"Bold" action by the politicians and the central banks created much of the current mess. If we'd just cleared the pipes by letting the banks fail, recapitalizing new banks, and basically rebooting the financial system, we'd be much further along.
Instead, we got bailouts and crony capitalism and ad hoc intervention, and today the global system is in many ways in worse shape now than in 2008. (Banking is more concentrated and national balance sheets are a mess from the bailouts)
letting the banks fail, recapitalizing new banks, and basically rebooting the financial system
Please tell us how that works in practice rather than in theory. I really, really want to know how you just 'reboot' the financial system without massive disruption to retail banking or the payments system. How do you 're'capitalize a new bank? If you just mean create new banks, who is running these banks? I mean, I'd like to have seen a complete reboot of the system as well, but it looks like the sort of thing that is much easier said than actually done. If you're going to mention Sweden, provide specifics of how long it took and how much capital was involved.
Contrary to what some pundits would like you to believe, this is not new ground. A real estate bubble followed by a balance sheet recession has happened in at least 2 other places before: Sweden in 1992 and Japan in 1991. Different choices in these countries led to different outcomes.
In Sweden, the government demanded steep losses from equity holders before it took over a large part of the financial system (unlike US officials, the Swedish government officials were not afraid to use their superior bargaining position to get an excellent deal for the government). The upfront cost for recapitalization was 4% of GDP, the net cost in the end was less than 2% of GDP (based on different computation methods some even say 0%). Following asset sales in 1995, the Bank Support Authority went into a dormant role in 1996, 4 years after the crisis.
Japan handled things differently and ended up with debt totaling 200% of GDP. See this excellent YouTube video from economist Richard Koo that explains the Japanese experience:
I don't listen to media pundits. I'm asking the grandparent poster for specifics of how s/he intends a reboot of the entire financial sector because I think this is actually a rather hard problem. I have been through a real estate bubble followed by a recession before (in the UK, at the same time as the Swedish one). I think there are some definite upsides to the Swedish approach, but the people who keep bringing it up seem to overlook the fact that Sweden is a) small - <10 million people, not much more than NYC and b) one of the highest-taxed economies in the world, with tax revenues equal to almost 50% of GDP, and c) is regulated out the yin-yang. The idea that we can just lift one bit of regulatory policy from there, apply it to our financial sector, and call our problem solved is not just misguided, it's flat-out magical thinking.
Economic/political discussions on HN are painful because people who are capable of generating meaningful insights when the topic is technical are reduced to wishful thinking and trotting out tired, simplistic misrepresentations of economics.
Let the country's biggest banks become insolvent, then "reboot" them in a week? When you start proposing that the world's largest economy model itself on theoretical notions only tested in a country 3% it's size, ideologically oriented in a completely different direction, and founded on a radically different social contract, then you are not arguing anymore.
It's not an argument, in the sense of debate and intellectual exchange, it's dogma.
> The idea that we can just lift one bit of regulatory policy from
> there, apply it to our financial sector, and call our problem solved
> is not just misguided, it's flat-out magical thinking.
It's also a straw man. He said "we'd be much further along." He didn't
say it would be simple or painless. He did imply that it would be less
painful overall than what we're doing now, which is not saying much.
What a stupid thing to say. Have you ever read about the currency crisis?
This is from a Wikipedia article you could have found in 30 seconds; if you had, perhaps you would have changed your mind about posting, saving us all the pain of knowing that someone on HN is capable of posting such a glib, worthless comment:
Several thousand newly homeless and jobless Argentines found work as cartoneros, or cardboard collectors. The 2003 estimation of 30,000 to 40,000 people scavenged the streets for cardboard to eke out a living by selling it to recycling plants. This method accounts for only one of many ways of coping in a country that at the time suffered from an unemployment rate soaring at nearly 25%.
_Twenty-five-fucking-percent and people selling cardboard for a living_
Is this the example you crazy people aspire to when you pine about your pure free markets and how the economy should have been allowed to undergo massive correction?
Do you think what happened was Argentina's worst-case scenario, given the magnitude of its crisis? Plenty of knowledgeble people [1] think crag's comment is not a stupid thing to say.
That opinion piece talks about how Argentina recovered from the crisis, and it definitely does not say that defaulting on their debt was the right step. If anything, it is a resounding endorsement for the Obama plan and a rebuke of austerity in times of crisis.
Argentina has regained its prosperity partly out of dumb luck: a commodity price boom has vastly benefitted this soy, corn and wheat producer.
The government intervened to keep the value of its currency low, which boosts local industry by making Argentina’s exports cheaper abroad while keeping foreign imports expensive.
It then taxed those imports and exports, using the money to pay for a New Deal-like public works binge, increasing government spending to 25 percent of G.D.P. today from 14 percent in 2003.
Why have Argentines embraced bigger government? In part because the preceding era showed how poorly austerity measures — the sort now being pushed by conservatives in the United States — promote growth. In the late 1990s, Argentina cut government spending drastically on the order of its lenders at the International Monetary Fund.
For one thing, extreme cost-cutting during a stagnant economic period will only inhibit growth. And government spending to promote local industry, pro-job infrastructure programs and unemployment benefits does not turn a country into a kind of Soviet parody. It puts money in the pockets of average citizens, who then spend it and spur the economy.
Are you going to answer my point, or just the degree of relevance of my citation? You presented Argentina's dire situation as a consequence of its currency crisis, when in fact devaluation (i.e., the "currency crisis") was a great relief. One, by the way, Greece is unable to do unless it abandons the Euro. One, by the way, Argentina was unable to do by law during nine years [1].
Did you read craig's short comment? It talks about devaluation, not default. Now, it so happens that Argentina chose to pay just what it owed the IMF and effectively get out of "the world credit establishment" with a big, unpaid debt. Guess what? No Argentinean government could have set in motion state intervention/"stimuli" of any kind had most of its resources been devoted to pay an unbearable foreign debt. (Debt interests, in fact.) As you surely know, even though Argentina's debt is proportionally [2] smaller than the that of the US, the payback rates it gets are prohibitive, unlike America's 3%.
Just for clarity, what was your point? That Argentina would have been better off without default? Without devaluation? Both? Let me reiterate, there is nothing stupid about thinking otherwise...
