IceFive
-
Posts
18 -
Joined
-
Last visited
Posts posted by IceFive
-
-
Are you aware of how banks that were very cautious pre-1913 were basically rendered unprofitable in the decades after the Fed was created?
No, why were they rendered unprofitable?
-
Once home prices were high and rising, and the conventional wisdom, from all sides, including especially Congress and the GSE's was that they would continue to rise unabated, we were in an unrecognized bubble dynamic.
So you admit it was the banks fault in going along with the conventional wisdom? You concede that they were not forced to do this?
-
If that's the best summary of the "whole issue", you obviously either do not understand what the whole issue is or you're simply spouting left-wing slogans. As long as you ignore the problems with FDIC/Fed regulated banks and the GSE, and ignore the fact that they had to be bailed out, you can continue to pretend that they were not part of the problem or were only led along by the sub-prime devils... poor innocent, ignorant big-banks/Freddie /Fannie!
Sorry, what left wing slogans have I been spouting? I look at the data then I judge. Show me contrasting data and I'll change my mind. The data is overwhelmingly one sided in this case.
My favorite part of that link above is where the guy links to previous right wing analysis before the crash - http://www.cato.org/pubs/regulation/regv23n3/gunther.pdf - This one advocates the exact opposite position of the one it currently holds. This is proof that the organisation is either wilfully dishonest or unconsciously self deceiving, since they clearly will warp any data to fit their preconceived political views. An honest way would be to warp one's political views to fit the data.
I submit that most politicians know that CRA was a minor cause of the crisis, yet they will repeat slogans to the opposite effect in order to gain votes from people who haven't seen the data, or can't understand it.
Governments will try to do all sorts of odd things, and have the muscle to pull much of it off, for extended durations. People who do not get with the party-program are just as likely to be burned as people who buy it completely.
This quote from you I find interesting. You're essentially saying that European banks were forced into buying US subprime because if they didn't they would have lost money anyway? Have I got your argument right here?
-
For anyone interested in actual facts, rather than right wing slogans:
This is the best summary of the whole issue I have seen so far.
-
I've been thinking more about a gold standard and the deflation that would result as the economy grows.
In isolation, deflation is just as arbitrary as inflation. Deflation represents an automatic transfer of wealth from debtors to creditors (the opposite of inflation). There is no basis to prefer deflation than the alternative.
In fact it gets worse for deflation. Wages and prices are sticky (just look at the fact that US firms prefer to lay off workers and freeze wages rather than applying a general pay cut to the workforce). So say you are running a business under a gold standard. You would have to give your workers nominal pay cuts just to keep their pay the same as last year.Otherwise everyone would be receiving pay rises regardless of their performance. Try telling someone you are cutting their wages based on their equally good performance as last year; its quite clear that persistent deflation would be impractical because of sticky prices and wages.
Most economists prefer a small rate of inflation for this reason. I think the Fed has done a good job of keeping a low moderate rate of inflation over the past few decades. Every prediction of hyperinflation from people on the right (from the WSJ to Objectivist commentators) has consistently been proven wrong.
-
Someone needs to explain how a gold standard can cover all the transactions in the economy since the quantity of gold in the world is finite but money supply has to necessarily increase as the economy grows.
Deflation would occur. So the money supply would stay fixed but the price level would fall.
Firstly, Objectivism definitely does not say the government should disallow fractional-reserve banking where the depositor and the bank are clear about the reality of the contract. The best argument against fractional reserve is that depositors think their deposit is a bailment contract when it is actually a loan. However, assuming that the terms and conditions are fully understood by all, the government should not ban fractional-reserve banking.
I completely agree with this. Thank you for clarifying Objectivism's position.
As for gold-standard, a "dollar" should simply be a weight of gold. This is merely a question of setting rates and measures, just as one would define an official, legal gram or ounce. It really is not essential, since one could use physical units too. The government really does not need to decide whether we will use a gold-standard or a silver standard or a multi-commodity standard. Still, setting nomenclature (as in "a dollar is X ounce of gold") is not too objectionable on the face of it... until one sees the havoc it played by allowing Roosevelt to change it.
I agree that the government need not and should not decide whether people use a gold standard.
