government spending… anyone who has taken a course in finance (or studied L1) knows about capital budgeting and the concept of net present value. I have my doubts that government consistently chooses projects with positive net present value. In fact, the big problem is that I doubt there’s any analysis of that kind. Why is that? * I’m plowing money into foreign equities for a reason. Just indexes. I don’t pretend to know anything about picking US stocks, much less foreign.
Just because the government spends a dollar does not mean that the dollar is spent badly. Those people who subscribe to that ideology just can’t be bothered to think and prefer to live their lives in slogans. Yes, you can sue the government. It’s done all the time. People look at something like NASA and say, “ah, but look at all the waste to set up a space program.” Or look at DARPA and say “gee, Yahoo and Netscape do the internet better because they’re private companies.” But this is enormous survivor bias. Pets.com, Webvan, Flooz, etc. How many dead companies does it take to set up an industry. Some enormous percentage of small businesses fail within the first few years, and many large businesses also fail. How efficient is that? Here’s a list of defunct car companies in the United States: http://en.wikipedia.org/wiki/List_of_defunct_United_States_automobile_manufacturers I’m not against private industry, and I think that the economy should be run primarily by private enterprise, but take a moment to think about all of the wasted money and capital that went into setting up these companies, and we have to figure that at least a few of them (20 maybe?) might have died because they were inefficiently run. If the government sets up ONE company to do something, and say it has long lines or something, people rail that the government can’t do anything right and is so inefficient. I’m not saying that the government does a great job at everything it does, but the private sector needs to look in the mirror a bit when they go and talk about how bloody efficient they are. Three martini lunches. Conferences at $5000 per person… company paid “client meetings” at Scores… it must be awesome to spend your shareholder’s money on stuff like that and call yourself efficient. Competition is key to improving services over time, whether business or government provided, so in general, government monopoly over an industry is not a good thing for the economy, but government participation in the economy, particularly during a crisis, is not automatically a bad thing.
frisian Wrote: ------------------------------------------------------- > * About government spending… anyone who has > taken a course in finance (or studied L1) knows > about capital budgeting and the concept of net > present value. I have my doubts that government > consistently chooses projects with positive net > present value. In fact, the big problem is that I > doubt there’s any analysis of that kind. Why is > that? what is the government’s return requirement? does it need to be absolute positive when you have a multiplier? also, besides what the return requirement is, how do you calculate return for a road repair when its usefulness is measured in perpetuity and return is calculated indirectly?
bchadwick Wrote: ------------------------------------------------------- > Just because the government spends a dollar does > not mean that the dollar is spent badly. Those > people who subscribe to that ideology just can’t > be bothered to think and prefer to live their > lives in slogans. > But those who think that govt spending is much less useful than private sector spending are correct. Divide up govt programs into sectors: a) Debt Service: Probably can’t do much about this. Callable govt debt would be good with me. b) Military: http://www.counterpunch.org/arguimbau10282010.html $50M/kill for Taliban in Afghanistan. Does anybody think that we are doing a good job here? Personally, the Taliban weren’t bothering me all that much prior to 9/11 and since they only had indirect involvement in it I think this cost is a little steep. c) Medicare, other health care: Looking after the health of old people is great. 65 isn’t that old and there’s lots of healthcare we have no public interest in supplying. Medicare fraud is wildly easy. d) Social Security: Another of your projects that we can inflate our way out of, maybe. Perhaps we need to think of more constructive approaches like asset-based limits. e) Discretionary programs: Eh, some good, some bad. In my time working for the govt I never saw anybody work very hard. > Yes, you can sue the government. It’s done all > the time. > If we are talking the Federal gov’t, it’s possible but is much more difficult than suing a corporation, individual, etc. because there are a bunch of steps you have to take first and a bunch of restrictions on what kinds of suits you can bring. > People look at something like NASA and say, “ah, > but look at all the waste to set up a space > program.” Or look at DARPA and say “gee, Yahoo > and Netscape do the internet better because > they’re private companies.” But this is enormous > survivor bias. Pets.com, Webvan, Flooz, etc. How > many dead companies does it take to set up an > industry. Some enormous percentage of small > businesses fail within the first few years, and > many large businesses also fail. How efficient is > that? > Pointing to dot.com bubble as a way of justifying govt waste is just not compelling. I completely believe that capital markets are better at allocating capital than govt bureaucracy. For the most part, bad private sector allocations are self-limiting. They aren’t profitable and they get closed down. Wasteful govt projects get closed down not because they aren’t profitable but because they are politically unprofitable. That’s a much less objective standard. > Here’s a list of defunct car companies in the > United