My point is that default, or any other sort of fuck-the-system type of approach (e.g. let the largest banks become insolvent) is not a serious option. First, the time for such a thing has passed; second, even if it were now the time for it, give me expensive stimulus and bailout every day of the week. Sovereign debt and deficit spending are not what's killing us -- 70% of GDP is half what Argentina's debt was and it's well within acceptable limits. I believe that calls for austerity are foolishly, and derived from free market dogma.
crag suggested that the mere fact that Argentina recovered from such a staggering blow to its economy was indicative of something -- the implication, it seems, is that the fact of recovery is enough to warrant severe measures such as default.
That's stupid, for the reasons I laid out above.
You, however, seem to be supporting the original reasoning by employing an appeal to authority and suggesting that certain credible thinkers agree with crag's premise. However the one example you provided did not bear evidence of that. I don't know what else your point is -- I don't care to debate Argentina except that you seem to be using it as an example of something.
I don't know about "what if" and the hypothetical situation in which Argentina did not default. I know what did happen --default, followed by an IMF-imposed austerity program, led to 50% poverty. It's only when people got behind so-called "big government" measures that they actually started to see real recovery.
I can't believe you don't look for a long-trend indicators, let alone (again) when you feel entitled to throw around terms like "stupid". Default didn't yield social chaos; rather, it was seen by most political factions as the only way to end it.
You see, Argentina's unemployment [1] and poverty [2] rates soared during Menem's worship-the-system 90's. These rates happened to peak, respectively, in 2001 and 2002, basically around the time Argentina defaulted, among many other measures.
Now, with a discipline as complex as economics, given all the variables floating around, it is hard to conclude rigorously that defaulting contributed to reversing this trend, but it sure is harder to claim the opposite!
Without agreeing with your interpretation of the facts, how do I tell you that I don't give a fuck about Argentina for the purposes of this conversation?
Not only that, you've conceded the only point I had about it:
it is hard to conclude rigorously that defaulting contributed to reversing this trend
You're having a conversation with yourself at this point. Please follow more closely the points being made before following any compulsion to chime in.
What a stupid thing to say. Have you ever read about the currency crisis?
This is from a Wikipedia article you could have found in 30 seconds [...]
I don't give a fuck about Argentina for the purposes of this conversation [...]
[...] follow more closely the points being made before following any compulsion to chime in.
Maybe you should spend more than 30 seconds on a topic (and give a fuck about it) before giving in to your compulsion to chime in. In particular if you feel like being arrogant and isulting at the same time, calling others' ideas "stupid". Well done...
Edit: For the record, you have conceded in the points of substance, particularly considering the minutiae you are addressing and all that you are surprisingly leaving out. You stated earlier:
I know what did happen --default, followed by an IMF-imposed austerity program, led to 50% poverty.
And yet poverty went down right after default and devaluation ("currency crisis"), as shown clearly in the two plots given above. Do you get that? If the rate in question (i.e., poverty) goes down after your chosen event (i.e., default), it's plain nonsense to claim said event pushes the rate up! Talk about the complexity of the "mixed yield" of simultaneous default and devaluation if you will, but just don't bring up stats because they will destroy your point, counselor.
This is what you have been in this thread: an arrogant, cocky lawyer who gets his most vital piece of evidence hilariously backwards.
Have you ever read about the Argentine crisis, or is your knowledge limited to Wolfram Alpha's graphs and Googleable factoids?
The fact is that this was a thread about how Argentina's crisis provides evidence supporting the positive benefits of allowing economic collapse. The initial post was intensely stupid in that it reduced the complex effects of economic collapse to a simple if-this-then-that causation. The only relevant point is causation, which I argued was not the case, and which you conceded -- despite you neither having made the original point, nor any attempt whatsoever to defend it.
You don't seem to be arguing the initial point, or the counter point. You only want to talk about Argentina, without taking a moment to understand the context in which it was mentioned. So congratulations on nailing me for reversing the order of the austerity program and the default -- great job, I feel really dumb for failing to correctly order a sequence of events related to a tangential point.
Here's what you have been:
Two guys are arguing on the street, and during that argument one of the guys mentions the name of a sports team. A drunk, walking by, happens to be a fan of that team. Despite not knowing in what context that team was mentioned, or whether it was mentioned positively or negatively, the drunk gets in a fight with one of the men. And not necessarily the one who uttered the team's name.
It's a shame we need to get to depth 10 to get some substantial discussion. I meant no offense and basically have been trying to tell you (among other things) that your use of "stupid" is just asking people to chime in!
I was born and raised in Argentina, though this should not matter, nor does it need to be "disclosed". I knew what the WolframAlpha plots would look like because I have lived the situation. Look, Argentina has been an exceptional country for many reasons (mostly bad), and it's not a too-big-to-fail state such as the US or Italy, so clearly its experiences need not apply to other countries.
In that respect, I do not agree with crag's suggestion that anything applicable to Argentina in 2002 could be applied to the rest of the lot in 2011. The thing is, though, that instead of raising your valid points about simplistic causation, etc., you mistakenly pointed (and in a snarky way) to Argentina's "currency crisis", i.e., devaluation, then to default, in turn linking them to social distress. Please convince yourself: in Argentina things got way better after default, devaluation and big spending, which took place at the same time. Argentina's real currency collapse can be found here [1] (with relatively little unemployment and poverty, by the way). There was no IMF-imposed austerity after the default: most of that austerity was recommended in order to meet debt obligations up to 2002, and leaving that cycle was the whole point of the default! Even though Kirchner was smart enough to pay the IMF debt, following the steps of Russia and Brazil, just to get them off his back, there was no state austerity after the default.
As for my first link, I thought (mistakenly) you implied that Argentina had gotten worse since the default, and I provided a recent article with a snappy reply. Not very constructive, I admit and concede.
(Yes, sorry, I'm loving this.) As Katie Couric said, "not to belabor the point", I feel you are still not seeing when crucial point of this however tangential thread. You say
So congratulations on nailing me for reversing the order of the austerity program and the default -- great job, I feel really dumb for failing to correctly order a sequence of events related to a tangential point.
Well, it's not a minor point to this thread, though this thread sure is, I agree, completely inconsequential in absolute terms: reversing the order means that the culprit could be the austerity measures, not the fuck-the-system default, which happened right before the first derivative changed signs!
