10 ms·

Why No Jobs

112 points by stuntgoat 17y ago

potatolicious 17y ago
> "Mr. Bernanke has a lot of money, as do the other bankers on the committee and the people who selected them. So they’ve decided to let millions and millions of people be unemployed and the rest of us experience the resulting recession rather than risk the chance that some of their money might be worth a little less." Okay, I was with you until this part - that's a pretty serious claim to make without any substantiating evidence, or even something that kind of looks like evidence. This seems like a gross oversimplification of a complex problem to me, and like most other gross oversimplifications of the recession, seems to just pin the blame on "greedy bankers".
- CoreDumpling 17y ago
  I agree. I "work for a living" (whatever that means, though in the context used here it's as opposed to being a "greedy banker"), and I can sympathize with the plight of the unemployed, but I've also made sure I had sufficient savings as a rainy day fund and am also prepared to reduce my living expenses if necessary. I think that I have every reason to be concerned that my little nest egg might be devalued. More apropos to the community here, this could also mean a shorter runway for a bootstrapped startup; I don't see how founders would be pleased by such a move.
  - potatolicious 17y ago
    More relevant to the general population: when your nest egg's value is anything but safe, you are going to spend your money as soon as you get it - this has more ill effects than I can enumerate This reminds me of my grandfather's stories during the Chinese Civil War (or shortly after the capitulation of the Nationalists anyway), where he'd get his pay and immediately bike at lightning speed to the market to trade it for sustenance. Of course, the only thing that fixed that was a complete currency reset: http://en.wikipedia.org/wiki/New_Taiwan_dollar http://en.wikipedia.org/wiki/New_Taiwan_dollar I'm not sure if the US would really be better off with that.
    - fnid2 17y ago
      The same thing happened in Argentina and the same thing could happen in the U.S. Countless fiat currencies in history have experienced the same fate. The only solution I have ever seen in my research is to return to a commodity backed currency. If there are other solutions, I don't know of them, but would like to.
      - cynicalkane 17y ago
        Currencies backed by anything are a terrible idea. Most economists now believe that deflation caused by a gold-backed currency was one of the primary causes of the Great Depression. Imagine how much worse it will be with, say, an oil-backed currency. What would 2007 have done to our economy? Central fiat banking is the best known solution to the currency problem. This solution gets hated on by a lot of people who don't know any better, but think they do. The central requirement is that the currency-makers be independent of just about everyone, so that nobody can debase the integrity of the currency for political reasons. This angers everyone who thinks they know better than the central bank, but the anger of the average anti-establishment type is fickle and transient. It also angers the politicans, who are more dangerous--the examples of Argentina and Taiwan given here demonstrate not the dangers of fiat currencies, but rather that any currency should be kept far, far away from politicians.
        Nwallins 17y ago
        > The central requirement is that the currency-makers be independent of just about everyone Thus ignoring our entire system of checks and balances. Do you not see the danger, here? > This angers everyone who thinks they know better than the central bank AKA, every market participant. > but rather that any currency should be kept far, far away from politicians. In what sense are central bankers not politicians? They are not elected, that's for sure. However, they exercise a large amount of control over our economy and very much influence official political action. In a sense, they are very much a separate executive branch of our political system.
        17y ago
  - gcb 17y ago
    they would be pleased because loosing the funds for dragging their clientles company for a few more months would be replaced by having a profit faster.
- barrkel 17y ago
  I'm not trying to justify Aaron's economically illiterate conspiracy theorizing, but I would like to reiterate some of what I first emailed Aaron a few years ago when he first started talking about this (e.g. http://www.aaronsw.com/weblog/predatorstate http://www.aaronsw.com/weblog/predatorstate ). It's true to a degree that bankers don't aim for zero unemployment - i.e. implicitly they "let millions and millions of people be unemployed" - because to do so would create inflationary effects. Such an economy would be overheating. In an economy the size of the US, you would expect there to be a few million people unemployed at any given moment, simply because of turnover. But this is pretty basic stuff. See e.g.: http://www.investinganswers.com/term/unemployment-rate-809 http://www.investinganswers.com/term/unemployment-rate-809 http://en.wikipedia.org/wiki/NAIRU http://en.wikipedia.org/wiki/NAIRU It is however true that the Fed has a rather ridiculously overloaded mandate. It has basically one lever - the interest rate - with which it is supposed to target multiple goals - "maximum employment, stable prices, and moderate long-term interest rates". If you think about this for a moment, you'll realize it's not possible.
