Friday, October 31, 2008
Firstly, there is significant evidence that consumers and firms are saving good chunks of their income due to the uncertainty of the market. In so far as that money is hoarded or used to pay off bad or old debt, then a rebate will do little to stimulate new investment and consumption. In so far that it is thrust into the financial sector via the purchase of bonds or stock etc., there is good chance that the money would be 'tied up' with the rest of the money that banks refuse to lend. It is true that lending is loosening, but it is still a problem.
No, the only way to guarantee an actual stimulus in this climate is through direct spending. Cut out the financial intermediaries and eliminate the potential for leakages and directly pump money into new investment projects - investment projects that sadly have been crowded out over the course of a number of decades due to the massive expense for the sake of "national defense" (or offense, as the case may be).
Wednesday, October 29, 2008
I agree with economist Bernard Baumohl who said:
"The latest Fed move is not going to hasten the economic recovery by a single day or accelerate the cleansing of bank balance sheets, what is needed more than anything else at this stage is simply patience."
I agree with him that the problem lies not with the cost of obtaining a loan (the demand side), but with the inability / unwillingness of banks to lend (the supply side) in this time of great debt and uncertainty.
Thursday, October 23, 2008
Wednesday, October 15, 2008
Tuesday, October 14, 2008
"Of the maxims of orthodox finance none, surely, is more anti-social than the fetish of liquidity, the doctrine that it is a positive virtue on the part of investment institutions to concentrate their resources upon the holding of “liquid” securities. It forgets that there is no such thing as liquidity of investment for the community as a whole. The social object of skilled investment should be to defeat the dark forces of time and ignorance which envelop our future. The actual, private object of the most skilled investment to-day is “to beat the gun”, as the Americans so well express it, to outwit the crowd, and to pass the bad, or depreciating, half-crown to the other fellow.... As the organisation of investment markets improves, the risk of the predominance of speculation does, however, increase.... Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.... These tendencies are a scarcely avoidable outcome of our having successfully organised “liquid” investment markets."
Here's to hoping his warnings are never forgotten (or ignored) again.
Saturday, October 11, 2008
I support this measure as an unfortunate necessity of our times. I've come to the conclusion after much thinking and much observation that the only way the government can attempt to end this crisis is to reduce the massive uncertainty in our banking and financial institutions. Having only one or two major / rich nations do this would be problematic as it would facilitate the flow of financial capital out of those troubled countries that failed to nationalize and toward those that did. No, to be beneficial globally, it has to be a global agreement. And it looks like that is what it will be.
Just throwing money at banks is more harmful than good as I mention in previous posts - again to reiterate, reduced interest is beneficial for those that want to consume or invest or borrow money for further lending (banks), but is hardly beneficial to banks and financial intermediaries that want to borrow when the banks they want to lend from have no incentive to do so, and that is where the real problem is. The problem isn't on the borrowing side of the equation, it's on the lending side.
By buying stock in failing banks etc., we assure other banks and customers etc. that that institution has the backing, support, and partial ownership by the government. This expectation alone immediately boosts the banks credit worthiness and reduces the uncertainty that if I as a bank lend to that institution, it could very likely fail. The idea is that interbank lending will eventually increase back to normal, and eventually the money will end up on main street where it belongs.
In order for this to work, massive amounts of stock will have to be bought. 700 Billion will not be enough to stop the global crisis. The entire system has to be normalized, and that will require a lot of nationalization.
Will this mean the end of capitalist financial markets? Not entirely, but it will mean the end of next-to-no-holds-bars financial markets. it will mean a true oversight by big government, and by the Central banks of the world. It will mean Hyman Minsky's predictions will have come true.
It's the end of an era. And the beginning of a new one.
Friday, October 10, 2008
I disagree. There is nothing irrational about taking your money out of stocks and financial instruments in general in a situation of intense market uncertainty. The argument that the "real" economy isn't that bad, so why make such rash decisions is ridiculous given the fact that the "real" economy, more and more since the financial credit explosion of the 1970s to today, is the financial sector. IE, the financial sector is inextricably linked to the traditional real economy.
People aren't in a "panic." They are worried. They see rising uncertainty and a financial sector in shambles. Panic implies people making impulsive decisions when things aren't that bad. Economists and pundits should take a lesson from history. The last time we had a major "financially caused" recession was the Great Depression. Most all the recent past recessions have been due to bubbles in physical assets (which is what this started out as but got infinitely worse because of the securitization of those assets - which is a financial problem), shocks to input prices, etc. I don't personally think this will likely be a depression, but this will be one hell of a recession - there's nothing irrational about preparing for it.
And I think Thorsten is correct that this could be a net negative effect in that the lower interest rates mean that those that can obtain financing are urged to make ever riskier decisions regarding what to do with their cheaply lent money. Low-interest rates are bubble creating.
I disagree with his assessment that it is all the government's fault, or that somehow fiat money is the core trouble-maker. Government was a contributor certainly, but markets themselves need to take a hard look in the mirror.
Thursday, October 9, 2008
So, I have been working my brain trying to conceptualize how credit and financial mis-coordination can be integrated with Keynes' liquidity preference and post-Keynesian concepts of credit and money endogeneity.
This where I'm at so far. It may make no sense at all... but I guess everyone with an econ background should be at least trying to figure out what's going on! The first picture is my basic setup, the second is an example of potential dangerous attempted monetary expansion under conditions of endogeneity, liquidity preference and credit, and high levels of uncertainty whereby credit money suppliers / savers are unwilling / unable to lend for present spending
Wednesday, October 8, 2008
Furthermore, Goodhart (1993) suggests that with the growth of wholesale
money markets and liability management, the distinction between situations of
illiquidity and conditions of insolvency has been erased in such a way that the
central bank’s role as lender of last resort involves a serious risk of loss. He also
warns that, in today’s more competitive conditions, a central bank would find it
increasingly hard to persuade banks to join in and share the burden of potential
loss from the rescue of an insolvent bank. He concludes, ‘this could lead to
serious problem for central banks. They may not have sufficient funds of their
own … to accept the potential losses involved in a future rescue exercise’
(Goodhart, 1993, p. 421). Here, the expression of liquidity preference for the
central bank operates through the amount of funds made available to banks. For
the central bank, the decision to place funds with the ‘risk-insolvent’ bank
involves the creation of new debts (i.e. change in the size of its portfolio). When
liquidity preference rises, the central bank is less willing to face a potentially
large insolvency problem, and there is no alternative but the partial or total
intervention of the government.
Credit-money is endogenous folks. The Fed can set the rate, but it's ultimately up to people and banks whether or not to lend. And reducing interest rates is not the way to do it - not when there are so many outstanding debts and in the midst of economic malaise.