Let me repeat that you have referred almost interchangeably to default, devaluation and an austerity program, which is really confusing. The first two are easily marked on a timeline: December 2001 and January 2002. By now I don't know what austerity measures you refer to, but again all this would take you very far from your statements linking default and/or devaluation and poverty. So, however tangential this thread is, it is based on the core of your original statements. Currency crisis and/or default did not, in any conceivable way, lead to the inception of cardboard collectors, nor to the 50% poverty rate. These issues had been building up steadily for a decade by the time the default happened, and this is not an interpretation or factoid.
As an aside (not countering any point!) be aware that for countries like Argentina big-government initiatives and fuck-the-system approaches go almost hand in hand, because comply-with-the-system plans means that you have to put aside a lot of your GDP to pay outrageous debt interests (forget about capital), leaving you little money to spread. I mean, look at the US debt ceiling fight the world witnessed last August. With a fraction of that spectacle any Third World country would have been left paying >30% annual rates, while the US is not (yet?) susceptible to speculation and still pays its cozy 3%. Fair or not, don't expect countries to behave the same "serious" measures under such a varied array of conditions. [No references for all this data. Feel free to grill me with factoids.]
As a final note, a few comments on:
Have you ever read about the Argentine crisis, or is your knowledge limited to Wolfram Alpha's graphs and Googleable factoids?
Have you? Should it ever matter in a debate? I'm presenting facts based on Wolfram Alpha, and you on Wikipedia. Why should we consider them factoids and not facts? Because we don't dig all the way for primary sources? We are both supporting our points with factoids, then. So? Should we support them with "reason alone"? Incidentally and ironically, you seem to have never read about Argentinean economics in depth: nobody with the lightest acquaintance of contemporary Argentinean economics could have honestly been unaware that poverty was, for almost a decade, sharply on the rise up to the default, and make the basic mistake of saying "look! default led to poverty". But boy, do you have a hard time accusing others!
> I really, really want to know how you just 'reboot' the financial system without massive disruption to retail banking or the payments system.
There will be massive disruption in any case. It can come in the format of recapitalization (Iceland) or inflation due to inflating their insolvency away (Latin America).
> How do you 're'capitalize a new bank?
OP meant recapitalize the failed banks. Short version:
1. Fire the board of directors.
2. Fire the management. (The question here is how many levels: At least the C-level execs, but probably another level below that.)
The above people have FUBAR'd the bank in the first place. Leaving them in place and expecting a different result is insanity.
3. Wipe out the shareholders.
4. Haircut the bondholders. Subordinated debt is probably 100% wiped out, preferred is probably 50%.
5. Inject treasury capital, and subordinate the formerly preferred. Nobody gets ahead of the treasury.
Total time is probably 1 week for the BoA sized guys. Declare a bank holiday if you wish, like 1933. Guys smaller than BoA are a weekend, as evidenced by FDIC takeovers.
6. Prepare for steps 1-5 for all the idiots that depended on the bonds from this bank as Tier 1 capital because they thought this bank was too big to fail. The system will be better without those idiots too.
Total time is probably 1 week for the BoA sized guys
You're telling me the government could have rebooted BofA, AIG, Wells Fargo, CitiGroup and Chase (to name just the top 5 - http://en.wikipedia.org/wiki/Troubled_Asset_Relief_Program#P...) in the space of a week or two. I would love if that were possible, but I don't see how it is. Proposals like this were debated at some length back in 2008, after all, and I distinctly remember them being decried as Communism, for understandable reasons.
> Proposals like this were debated at some length back in 2008
No, they were not. The proposals were about how to avoid doing the above list.
Firing the management and BoD would take less than a day. Wiping out the shareholders and bondholders would also take less than a day. Injecting new capital would take less than a day.
All of those could be done on the same day. I'm alloting a week in order to find/promote the correct caretaker CEO.
> I distinctly remember them being decried as Communism, for
> understandable reasons.
Yes, if I was a stakeholder in the financial industry whose wealth and
connections afforded me a huge mouthpiece, I too would resort to emotive
namecalling of any policy which might force me to take a haircut.
I distinctly remember them being decried as Communism, for understandable reasons.
Understandable that they are actually communist, or understandable that bankers and regulators would say any old bullshit to at least barely legitimize to the public massive transfers of wealth into their pockets?
You honestly think we'll be able to find other people qualified to run the new banks? Maybe, maybe not. But I'd imagine that whoever's running the show right now will easily be able to stay in the picture. It's like being a CEO. Once a CEO of a big corp, always a CEO of a big corp, no matter how poor your track record. Maybe I'm just being cynical here.
> You honestly think we'll be able to find other people qualified to run the new banks?
Clearly the ones currently running the bank are unqualified, which is why it is insolvent. Leaving them in place and expecting a different outcome is not sensible.
But directly to the point you ask: Yes, I believe there are many candidates who will perform better and for less money. (In the words of Charles de Gaulle: The cemeteries of the world are full of indispensable men.) Probably a fair fraction are inside the organization already, but if I were the regulator in charge, I would cross fertilize and take folks from outside the organization because internal allegiances are probably in the way of a thorough reorg.
Good Lord!! What are you saying?? That because there aren't "qualified" people that we should leave the current criminals there, even though they jeopardized our entire financial system!??!?
There are plenty of people that could have run the banks. Sheila Blair perhaps? I'd be okay with Elizabeth Warren. Hell I'd even take Jim Cramer at this point.
The FDIC does this kind of thing all the time, especially these days. Yes, it would cause some pain and mayhem, but nothing compared to what will probably result from the current paralysis. If the money spent so far on propping up insolvent institutions had instead been put towards FDIC takeovers of insolvent banks, guarantees of their retail deposits, and prosecutions for mortgage fraud a la the S&L crisis, there would be a lot more confidence in the world's economic future by now.
Such a response has only been politically infeasible in the US because the financial industry has such a stranglehold on US political discourse. (See Confidence Men, and in particular its description of the resistance Obama faced when he tried to do this kind of thing with Citigroup.)
Don't feel bad that no one else believes it, heh. Throughout history, the world has been literally insane -- this is just another example of an insane view that's spread into popular culture. ("The system is too big to fail" / "Postponing the disaster is better, because the pain will be distributed over a longer period, rather than shocking us all at once" / whatever other crazy, impossible thing.)