States: > > http://en.wikipedia.org/wiki/List_of_defunct_Unite > d_States_automobile_manufacturers > Look closely at that list and there’s a really good reason it’s so long - Ford wiped out most of them by inventing interchangeable parts, and assembly line production by well-paid workers that drove a great economic revolution and led to affordable cars. Private industry is proud of that list. Other car companies on that list are defunct because they were merged (AMC) or their cars sucked (AMC). > I’m not against private industry, and I think that > the economy should be run primarily by private > enterprise, but take a moment to think about all > of the wasted money and capital that went into > setting up these companies, and we have to figure > that at least a few of them (20 maybe?) might > have died because they were inefficiently run. 20 is not remotely close. Ford took out 20 of those companies just in the A’s that were making hand-made overly expensive cars that were hard to maintain and not as good as what Ford was offering for much less. > If > the government sets up ONE company to do > something, and say it has long lines or something, > people rail that the government can’t do anything > right and is so inefficient. > Like what? > > I’m not saying that the government does a great > job at everything it does, but the private sector > needs to look in the mirror a bit when they go and > talk about how bloody efficient they are. Three > martini lunches. Have you ever worked at a place wher you could do this? I’d fire anyone who had one martini with lunch. > Conferences at $5000 per > person… I go to those conferences and think they are worth it. > company paid “client meetings” at > Scores… I, uh, well, uh, forget it. > it must be awesome to spend your > shareholder’s money on stuff like that and call > yourself efficient. > > Competition is key to improving services over > time, whether business or government provided, so > in general, government monopoly over an industry > is not a good thing for the economy, but > government participation in the economy, > particularly during a crisis, is not automatically > a bad thing. Are we talking about “govt participation” which is very broad, or wildly fiscally irresponsible unproductive spending from a country with too much debt run up during good times? If competition is key, perhaps we should think about how much competition is involved in pork politics which is simply about jobs in your own district so you can ge re-elected rather than responsible economic policy.
I think there are a bunch of points here where reasonable people can disagree JoeyDVivre Wrote: ------------------------------------------------------- > bchadwick Wrote: > -------------------------------------------------- > ----- > > Just because the government spends a dollar > does > > not mean that the dollar is spent badly. Those > > people who subscribe to that ideology just > can’t > > be bothered to think and prefer to live their > > lives in slogans. > > > But those who think that govt spending is much > less useful than private sector spending are > correct. Divide up govt programs into sectors: > a) Debt Service: Probably can’t do much about > this. Callable govt debt would be good with me. > b) Military: > http://www.counterpunch.org/arguimbau10282010.html > > $50M/kill for Taliban in Afghanistan. Does > anybody think that we are doing a good job here? > Personally, the Taliban weren’t bothering me all > that much prior to 9/11 and since they only had > indirect involvement in it I think this cost is a > little steep. > c) Medicare, other health care: Looking after the > health of old people is great. 65 isn’t that old > and there’s lots of healthcare we have no public > interest in supplying. Medicare fraud is wildly > easy. > d) Social Security: Another of your projects that > we can inflate our way out of, maybe. Perhaps we > need to think of more constructive approaches like > asset-based limits. > e) Discretionary programs: Eh, some good, some > bad. In my time working for the govt I never saw > anybody work very hard. > I agree that Social Security is the big issue, and medicare fraud is bad, but so is insurance fraud, which is just as much a cat-and-mouse game as medicare fraud. The insurers get around this by collecting premiums until someone actually needs something expensive, and then they get dropped. Governments are bureaucracies, and the head that sticks up the highest is the first one to get hammered. I see this all over, not just in governments. Large companies also are big bureaucracies. Yes, in the private sector, there are some stellar workers, but there are a ton of support and mid-level staff that can be just as lazy as the govvies. And I’m pretty sure Barak Obama doesn’t get very much sleep. The last President to sleep much was probably Ronald Reagan. > > Yes, you can sue the government. It’s done all > > the time. > > > If we are talking the Federal gov’t, it’s possible > but is much more difficult than suing a > corporation, individual, etc. because there are a > bunch of steps you have to take first and a bunch > of restrictions on what kinds of suits you can > bring. > Mostly I was questioning the poster’s knowledge that one can, in fact, sue the government. And one can win too. > > People look at something like NASA and say, > “ah, > > but look at all the waste to set up a space > > program.” Or look at DARPA and say “gee, Yahoo > > and Netscape do the internet better because > > they’re private companies.” But this is > enormous > > survivor bias. Pets.com, Webvan, Flooz, etc. > How > > many dead companies does it take to set up an > > industry. Some enormous percentage of small > > businesses fail within the first few years, and > > many large businesses also fail. How efficient > is > > that? > > > > Pointing to dot.com bubble as a way of justifying > govt waste is