Actually, I would be for just using weights for monetary transactions, buying and pricing things in terms of weights of gold -- a car would cost you 10 ounces of gold (instead of $20k). This would end a lot of confusion between the dollar and gold.
Imagine with the general deflation that would occur, the smallest denomination of gold would get increasingly minuscule. To the point that you would be paying things in nanograms and atoms of gold. I guess it could be implemented with a suitable electronic system to account for everyone's holdings of gold and its location. You could even account for fractions of atoms of gold (I'm being serious).
I'm not going to pass judgement on such a system until I've had a think about it a bit more.
-
What I'm really against is the bank printing up currency to more than what they can account for in their reserves.
But it should also be illegal, because I think it would be fraudulent.
This is what fractional reserve banking is defined as. However why is it fraudulent if all parties agree to it? It clearly isn't, especially under a system of competing currencies that you advocate since people would simply switch currencies if they didn't like it.
They have it exactly backwards. Leaving the gold standard caused the Great Depression, acknowledging the reality that we had left the gold standard and subsequently devaluing the currency forced prices up to fall in line with debt and allowed for rational trading and lending to resume.
Here's that chart again:
You guys have said you think its weak but I don't see that at all. What I see is that for the US, the UK, and Germany (the worlds 3 biggest economies during the 1930s), when they left the gold standard, a recovery ensued. Being the worlds 3 biggest economies, its also not surprising that a general upturn occurred in other countries even if they were yet to leave the gold standard.
As for the gold standard, there's a lot of misunderstanding going on here. All the gov't needs to do to establish a gold standard is pass a law declaring gold convertibility of U.S. currency at a given rate. That rate would be an exact number = (currency in circulation)/(gold reserves). That number can be as high as it needs to be to provide 100% convertibility. That's the definition of a full reserve gold standard. A fractional reserve gold standard means that the government print more money (or other obligations) than can be redeemed for gold... until the people catch wind.
Yes, finally! Someone here understand's the gold standard. Now I ask why is passing a law to fix gold at a government defined rate, preferable to the current system of letting the dollar float freely against gold?
Here is a good summary of the gold standards effects during the depression (http://www.j-bradfor...ldstandard.html):
The gold standard and the Great Depression. The current judgment of economic historians (see, for example, Barry J. Eichengreen, Golden Fetters) is that attachment to the gold standard played a major part in keeping governments from fighting the Great Depression, and was a major factor turning the recession of 1929-1931 into the Great Depression of 1931-1941.- Countries that were not on the gold standard in 1929--or that quickly abandoned the gold standard--by and large escaped the Great Depression
- Countries that abandoned the gold standard in 1930 and 1931 suffered from the Great Depression, but escaped its worst ravages.
- Countries that held to the gold standard through 1933 (like the United States) or 1936 (like France) suffered the worst from the Great Depression
- Commitment to the gold standard prevented Federal Reserve action to expand the money supply in 1930 and 1931--and forced President Hoover into destructive attempts at budget-balancing in order to avoid a gold standard-generated run on the dollar.
- Commitment to the gold standard left countries vulnerable to "runs" on their currencies--Mexico in January of 1995 writ very, very large. Such a run, and even the fear that there might be a future run, boosted unemployment and amplified business cycles during the gold standard era.
- The standard interpretation of the Depression, dating back to Milton Friedman and Anna Schwartz's Monetary History of the United States, is that the Federal Reserve could have but for some mysterious reason did not boost the money supply to cure the Depression; but Friedman and Schwartz do not stress the role played by the gold standard in tieing the Federal Reserve's hands--the "golden fetters" of Eichengreen.
- Friedman was and is aware of the role played by the gold standard--hence his long time advocacy of floating exchange rates, the antithesis of the gold standard.
- Commitment to the gold standard prevented Federal Reserve action to expand the money supply in 1930 and 1931--and forced President Hoover into destructive attempts at budget-balancing in order to avoid a gold standard-generated run on the dollar.
What surprises me most about this debate is the clear contradictions with Objectivism that the gold standard implies. All I have heard from you guys is "pass a law in order to regulate the amount of reserves banks hold (ie 100% reserves)" or "pass that law to guarantee convertibility to gold at such and such rate". Whatever happened to the non-initiation of force?!