The herd (group think) never changes direction unless it has no choice.
We may, individually feel the need to break it all down. But most people don't care or understand. Not until bread cost $250 a loaf. Then the herd stomps it's feet and waves it hands screaming, "OMG what happened? Whose to blame?".
Then something might get done.
The bigger problems are the bankers themselves. Bankers NEVER change unless they have no choice. And our government (the US) had that chance, to force them in a different direction. For one moment Bush and Obama had the chance to really change things. They didn't.
Actually Bush had two chances to shake things up; 9/11 was his other. For one moment, he had the attention of the entire planet. Everyone. And what did he say? "SHOP".
I'm looking at it. It's 1/1000the the size of the US, has 2 exports worth talking about, and it has to offer an 8% coupon in the bond market. This does not strike me as a useful model for the US or EU.
"Liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate… it will purge the rottenness out of the system."
-- Andrew Mellon, Secretary of the Treasury, 1929
Once he had become the most hated president in American history, Herbert Hoover wrote caustically of advisers like Mellon whose "prediction that it would right itself was not based on any studies he did or any evidence he presented."
Krugman was right to call this the return of Depression Economics. Note the conservative obsession with debt and US credit worthiness at a time US borrowing costs are FALLING to about 1% over 30 years (!!!), a figure at which there is basically no cost to pursuing fiscal stimulus and at which the spending pays off immediately in greater tax revenues and less spending on social services for the unemployed. Run the numbers yourself:
We shouldn't practice financial regulation like it's holistic medicine. Metaphors about cleaning the pipes and taking the pain should be weighed against the evidence we have about what happens when you let banks fail, and that didn't go very well when we did it with Lehman Brothers.
The failure of Lehman Bros. did not directly cause the financial collapse.
The financial collapse was caused when other banks realized how bad Lehman's balance sheet was. Because their own balance sheets were also bad and they deduced all the other banks out there are probably in just as much trouble.
So banks stopped lending to each other and that's what caused the collapse.
But those circumstances wouldn't have changed if we bailed out Lehman. Because the realization would still have been the same.
So far this year, 73 US banks have failed, with resolution handled by the FDIC. Bank failures don't have to be horrific.
We would arguably be better off as a country if rather than bailing out the big banks they had been taken over, recapitalized, and reprivatized.
They aren't hardly at the scale of Lehman/BoA though - its hard to imagine a failure of one of those banks being handled by the FDIC with anything approaching grace or control.
While the greater point may be true, it does have the benefit of hindsight to a certain degree.
At the same time - after seeing the effects of Lehman's collapse, the regulators really didn't have any other choice than saving those banks. The option of not acting really wasn't there.
True, obviously action was necessary, but it didn't have to be no-strings bailouts. At the very least, the bankers who ran their banks into [probable] insolvency should have been removed from control, and their shares and options rendered worthless.
- Credit markets seized up because no one could tell who
was insolvent.
- Massive outflow of foreign capital from the US as
investors realized what a mess the US financial system
must be in.
I'm in favor of letting a bank like Lehman Bros collapse despite that. The most important thing for day-to-day economic health is to make sure no one loses retail deposits, and Lehman Bros wasn't even in that business. But what should have followed is much more intrusive regulation and oversight of the financial industry to determine exactly who is insolvent and arrange an orderly writedown of people's bad financial positions. Unfortunately, the disproportionate political power of the financial industry made such a policy impossible to implement. (See the recent book Confidence Men.)
The most important thing for day-to-day economic health is to make sure no one loses retail deposits
You're ignoring the money market here. I just looked up some numbers, and Forrester research peged the amount of deposits at FDIC insured banks at $6.9 trillion at the end of 2007 (http://www.forrester.com/rb/Research/industry_essential_us_r..., although the number of insured dollars is probably a fair bit lower than that due to limits on the size of insurable deposits), while the Institutional Money Market Funds Association gives $3.6 trillion in money market funds. Money market funds are marketed as being equivalent to bank deposits (down to the ability to write checks against them) and many retail investors don't understand that they aren't insured.
I recall reading (think this was in Too Big To Fail) that the deciding powers were afraid that if there was another Lehman, cash would stop coming out of the ATM machines. This is what prompted AIG and a few of the other shotgun marriages.
"Bold" action by the politicians and the central banks created much of the current mess.
No, bold actions by financial instrument designers, sellers and buyers created much of the current mess. Agreed on the crony capitalism and ad hoc intervention, and the real shame is that the cowboys who got us here did great out of the deal, but let's lay the blame appropriately.
The bold action was the imposition of those regulations back in the wake of the Great Depression. The repeal of them was business-as-usual cronyism for the sake of incremental financial gain.
Not exactly. True free market economies would let the banks fail, but the government also wouldn't recapitalize new ones, it would let the market handle that, or not as the case may be.
"Bold" action by the politicians and the central banks created much of the current mess.
The problem is a lack of boldness. Bold regulation on banks and insurance companies is necessary. If we're going to do bailouts, we had better make sure the same misbehaviors can't happen again.
In the U.S., we're fucking up my trying to fix failing institutions in-place. No management changes. No meaningful regulations. Often the laws are written by the industry they're intended to police (cf. health insurance). That's a horrible strategy. We need to become outright liberal again and double down on boldness, not play around with this compromising corporate-friendly chickenshit nonsense.
If we'd just cleared the pipes by letting the banks fail, recapitalizing new banks, and basically rebooting the financial system, we'd be much further along.
This sounds like a quote by Herbert Hoover. Contrary to history's view of him (which is intensely negative) he was a very intelligent and probably a good-hearted man. He, however, believed that there was absolutely nothing government could do to save the economy, and that letting the beginnings of the Great Depression go unchecked was the least evil action. He was wrong.
Instead, we got bailouts and crony capitalism and ad hoc intervention, and today the global system is in many ways in worse shape now than in 2008.
That is true. The bailouts were a necessary evil, but the way they were handled was ridiculous. Top management at the bailed-out banks should have been fired, and real regulation should have been put in place to prevent the behaviors that made the bailouts necessary.