  - scotty79 17y ago
    In my country equivalent of FED has only one goal: Keep inflation moderate and manageable. It works out pretty well.
    - pinstriped_dude 17y ago
      And "my country" would be _______ ?
      - scotty79 17y ago
        Poland I was a bit imprecise. Not equivalent of whole FED but equivalent of part of FED that makes decisions about monetary policy. http://en.wikipedia.org/wiki/Monetary_Policy_Council http://en.wikipedia.org/wiki/Monetary_Policy_Council In Poland monetary policy is understood as keeping prices stable not as attaining a set of objectives oriented towards the growth and stability of the economy.
    - 17y ago
- shawndrost 17y ago
  I agree. Although Aaron does offer support for the idea that Bernanke is choosing unemployment over inflation [1], he doesn't support the idea that the bankers are motivated by selfishness. (For example, they may be motivated by the fact that inflation would make the dollar an unattractive investment vehicle to other countries.) [1] Via quoting from the Economist: “Mr Bernanke does not want to risk a de-anchoring of inflation expectations. He is willing to accept 10% or greater unemployment and the resulting economic and political fall-out in order to avoid that risk.”
  - scotty79 17y ago
    > ... he doesn't support the idea that the bankers are motivated by selfishness. ... Isn't that assumption always taken by default when considering nearly all market actions? That actors in the market are primarily motivated by selfish goals?
    - drunkpotato 17y ago
      Unless that assumption would lay the blame for a catastrophe on wealthy people and require changes that would make them less wealthy, in which case we cannot take selfishness for granted and have to assume their motivations are altruistic (if misguided). You really need to be up-to-date on modern market ideology.
      - yummyfajitas 17y ago
        Modern market ideology does tend to assume people controlling the government and various agencies (for instance, Bernake) are motivated by selfishness. It also assumes that the home-borrowers, politicians, realtors and bankers who created the housing bubble were motivated by selfishness, as were the hedge fund managers and bankers who helped pop the bubble.
        eru 17y ago
        Those market actors also only have limited rationality (and not perfect foresight), and skewed incentives (-> principal agent problems). That needn't hinder one from constructing a conspiracy theory, though.
- fnid2 17y ago
  Just ask yourself this question: If I have $1M and I can decide between two options a) tomorrow my money is worth $2M b) tomorrow my money is worth $500k Which option would you choose? These bankers are human beings. They are naturally and understandably biased. Not only are they making these decisions for themselves, but they are making them for all their friends, family, and business associates -- all of whom are also millionaires and billionaires. I don't see it as much a conspiracy theory as an understanding of human nature. Originally, the fed was created by a secret committee of bankers on a remote island. It was rushed through congress quietly -- I know, because I read the decades old NY Times article covering the legislation at the Will Rogers Museum. Then, if you watch the recent Moore film, you'll see that the current bail out was voted down in congress, then secret meetings led by many of these bankers, GS and the like, prompted a revote and they rushed it through again -- when it passed. What Aaron said is pretty accurate. The bankers aren't looking out for main street and the jobs won't be back for a while. I've been trying to sell a house now for almost a year and many people want it and none of them can get a loan -- they've tried. They have jobs. They have income and the ability to repay the loan, but the banks just aren't giving out any money. Contrast that to 4 years ago when you didn't even have to have a job at all or verify income to get a million dollar loan -- I know, because it was my job to build information systems to help the subprime match makers connect home buyers with the banks who wanted to give them the loans. When I realized how dirty it all was -- I quit and started my own company and I'm very glad I did.
  - byrneseyeview 17y ago
    But it's really more like his choices are: a) His $1 million earns ~3% interest and depreciates by 2% per year, or b) His $1 million earns ~4% interest and depreciates by 3% per year. You're arguing that these guys are promoting multi-trillion dollar swings in the country's wealth in order to earn a couple more basis points on their investments. If you're going to posit a Greedy Ben Bernanke, why is he being so slow and cautious? He can probably make, at most, 1% per year extra by manipulating the value of the dollar. Or he could take a suitcase full of cash.
    - yummyfajitas 17y ago
- johnl 17y ago
  I think the article is misdirected. A few years ago Japan increased their money supply by 30% to dig themselves out of their depression and it failed to work. So increasing the money supply I doubt will work any better here in the U.S. All those people now being foreclosed on should have had their loan applications disqualified. That responsibility falls to Washington to regulate, not the Federal Reserve, and the biggest scream that "you can't do that" would have been Washington, not the Federal Reserve I believe.
garply 17y ago
"It all worked great for a while, until one day they found they had too few pieces of scrip. Every couple had only a couple hours left and, having so little, they didn’t want to waste it." Wait... where did the old pieces of scrip go?