- Countries that were not on the gold standard in 1929--or that quickly abandoned the gold standard--by and large escaped the Great Depression
-
In other words, for a one dollar bill, instead of saying it is backed by the good faith and credit of the United States, it would say redeemable for 1/2000 ounce of gold. And the government would not be printing dollar bills.
You are essentially saying that the government should stop issuing dollar bills and that private issuers should make their own bills at a rate of convertibility of their choosing.
Printing more nominal bills than gold available at the bank would be illegal, as this would be fraud,since each dollar issued by the bank would be a draw on its gold reserves.
If I have got your argument right above, then there is nothing to stop a private issuer from not having 100% gold reserves. You say it would be illegal and fraud to have fractional reserve banking, but I don't see any basis for why that would be fraud. If the issuer freely chooses to have 10% reserves and everyone who uses those bills is happy, there is no problem. As long as the reserve level is advertised faithfully then it is not fraud.
Which then leads to the following problem with privately issued currencies - the issuer would simply print extra bills to a small % of the total number of bills each year and deposit them in its own bank accountsee note 1 below. They would quickly become the richest corporation ever while causing only a small amount of inflation.
You may argue that people would switch to other competing bills, but I don't see that happening. Currency has a strong network effect; everyone will switch to the same bill because that's what everyone else is using. Can you imagine a world in which every item in the supermarket has 20 different prices on it, one for each brand of dollar bill? That in itself is not desirable.
=============================
Note 1 - That is essentially what the government does today. With quantitative easing it prints money and buys govt bonds with the money. This is essentially the government printing money for itself to spend. The difference with the government is that it is democratically accountable to the people. If a private issuer ever did this then they can spend the printed cash on whatever they want and are not democratically accountable.
-
Ice, that graph really doesn't show what you're claiming it does very convincingly. Yeah, for the US the point comes in conveniently at the depth of the crisis, but several other countries did it before their worst crash, or once things had already gotten better. Besides, there are so many reasons as for why a depression can be prolonged that saying based on this that it was obviously the gold standard's fault is ludicrous, to be honest. There's a million different government policies and economic facts that come into play there. I'd be very interested in seeing how much of the drop in income is explained by the gold standard; I'm willing to bet it is a very small % (when you do statistical analysis on it).
It is pretty much universally accepted amongst respected economists across the political spectrum, from Milton Friedman to Keynes, that leaving the gold standard helped America's recovery. The graph is pretty clear for America and Britain, less clear for other countries granted.
Having a gold standard does not necessarily mean that the price of gold against a currency should be fixed as it was in America at one time at $35 per ounce. The price of gold in Dollar terms should be allowed to freely fluctuate since there is not enough gold in the world to match all economic activity.
I think this shows where you guys are unclear - your first sentence is exactly what a gold standard is defined as. Your second sentence is exactly the system we have TODAY ie no gold standard with the price of gold in dollars freely fluctuates. You have the exact opposite definition of the two regimes.
I think you misunderstand the nature of gold as money, because a gold standard or gold as money does mean that there would be a fixed amount of gold that would be available for each dollar.
You make the same mistake; that is exactly what a gold standard is.
-
*** Mod's note: Merged from this topic on "Occupy Wall St." - sN ***
If they devalue now, let people know why they're devaluing, put in place safeguards against future bubbles (like, oh, I don't know... a full-reserve, audited gold standard?), then everyone takes their lumps and we rebuild what is still a vital, intact economy.
Having a gold standard would be an absolute disaster. Take a look at this chart which shows that during the depression you could predict a country's recovery based on when they left the gold standard:
http://en.wikipedia....ssion_Graph.svg
The reason for this is because currencies need to freely float against eachother (ie devalue & revalue) based on market activity, not be artificially fixed against a commodity which is a recipe for rigidity and stagnation. You can see this in the Euro today which is basically a modern day gold standard in most substantial respects.
And a full reserve gold standard?! Well that would mean a drastic cut to the amount of credit in the economy as banks would have to keep more reserves. If private & government players both deleverage at the same time as you advocate, then peoples incomes will fall drastically since one person's spending = another persons income. This would NOT be good policy.