What ultimately is destroying the U.S. is not the conduct around our banking system. That's bad, I'll give you that. It's the two astronomically expensive wars we are fighting that are unlikely to end any time soon.
> Bold regulation on banks and insurance companies is necessary.
What about bold regulation on the regulators and the politicians? You remember them - they thought that subprime mortgages were a good idea, that everyone should own a house, so any bank that wouldn't play ball didn't get to play.
You remember Fannie and Freddie - they lied about the fraction of the market that was subprime, so everyone's risk calculations were wrong.
> Often the laws are written by the industry they're intended to police (cf. health insurance).
Actually, they're always written by the relevant industry.
> That's a horrible strategy.
However, like gravity, it's how things are. Any plan that assumes otherwise is doomed.
> This sounds like a quote by Herbert Hoover. Contrary to history's view of him (which is intensely negative) he was a very intelligent and probably a good-hearted man. He, however, believed that there was absolutely nothing government could do to save the economy, and that letting the beginnings of the Great Depression go unchecked was the least evil action. He was wrong.
And, you're completely wrong. Hoover tried stimulus after stimulus; he dramatically increased spending. FDR actually campaigned against the spending and changed course upon taking office.
Both Hoover and FDR believed that the great depression was caused by excess production, so they both tried to restrict it. FDR didn't give up until it became apparent that an "arsenal of democracy" had to actually produce lots of stuff.
This "war on production" is now credited with putting the "Great" in "Great Depression", that is, with making it last as long as it did.
You're right that Hoover ran a deficit. There's a common misconception that he was all for austerity when he in fact increased spending with a variety of stimulus programs.
However, his stimulus programs were tiny compared to the size of the hole. FDR's programs got progressively bigger over time, until he blinked in 1937, but were still quite small compared to what was required. When WWII came along is when things got serious.
That's the basic Keynesian view as I understand it. I find it credible, but the fact is that I don't actually know that much about economics. One thing that I am quite sure of, however, is that nearly no one else talking does either. Or if they do then they usually have got several axes to grind and are selective in their data, disingenuous in their arguments, or too emotional to be trusted.
Wow, I'm getting pretty cynical about the whole thing.
If we're going to do bailouts, we had better make sure the same misbehaviors can't happen again.
We've been bailing out too-big-to(should)-fail, crony corporations ever since Chrysler in 1979. And they die slow deaths regardless of how many taxpayer dollars line their executives' "golden parachutes". Let the strongest survive and the weakest find new careers. That's how you get "management changes".
[Hoover] believed that there was absolutely nothing government could do to save the economy, and that letting the beginnings of the Great Depression go unchecked was the least evil action. He was wrong.
The current approach by Ben Bernanke of printing money is a reaction to the Great Depression, in which the money supply contracted. There seems to be little attention paid to the Hoover phase before it, in which many institutions failed. This purged many of the weak institution, and probably more than a few not-so-weak ones.
Purging weak institutions before making cheap money available to the banks would have been a helluva lot more sensible than the Great Giveaway that occurred.
Herbert Hoover is a bit more complicated than even your more nuanced take on him. He did come to a somewhat activist government in the second half of his term. Of course, his real but somewhat muted response to the Great Depression led FDR to attack him. But from the Right, using populist rhetoric about government debt and wasteful bureaucrats.
Hoover wasn't evil as you point out, but nor was he an ideologue who refused to choose the best policy because of prior beliefs. Believing that story line makes us blind to learning from his failings to better ourselves. To wit, his great vice wasn't lack of compassion or intellectual arrogance; it was simply a... lack of boldness.
Barely. People like to quote a statistic about how federal spending as a % of GDP went up in the second half of his term, but the GDP was shrinking then.
All HN threads attract posts with excess ratios of certainty to knowledge.
On the technical stuff, the excesses are met with really knowledgeable rebuttal, driving up the denominator. People are afraid of embarrassment, so they write more carefully, driving down the numerator. The dynamic drives the overall ratio to something like one.
On economics, everyone is really sure the other guy is crazy. They make posts that drive up the numerator, as that's the only way to get heard, and drive down the denominator, as they must address the other guy, whether they know anything about the matter or not. The average blows out hyperbolically -- if there's a limit, the signal / noise drops too low for even the craziest people before that limit is approached.
It's kind of remarkable to see how quickly those ratios go to their logical endpoints.
I agree with OstiaAntica. This Economist article is a thinly veiled call for more debt and more inflationary spending. Who stands in the way of "recovery" ? The obstinate Germans (who learned the lesson of hyperinflation last century) with the only sound Euro economy, i.e. they will be paying for the bailouts. In the USA its the Tea Party and the few Republicans with a spine who recognize that the problem is the massive debt and adding to it is only going to delay the inevitable and make it worse. The bold action (that will never happen) is to let the zombie banks and businesses fail, then pickup the pieces and start over. It won't happen and everyone had better prepare for high, if not, hyper-inflation because politically that is the road we are on.
The are numerous examples of countries having a larger debt to GDP ratio than the United States who recovered nicely from such debt ratio.
In the U.S. taxes are around 24% GDP which is quite low relative to the rest of the industrialized world and quite low relative to our recent past (50 years). Raising taxes will counteract any hyper inflationary forces. Increasing the debt for the U.S., given that the borrowing rate is ridiculously low and tax rates are similarly low, will not lead to hyper inflation. Inflation is a not a problem in the U.S. right now.
With all due respect raising taxes that high is a straw man. I'd be all for raising taxes if it worked but it doesn't. Nation states are competitive entities and they compete for the world's resources. If the U.S. dramatically raises taxes on the rich then emerging countries like Hong Kong see an opportunity and lower their tax rates. Then you start to see capital flee the U.S. for overseas.
Don't get me wrong. We could and should raise taxes to the highest levels we can. But there's a threshold where it becomes cheaper for rich people to hide their money than it is for them to pay higher tax rates. When we cross that threshold we see tax revenue start to drop.
So while I'm in favor of raising taxes I don't think we can raise taxes to the point where it would get us out of this mess.
> With all due respect raising taxes that high is a straw man.
How high? And how is it a straw man? A straw man is a false argument that someone uses to make another person's position seem weak in a debate. I don't see that happening here. (Except maybe in your post. You're making it seem like the person you're responding to is in favor of doubling or tripling the tax rate or something, when in reality he probably supports a moderate increase.)