just not compelling. I completely > believe that capital markets are better at > allocating capital than govt bureaucracy. For the > most part, bad private sector allocations are > self-limiting. They aren’t profitable and they > get closed down. Wasteful govt projects get > closed down not because they aren’t profitable but > because they are politically unprofitable. That’s > a much less objective standard. > I understand what you are saying and I mostly agree with you. I would rather see capital markets allocating in normal times. But we’re in a different situation here. When a tricycle tips over, you have to right it before you go on securitizing crap and issuing CDOs and CDSs all over again to get capital markets efficient and transparent again. Again, my main complaint is that private markets have a ton of inefficiencies in them that people gloss over. When banks aren’t lending to small businesses and would rather just borrow from the fed and collect treasury yields, the banks are doing what’s in their self interest, but it’s not really generating all that efficiency you are talking about. The private sector is not NEARLY as efficient as it is claimed to be, and this kindergarten view of big bad government spending vs. pure innocent and delicate private sector spending can cause real damage at times like this. What makes private sector innovation better than publicly provided services is that, over time, the inefficient services die or get reformed or absorbed into more efficient ones, but this is a long process that takes years or decades. We have a dire unemployment situation here that needs to be addressed very soon. We have a market failure in capital markets which is why we need someone to “right the tricycle” so that it can get going again. Banks aren’t going to do it, so that really only leaves the government. We basically need to 1) “reset” the system, 2) create a new set of ground rules so that we don’t hyperleverage ourselves; for example, making it so that when GM goes bankrupt, you don’t have 100x the value of GM suddenly deliverable because people can take CDSs out on the firm without having some collateral (preferably the GM bond itself) to assure that the derivative has a reasonable chance of performing if a default event occurs. 3) figure out how to distribute the costs of reconstruction. Basically we need to do the reset and recapitalize the banking system so that small and innovative businesses can start to grow and employ people (and I realize that a lot of them are going to be fail, but this is just the price we have to pay at the moment). We may need to pay up to make a bunch of people whole or mostly whole out of some kind of slush fund (currently the Fed balance sheet and the FDIC). And then, later, we need to allocate the costs of this across different sectors of society. This is actually one of the reasons I think the inflation path is the best of a bad lot, because it redistributes the costs widely. Pretty much everyone has mud on their hands. People who consumed too much and bought houses they couldn’t afford, or ran up credit card debt… yes, they are guilty. But people who didn’t do the due diligence on who they were lending to, or what crap they were investing in are also are guilty. I feel bad because I felt I managed my debt conservatively (like I didn’t have any) during the good times, and then get slammed with the recession anyway without even some nice assets to sell. Though, if I look at it, I got some growth in my equities during the good time that I just had to give back in the bad times, so I guess I had stuff that was also the result of this collective madness. The problem is that it will be hard to distribute the costs through tax policy or regulations or fees, etc… So it’s probably best to do it through inflation. That isn’t to say I love inflation; I just think it’s the best of a bunch of bad options that we’re in because we let people lie to us about how we could live in nice houses without any income or job or assets, or we could get 6% on an AAA rated CDO tranche. > > Here’s a list of defunct car companies in the > > United States: > > > > > http://en.wikipedia.org/wiki/List_of_defunct_Unite > > > d_States_automobile_manufacturers > > > > Look closely at that list and there’s a really > good reason it’s so long - Ford wiped out most of > them by inventing interchangeable parts, and > assembly line production by well-paid workers that > drove a great economic revolution and led to > affordable cars. Private industry is proud of > that list. Other car companies on that list are > defunct because they were merged (AMC) or their > cars sucked (AMC). > I think we’re converging here… my point is that there was a ton of inefficient activity going on in the private sector (note that I used an example other than dot-com to show that this is not specific to the tech craziness). Yes it arguably got more efficient as the big three drove some out of business and acquired others, but this was a multi-decades long process. And remember that many of these companies existed in the efficiency idyllic time before labor unions and OSHA regulations, environmental concerns, and even much taxation. And still the private sector had a ton of inefficient companies. > > I’m not against private industry, and I think > that > > the economy should be run primarily by private > > enterprise, but take a moment to think about > all > > of the wasted money and capital that went into > > setting up these companies, and we have to > figure > > that at least a few of them (20 maybe?) might > > have died because they were inefficiently run. > > 20 is not remotely close. Ford took out 20 of > those companies just in the A’s that were making > hand-made overly expensive cars that were hard to > maintain and not as good as what Ford was offering > for much less. I think you missed my drop of sarcasm there. 