-
I'd say that the major source of causation flowed from regular and prime mortgages toward the sub-prime ones: via the effect on home-prices. When credit booms and flows to an asset-category, the price of those asset goes up. Typically, lower quality assets in that category go up in price as well ("rising tides lift all boats"). Thinking that prices of homes would rise was the single biggest factor inducing loans (including sub-prime loans) and all the more complex financial assets based on those loans.
The notorious Greenspan put and Bernanke's "helicopter drop" reiteration of the put led people to assume that the Fed would try its best to ensure a floor under nominal prices of assets. This turned out to be a valid assumption. However, even the Fed can only do so much. The question then becomes: what type of floor can the government actually support. People who completely buy the government's party-time theme ("use your home as an ATM") are irrational. However, people who don't get with the program and who assume that the government will simply sit by and do nothing, or who act as if we're in a free-market are irrational in their own way. Government involvement in the economy is so high, that guessing correctly about government action is a major criterion for success. (Witness the recent upheavals in the stock market driven by ever changing guesses about what European governments will do about the debts of their "PIGS").
In a free-market, actors who are using other people's money are kept in check by those other people. However, when those other people are being back-stopped by government guarantees, this removes the most important check that a free-market would impose. When the recent crisis was clearly upon us, and Countrywide was clearly in trouble but not yet dissolved, they (Countrywide) tried to raise funds by offering CDs with slightly higher rates. In a free market, they would have had to offer a huge premium to induce people to invest. However, with the FDIC guarantee, putting money into their CDs carried only a small risk of inconvenience and slight delay in return of principal. A small premium of about 0.5% was enough to induce people to buy their CDs. If bad actors are not checked by funds drying up in such bad times how can one expect any checks during good times? [The same principle plays out with food and drugs: with the government being the rule-setter and proactive policeman in those areas, it drives out private-sector options, since people don't see the point.]
Of course if the FDIC and the Fed were to tighten standards, if Glass Steagall were to be brought back, and so on we would reduce risk-taking. We could go all the way and reduce fluctuations to North Korean levels: stagnation and steady decline are the ultimate non-fluctuation.
Interesting analysis but I have a few issues.
First, the government has to intervene in the market to some extent, for example in setting nominal interest rates. Wouldn't you rather have a system where investors are guessing what rational central bankers are going to do, rather than having a fixed stock of money that always and everywhere produces deflation. Wages are sticky to the upside so persistent deflation would be an utter nightmare for any economy.
Second, in your last paragraph you set a continuum of regulation from laissez faire to North Korea. The key for policy makers is to find a balance; to reduce reckless risk taking while still allowing people to risk their capital on ventures. The fact that regulators failed in this and actually exacerbated reckless risk taking doesn't change the goal of successful policy making. It was done successfully in Canada which didn't experience as much of a boom and bust because of minimum loan-to-value regulations. (I realise that Canada's real estate is looking frothy at the moment but lets see if the BoC will raise rates.)
I strongly disagree that the only way out of the Financial Crises via bad mortgages is to devalue the dollar so that the nominal price for houses goes up above the current valuations. The only way out of the crises is to let the mortgage bubble collapse entirely -- let the market adjust downwards -- and then the market can take care of the devaluations. Devaluing the dollar would hurt the entire economy and the Federal Reserve had better not do that with the ensuing inflation or hyper-inflation. The only real solution is freedom in the market place. One does not help the bubble by continuing it. Let housing prices fall to the bottom so the market can take care of the rest of the problem. In short, capitalism is the solution, not further market manipulations by the government.
This is a liquidationist argument which is basically what turned a recession into the great depression.
EDIT:
Andrew Mellon, Secretary of the Treasury from March 4, 1921 until February 12, 1932:
liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate… it will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people.I wonder how that one worked out lol.
-
Let me try and advance this discussion by asking a question:
Why did European banks buy up massive quantities of toxic securitized loans originating in the USA?
Essentially because they misjudged the risks.
Exactly. Contrary to the title of this thread, it was the bankers own fault.
-
Let me try and advance this discussion by asking a question:
Why did European banks buy up massive quantities of toxic securitized loans originating in the USA?
-
If it wasn't for the implicit backing of potential losses by the government, a lot of these loans wouldn't have been made because the risk would be too great. Bankers normally don't make terrible loans if it's their own money that is at stake. They're not stupid...