> That's why per capita tax receipts have stayed fairly consistent over time . . .
Your link shows the opposite. Per capita tax receipts have grown 250% over the last sixty years according to that chart.
> I don't think we can raise taxes to the point where it would get us out of this mess
How high do you think that is? Right now receipts are well south of 20% of GDP. Currently revenue would have to be doubled, but outlays typically increase and revenues decrease during a recession. If you look at the non-recession tax rates that would be needed to close that gap in, e.g., the Bush years, it would have only taken a 5-10% increase, which hardly seems as outrageous as you're making it out to be.
> How high? And how is it a straw man? A straw man is a false argument that someone uses to make another person's position seem weak in a debate. I don't see that happening here.
I suspect it's around where they were during the Clinton presidency. But I honestly don't know. And if we were making policy rationally instead of trying to demonize one side or the other what we'd be doing is trying to find that out.
As for the term Straw Man what you're saying when you says "raise taxes" is "The answer is simple". You're giving the impression that the other person just doesn't want to look at the obvious answer. My point was the tax argument is false (because we can't realistically raise taxes that high) and hence the argument that our debt is a serious problem is not a weak one.
> Your link shows the opposite. Per capita tax receipts have grown 250% over the last sixty years according to that chart.
Consistent is relative I'll grant you that. But the point is when the top tax rate was around 90% tax receipts were lower. So in comparison to our wildly fluctuating tax policy the receipts have been relatively consistent.
> How high do you think that is? Right now receipts are well south of 20% of GDP. Currently revenue would have to be doubled, but outlays typically increase and revenues decrease during a recession. If you look at the non-recession tax rates that would be needed to close that gap in, e.g., the Bush years, it would have only taken a 5-10% increase, which hardly seems as outrageous as you're making it out to be
Right now you're just making up numbers so I can't really debate your point. 5-10% of what? Income tax? Capital Gains? If you combine National + Average State debt for each American the number comes out to around $150,000 per tax payer with interest. That is not something that is going to be solved with a 5-10% increase on anyone.
> Right now you're just making up numbers so I can't really debate your point.
No, I'm not, and it's a bit disrespectful of you to say so. You could have verified what I was saying with a mere sixty seconds of fact-checking on your own.
I was talking about receipts, just like earlier in the paragraph. What tax it comes from really does not matter for the purposes of this discussion. Receipts would have had to increase somewhere on the order of 10-20% during the Bush years for that period to have a balanced budget. That's according to this chart (http://www.heritage.org/budgetchartbook/growth-federal-spend...). Now, this is from a conservative think-tank, so take that with whatever grains of salt you will, but this is consistent with spending charts I have seen on non-partisan sites.
We weren't talking about balancing the budget we were talking about eliminating the debt and you didn't say 10-20% you said 5-10%. So do you have a source for the 5-10% or am I right that you just made that number up?
I don't mean to flame but I based my statement on facts not a desire to disrespect you. Namely the Total U.S. tax revenue which was $2.1trillion. 10% of that is $210 billion which is less than half the interest on our national debt
(btw - The U.S. deficit for 2011 was $1.5 trillion)
For the record I'm not trying to be holier than thou. I've absolutely guesstimated (aka "made up") numbers in the heat of the moment. But when someone called me on it I didn't try to be indignant about it
Typically "eliminating the debt" is interpreted as building a modest surplus. No one is claiming it can be completely done away with immediately. That simply requires balancing the budget + a few percent. It's true that my 5-10% number was an estimate, as was the 10-20% number; that is not the same as making numbers up.
Even the estimate that is most generous to your position is more than sufficient to support my argument. It could be twice again that amount (40%) and still not reach the levels of unworkability you posited in your original post, considering a number of other countries are under burdens more than 60 or more percent above the United States'. You can pick all the nits in the world but that fact remains.
If we managed to increase that by 40% that would generate an extra $840 billion per year.
(Keep in mind that's massively generous because that would mean a 40% increase in everyone's taxes not just the top earners)
The total debt right now is $14.7 trillion. Even the most conservative CBO estimates had us adding $700 billion per year to the debt (usdebtclock.org) and those were very conservative estimates.
So your 40% increase doesn't even deal with the deficit. Much less the debt or the unfunded liabilities.
And that's assuming you could get that. My original point was people will subvert the tax code when tax rates get high enough to justify accountants and lawyers to do so. That's why a 90% tax rate didn't produce dramatically more revenue per capita.
I'm not saying you're wrong because I don't know but you are over simplifying
First you're forgetting those countries don't have state taxes. For example, the top tax rate in California is close to 40% when you combine both State and Federal. Plus you have some cities that have income tax.
Second you're forgetting loop holes. Again the point I made above is U.S. citizens paid less in taxes when the U.S. tax rates were higher.
So again I can't say you're absolutely wrong. But you did over simplify (and you also ignored the point made in the very post you were supposedly replying to)
The chart says total tax burden so I'm assuming it takes into account state taxes. The one chart indicates an average for the U.S. of around 26%. This would be a 2% increase from what it is today. In a $10 trillion economy this would be a $200 billion tax increase. Given that borrowing rates are so low right now an awful lot of money can be borrowed before the budgetary burden reaches $200 billion in additional annual spending.
Total tax burden is a vague term. They could easily mean total Federal tax burden since they're comparing countries. This NY Times article pegs the total U.S. Federal tax burden at 20.7% which makes the numbers you quote seem dubious
Tax burden is not a vague term. They define it in the charts. Total tax burden is the percent of GDP that is tax revenue. The link you gave talks about effective tax rate. This is very much different than the percent of GDP collected in taxes.
A question: how does the fact that these are revenues instead of rates play into this discussion? I.E., one of the arguments of free-market proponents is that lower tax rates can increase revenues by allowing the economy to grow-- which, if it were true for some or all of the economies, would actually undermine the point.
I'm genuinely curious about this, not trying to stir up a giant political debate.
I think it's quite bad to focus on rates. Given that there are usually loop holes and tax incentives it becomes necessary to look at tax burden as a percent of GDP.
The people who make the argument you mentioned are wrong. If lower taxes always lead to greater economic growth then the optimal tax burden would be 0%. But this would mean there is no government and we'd be in an anarchy. Does anyone really think an anarchy is the optimal way to grow an economy?