> > If > > the government sets up ONE company to do > > something, and say it has long lines or > something, > > people rail that the government can’t do > anything > > right and is so inefficient. > > > Like what? > > Like the DMV? > > I’m not saying that the government does a great > > job at everything it does, but the private > sector > > needs to look in the mirror a bit when they go > and > > talk about how bloody efficient they are. > Three > > martini lunches. > Have you ever worked at a place wher you could do > this? I’d fire anyone who had one martini with > lunch. > OK, these aren’t so common anymore, but you ask the older generation, and these were pretty common in the 50s and 60s. Often recollected with extreme fondness… > > Conferences at $5000 per > > person… > > I go to those conferences and think they are worth > it. > Do you really need all those silly gift packs that are designed to have you invest with a particular group even if it isn’t really in your client’s best interest?? Is that efficient? > > company paid “client meetings” at > > Scores… > > I, uh, well, uh, forget it. > Let’s go sometime when you’re in town! 
> > it must be awesome to spend your > > shareholder’s money on stuff like that and call > > yourself efficient. > > > > Competition is key to improving services over > > time, whether business or government provided, > so > > in general, government monopoly over an > industry > > is not a good thing for the economy, but > > government participation in the economy, > > particularly during a crisis, is not > automatically > > a bad thing. > > Are we talking about “govt participation” which is > very broad, or wildly fiscally irresponsible > unproductive spending from a country with too much > debt run up during good times? > I agree that there was too much debt run up in good times. A lot of it was private debt, now much of it transferred to the public balance sheet, which at least gets it financed at a better interest rate (which doesn’t solve the problem, but at least makes it a tiny bit more manageable). Here is some research I did recently on government spending as a proportion of GDP, using the Fed’s FRED dataset. http://www.chadwickresearch.com/blog/?p=124 The conclusions were interesting. Basically, government spending as a percentage of GDP hasn’t gone down much since the 1950s, sitting at somewhere between 20 and 25% of the economy. About half of that is state and local government spending, and the main driver of changes - both increases and decreases - has been the defense budget. Now the deficit has gone up and down over time - mostly up, recently - and I will do some analysis on that shortly, along with the Social Security and Medicare budgets, but the implication is that a lot of the deficit is because we’ve cut taxes without cutting government spending, and simply substituted debt to make up the difference. If we hadn’t been busy fighting a bunch of wars, of course, the deficit would be less, and of course the big problem I see is that we ran up enormous deficits in good times, and therefore are substantially less able to go into debt to get ourselves out of the current mess. But your point would seem to be that we shouldn’t be in debt ever? > If competition is key, perhaps we should think > about how much competition is involved in pork > politics which is simply about jobs in your own > district so you can ge re-elected rather than > responsible economic policy. I don’t like pork distribution very much, either, but what do you think soft-dollars are? Pork that’s kosher?? And pork distribution in Congress is simply a bunch of people negotiating the best deal they can for their district? Is that really so different from someone trying to buy the best product for themselves? The invisible hand doesn’t work when people are exchanging services, only when people are exchanging cash??? And I’m still waiting to hear you say that governments shouldn’t have created mandatory K-12 education, land-grant colleges, the interstate highway system, DARPA. And the fact that we can say that K-12 education should be a lot better isn’t a sufficient criticism, because we both know that if education weren’t mandatory, then pretty much only the elite would know how to read and write. Anyway Joey, I just think it’s way too easy a criticism to say that government is inefficient and businesses are efficient. It’s a lot greyer than that, mostly because the problems of government are primarily the problems of large bureaucratic organizations, which many of the big economic players are as well. There is a problem with government being a monopoly on the power of coercion and therefore not subject to competitive forces, but democratic processes help to mediate that, and that is one of the reasons why democracy is so important. But crisis management is one of those times that you want a big powerful player to have to take into account a broad variety of considerations, some of which (like fairness, safety, long-term thinking) are not necessarily economic. This is why the fact that November 2nd is the day that we get to choose who will receive our corporations’ bribes is so significant. The problem isn’t that the state is in danger of being socialist… the problem is that the state itself has become privatized.