House price bubbles occurred globally and most nations did not bail out shareholders. For example across Europe banks were nationalized meaning shareholders were wiped out. Bankers aren't stupid, but they are more interested in short term profits than long term shareholder value (its called the agency/principal market failure).
Everytime you hear someone blame CRA or any other US specific government intervention, you should ask yourself why that meant the Spanish and British real estate markets also experienced a massive bubble.
-
It is government standards, enforced by the government-owned lender of last resorts that have caused banks to take increasingly more risks since 1913.
No, it was the private non-regulated asset backed securities issuers who made the NINJA (no-job, no income, no assets) and low-doc loans (blue line in the chart above).
It is evil to impose a standard onto someone by force.
Why?
There are several laws and system of laws that prevent "discrimination" on the part of banks and and states that they must loan to a variety of people in their community, even if they are uncreditworthy, or be fined heavy fines if they fail to comply with the law. The Community Reinvestment Act signed by Clinton is one such law, and there are others. The banks are the most heavily regulated of all our industries, and regulations means force -- a real gun pointed at their heads if they do not comply with the laws telling them who they have to do business with. So, the heavy fines or jail time is force -- real force -- aimed at them if they do not comply.
Again, CRA, Fannie/Freddie, etc were factors but not the main problem. The main problem was asset backed securities issuers (non regulated) who lowered lending standards in order to boost short term profits.
-
The root of the problem were laws like the Credit Reinvestment Act that forced banks to lower their standards. Without F & F, many of these banks would have failed -- instead they put it all off on F & F. The whole situation gave false signals that sub-prime was low to medium risk, when it wasn't. This also lead to high speculation on mortgage backed securities that they were low risk.
I also disagree that the CRA was the root of the problem. Housing bubbles were a global phenomenon and were inflated in most western nations at the same time who had no CRA like regulations.
I also disagree that loose monetary policy on a global basis was mainly to blame. You can't blame low interest rates for an institution lending to someone with 0% down, or no documentation, or no job. Even if low rates makes such lending profitable in the short term, market professionals should have known (being professionals) that such lending would go toxic quickly. The fact is that market "professionals" were voluntarily willing to lower lending standards in order to boost short term profits, therefore they are mainly to blame for the crisis.
What we need to prevent this crisis happening again is government mandated lending standards to force all lenders to act responsibly. For example make it illegal to give someone a mortgage with less than 10% down.
-
The following link provides a good summary of why Fannie and Freddie were NOT to blame:
http://economistsvie...again-it-w.html
More specifically, the graph below shows the rise of "asset backed securities issuers" from 2002, and the fall in market share of Fannie and Freddie (pink line). The asset backed blue line shows non-depository institutions that are NOT required by government to lend to poor people (ie not CRA regulated). Yet they made catastrophically bad loans anyway.
Graph: http://economistsview.typepad.com/.shared/image.html?/photos/uncategorized/2008/09/24/gse.gif
I'm not saying that they didn't contribute to the crisis but blaming Fannie and Freddie for it is a Republican/Austrian/Objectivist/Right-wing red herring.
Don't Blame Wall Street -- The Government Did It!
in Political Philosophy
Posted · Edited by IceFive
This isn't being forced to lend. A bank makes more money in the long run (even with a lender of last resort helping its failing competitors) if it makes sound lending decisions.
The biggest originators of sub prime mortgages were not subject to CRA.
Goldman Sach's did more than just play the game. They committed fraud by creating a mortgage investment vehicle for one client who wanted to bet that it would fail, and then lied to other clients about this in order to get them to invest in it. Here there was no government involvement, just pure greed. Wall Street is to blame.
Besides, if your quote above is indeed the "game", then a firm who neglected to play would come out ahead in the long run. How can you argue that not investing in subprime during the boom was a bad strategy? Avoiding subprime would have been a great strategy.
Here is the same argument as the commentors above. I fail to see why avoiding a speculative bubble is not a winning strategy for a company and its shareholders?
Can I see evidence of this please? As far as I know, GLB only restricts banks from merging with insurance companies if their CRA requirements aren't being met. There is no restriction on securitization in existing banks as far as I know.