Raising taxes does work since the tax level in this country is quite low. It has a long way to go to catch up to France, Germany, etc. If raising taxes to the level of Germany would cause such a massive outflow of capital (which could be taxed at the exit point) then why does Germany have so much capital? Wouldn't the same thing happen to Germany?
The current tax burden as a percent of GDP in the U.S. is low by U.S. standards of the last 50 years and quite low relative to other industrialized nations.
The so called fiscal problem we have is easily fixable. Raising taxes is a viable strategy.
If raising taxes to the level of Germany would cause such a massive outflow of capital (which could be taxed at the exit point) then why does Germany have so much capital?
You're missing the fact that there are significant cultural differences between Germans and Americans. Germans seem to consider this tax rate a reasonable price to pay in order to maintain their desired social contract. Americans (especially the wealthier ones) would decide that they are getting screwed by a corrupt system and would start looking for a way to get out of paying. Funny thing is that the Germans are starting to act like Americans when it comes to paying to bail out Greeks, Italians, etc. so I suspect it boils down to Germans trusting other Germans more than Americans trust other Americans.
Erm... I'd like to see your definition of "emerging country" because it seems completely different to the accepted definition for either of those words
And that's the funny thing about solvency. As long as investors give you low interest rates, all is well. If they decide you will be insolvent, bond rates rise, resulting in a self-fulfilling prophesy where you actually become insolvent.
Solvency is of course inversely correlated to debt to GDP ratio, but there are tons of other actions at work.
Can you please explain your theory of how massive cuts to government and the ensuing massive layoffs of government workers, and the government buying less stuff from businesses, is going to fix the economy? Please take into account in your explanation that the US is able to borrow at record low rates right now.
And also note that inflation is next to non existent right now. A few years of 3% inflation would do more to fix the housing market than all government assistance put together at this point in time.
PS: I still think we should cut government spending by around 30% AND remove the home mortgage tax deduction but both of those need to be slow changes or they are going to cause a great deal of harm.
Removing the home mortgage tax deduction will cause the price of houses to drop, because no one would be able to afford the more expensive houses anymore, and they would have to drop the price to make them affordable.
The only thing that the tax deduction did was to raise the price of houses.
How is the US government debt the problem? I just don't see it. Government debt certainly didn't cause the problem, we can still borrow at a 2% rate, and there's been little evidence of inflation.
I'm in the middle here. U.S. and State debt is a huge problem IMHO but I agree that private debt is a bigger problem (given it dwarfs public debt by a large margin).
But the one point where I think you're clearly wrong is using interest rates or lack of inflation as measurement sticks. As long as the U.S. holds the reserve currency we have the whole world trying to prevent our currency from collapsing. That means giving us whatever interest rate we want and pegging their currency to ours.
I suspect we'd see a major collapse in the dollar if the world decided to abandon it as the reserve currency.
The US government is able to borrow at a low rate because there are few good alternatives: the Euro and the Yen are both terrible choices, the Pound is not particularly good either, the Australian market is too small to absorb significant inflows, and the Chinese market is not open to foreign investment. As the Chinese open their currency over the next few years and present it as an alternative reserve currency to the dollar, the free ride will start coming to an end and the US will need a significant devaluation in order to keep from choking on the higher rates. It would be better to have the debt under control when that happens.
Let me guess: the "bold action" they want is to throw a few more trillions at bank shareholders and prodigal borrowers.
No thanks. We would be better off to head straight through the black hole, full speed ahead. It will be painful for a few years but we'll come through the other side with cleaner balance sheets and sustainable government budgets.
They almost made it the entire article without throwing in a bit of Both Sides Do It nonsense.
"In America the Republicans are guilty of outrageous obstructionism and misleading simplification, while Mr Obama has favoured class warfare over fiscal leadership."
Obama class warfare? No sign of it. I think Obama's a great human being, but he's a essentially a conservative by any sane standard. With the economic stance he holds now, he'd have been a Republican in 1970 (a time in which Republicans were not all horrible).
..and you are basing an individuals total tax rate based on income tax alone, which doesn't account for the many other taxes that someone has to pay.
I suppose if you made money, didn't live in a house, and didn't spend your money in any way, your tax rate would be 50% in France. This just isn't the case for the average consumer.
That article has almost zero factual content to back up it's assertions. This kind of nonsensical ravings really grate me. Don't write something like 'witness the increasingly dark economic backdrop' or 'America’s economy is still limping along' without some hard numbers. This article attempts to support those statements with broad general commentary like 'summer slump in share prices and consumer confidence suggest future spending will weaken further'...that's not proof, that's an interpretation of data that the author isn't sharing.
The worst part about that article is that the meatiest statement 'That could change if Congress came to its senses, passed Barack Obama’s jobs plan and agreed on a medium-term deficit-reduction deal by November' is dead on, but delivered in such a clumsy manner it's almost a throwaway piece.
This is an online version of an article in the Leaders section of the Economist magazine. The articles in that section are mostly short summaries of topics discussed in greater detail in the relevant subsections of the issue.
For instance, the same print issue as this 'nonsensical raving' has a much more detailed summary of the euro crisis in the Briefings section if you're looking for the gory details alluded to in the leader[1].
Although the Economist tends to oscillate between sanguinity and (mild) hyperbole, this is as close to panicked as I have seen it in a decade. Situation downgraded from 'worrying' to 'grave.'
This article has no depth and is not worth discussing.
Here are two quotes taken from the article:
1) "That could change if Congress came to its senses, passed Barack Obama’s jobs plan and agreed on a medium-term deficit-reduction deal by November." - Author favors Obama's plan and says it will fix the problem.
2)"while Mr Obama has favoured class warfare over fiscal leadership." - Author refers to the exact same policy, but now calls it favoured class warfare.
This has a ton of link bate and zero information anyone actually cares about.
I am continuously amused by people vehemently arguing about topics they have almost no expertise in and thinking whatever insane batshit theory they have is better than a PhD doctorate's advice.
"That could change if Congress came to its senses, passed Barack Obama’s jobs plan"
The jobs plan doesn't even have enough Democratic support to pass the Senate, so the likelihood of it making it through both houses is nil. It's more of a political plan than an economic one.
I also think that we have limited capability to make expedient investments in infrastructure with a positive ROI. Take a look at the Columbia River Crossing project between Oregon and Washington states - six years after project inception, the final environmental impact study still hasn't been released. Construction would start in 2013 at the earliest and is estimated to take 5-7 years. Time lines like that are common with large infrastructure projects in the US.
When discussing "bold action" to save the economy, we should really be reevaluating the incentives of the traders on Wall Street.
This makes me think of Mark Cuban's article "What Business is Wall Street In?"
These traders on Wall Street have little interest in creating capital for the companies that stem innovation. Their main incentive is profit, even if it means making money off economic downswings. We need to put them back on the proper track via taxes or a complete restructuring of the capital gains system.
"If Democrats and Republicans fail to hash out a compromise on the deficit, draconian spending cuts will follow in 2013. For all the tirades against the Europeans, America’s economy risks being pushed into recession by its own fiscal policy—and by the fact that both parties are more interested in positioning themselves for the 2012 elections than in reaching the compromises needed to steer away from that hazardous course."
building a firewall around illiquid but solvent countries like Italy
I'm not entirely sure I understand the distinction being made between illiquidity and insolvency here, could someone please explain it? It seems to me that if you are in a state in which a high enough interest rate on your debt will put you in a death spiral from which you cannot feasibly recover, then your problem is bigger than liquidity.
That's exactly the distinction being made. Italy's debt is highish but manageable; it budget deficit is small. If it can borrow at reasonable rates for the next few years, it's not in danger of default. That's illiquidity. Compare to Greece, which, even if it could get loans at low interest, is never going to be able to repay what it already owes. That's insolvent.
So the only thing that really separates Italy from Greece is the market's expectation that Germany won't let any of the other sovereign nations default. Absent that expectation, Italy and Spain are one good speculative attack (a la Soros vs. the British Pound) away from insolvency.
The scariest part of all this, is that for the first time in the past century, we no longer have any options. Less regulation, more regulation, centralization, de-centralization, it's all been tried. We're out of options, and the policy makers and central bankers have clued in (Bernanke's recent speeches have been dreadful to listen to).
Maybe, just maybe, things are going to go really, really badly this time around. Maybe.
It is better to gravely recognize the scope of the problem, assemble facts regarding the situation, and then to move to positively affect the situation on all levels, from globally to locally.
The bold action that is needed is to not panic, but to take measured steps regardless of ideology and re-election chances.
I wish I was in a position to do more than work hard, invest, and not panic.
On one hand, I really hate the Economist. It's a magazine that thinks an ideology, a smart tone, and providing the only decent coverage of world events widely available makes for a compelling magazine. Even if that coverage is ridiculously biased and not really knowledgeable about facts on the ground.
On the other, it's perhaps the pre-eminent mouthpiece for the ruling Anglo-American elite, and it's comforting that they're sounding the alarms to what's happening. I think it's too little too late, but I genuinely hope that people and policymakers hear them.
Because this is really bad, folks. Really, really bad. It's pretty clear the dominoes that will fall: Greece fails, setting off markets and destroying banks across the continent, causing Spain to fail, doing the same, causing Italy, Belgium, maybe even France to fail. Who knows what after that. The EU's demise will signal the financial collapse of an economy larger than the United States; it's already either at the brink or already in a new recession, and this will be the deathblow. The quick succession of collapses, happening all within the span of a month or two, reverberate throughout the entire world, throwing the USA back into a second, possibly harsher recession than the first we have yet to recover from.
The only other solution is converting the European Union into a fiscal union. On the face of it this is implausible: you'd be asking Germans, who in their self imagination see themselves as pure as snow, to pony up hundreds of billions of dollars to subsidize what they see as the lavish lifestyles of lazy unproductive Mediterranean types. Even if you could form some political consensus to do this, though, it's not even clear that politicians could coordinate the solution in time to cut off the collapse. Effectively consolidating dozens of countries into the same fiscal union isn't a change you can implement by sheer willpower; it'd be a herculean task even with years of preparation.
And, stateside, any attempt to counteract or prepare for this tidal wave is simply doomed because of our ridiculously broken institutions. One side has the ability to co-operate and try to fix the situation, but because of how our government is set up all the incentives on their side are to actively sabotage the economy--regardless of causes, if it does badly, the party of the current President will be blamed.
Because people (Americans, Germans, Greeks, Chinese) are all idiots, from the man on the street to the upper echelons of power.
Greece's failure will only destroy banks that France and Germany aren't interested in preserving. They can play the zombie-bank game for a long time.
Also, I really disagree that this crisis has evolved from idiocy. It's more a matter of misaligned incentives. Many of the people who have caused this mess have already profited handsomely from it.
Greece's failure will invite a sustained speculative attack on Spain and Italy which would probably require coordinated actions between European and non-European (i.e. American and Chinese) governments to stop.
I agree that the crisis is a matter of misaligned incentives, but I include politicians and bureaucrats from pretty much every country in the set of those who have directly misaligned incentives (i.e. not just indirectly misaligned by campaign contributions from wealthy bankers), so I have very little faith in the ability of regulation to solve the problem.
The Economist would be a lot more credible if it admitted that yes, they want the Germans to subsidize the Greeks and no, there is no plausible scenario under which those subsidies end.
Absent that, they look as rhetorical as anyone, if somewhat better written.
Get money out of politics so politicians can make unbiased, level-headed decisions.
I don't doubt the complexity of our current economic situation, but the way our government is currently run by lobbyists who naturally have their own myopic view, I think it would be more an accident than on purpose that our economy gets better.
Lately, I've noticed that political and financial systems seem to behave according to the laws of increasing entropy in closed systems. For that reason, sometimes I fear that there is no fixing it, and that only a new system will be better.
What I find interesting is how an impending Chinese squeeze would affect American markets. Their economy has been steadily dropping, but with all eyes on Europe no one has really looked into it.
Scary news sell newspapers. This article is way to sensationalist for my taste. The one thing I find worrying is the large shift in power from people to financial corporations that has happened in the past decade.
Instead, we got bailouts and crony capitalism and ad hoc intervention, and today the global system is in many ways in worse shape now than in 2008. (Banking is more concentrated and national balance sheets are a mess from the bailouts)