- potatolicious 17y ago
  Mr. and Mrs. Jones from down the street were saving them all in the hopes of getting rid of the kids for good?
- philk 17y ago
  He's getting the story a bit wrong. One or two of the couples will have a whole lot more scrip than the others that they've saved up.
- jbert 17y ago
  Some possibilities: Some are lost (you need to print money to replace torn/lost bills). Some people join the group without new scrip being added (money supply needs to grow with population). Some people de-facto left the group (kids grew up/they moved away) while holding scrip (people stuffed cash into their mattresses and forgot about it/died).
philk 17y ago
Keeping inflation under control isn't just something done to protect "wealthy bankers". The stability of the financial system as a whole is predicated upon the fact that money that I earn today will be worth something tomorrow.
- codexon 17y ago
  The stability of the financial system as a whole is predicated upon the fact that money that I earn today will be worth something tomorrow. The main purpose of currency is not the eternal accumulation of wealth. It is for liquidity: making bartering easier. If you want long-term stability, you can invest in gold or bonds. The reason why the US has planned inflation is to maintain liquidity when productivity rises or currency becomes horded. Economists such as Bernanke have learned from the Great Depression that rising deflation with the same productivity results in spiraling unemployment: ...a town full of shoe factories that closed during the Depression, leaving the community so poor that its children went barefoot. "I kept asking, Why didn't they just open the factories and make the kids shoes?" The reason is because companies know that consumers do not have money to spend so they fire people to preserve their appreciating currency. By doing nothing, these companies gain wealth while children walk without shoes. From a purely capitalist view, these companies have the right to do so. But would you really still hold that belief if all the farms shut down in this manner?
  - philk 17y ago
    I'm advocating keeping inflation under control, not deflation. These are two entirely different things.
    - codexon 17y ago
      If you don't inflate the currency to a certain level when productivity increases due to technology or population growth (such as right now), it may result in a deflationary spiral. As Aaron said, it is a personal opinion of how much inflation you prefer. Do you prefer a relatively high inflation because you want to be employed? Or do you want a relatively low one so your assets appreciate or keep their value?
Tichy 17y ago
I wish there was more than that baby-sitting co-op to support those ideas. One story doesn't make a proof. Krugman brings it up all the time - so the hopes of the nation apparently rest on a single baby-sitting co-op. It's been too long since I thought about it, but back then I felt there were some aspects missing from the story. Must think about it again, but overall, it is a very limited experiment, hardly the same as a full economy. Also, doesn't the co-op story show that people can also create their own money? If lack of money was the problem, why don't they just exchange services and products (I mow your lawn and you clean my car)? Money is just a tool to make exchanges more efficient, but it's not that without money they become impossible. Of course, it is always appealing to blame everything on some rich elite.
- davidw 17y ago
  > I wish there was more than that baby-sitting co-op to support those ideas There are people who dedicate their careers to studying this stuff... and they have better examples. That's just a simplified example used to communicate the idea. > why don't they just exchange services and products What money makes possible is more complex exchanges. Say, I make a web site for some guy, who gives a book to some other guy, who gives some steaks to another guy, who gives some pasta sauce to another guy, who gives some milk to me. Without money, complex interactions necessary for a modern economy wouldn't be possible. > Of course, it is always appealing to blame everything on some rich elite. Actual economists generally don't do that. I wish if people wanted to post economics articles, they'd 1) do so on reddit, but if they really can't contain themselves, that at least they'd 2) post actual papers by real economists (and not just their opinion pieces) or something more than politicized handwaving.
  - Tichy 17y ago
    "There are people who dedicate their careers to studying this stuff... and they have better examples." Yeah, but last I heard, not all of them agree with Keynes. Also, please point to some examples. I have heard Krugman repeat that baby-co-op several times now. You'd think he'd provide some other examples occasionally if they are so abundant. I know that money is a very useful tool, but it still seems to me that if only money was the problem, people could find workarounds. They could create their own money, if the state did not provide enough. The baby co-op did just that, it seems. It just takes a little more than one baby co-op to convince me that availability of money is the only factor that makes an economy work. It is however a very appealing theory to governments, because it justifies them printing more money. And as we see, it appeals to conspiracy theoreticians, too. My own view (without academic seal of approval) is that efficiency is the main factor that determines our well-being.
tsally 17y ago
I was having a discussion with my friend today on related topics and I couldn't figure out the answer to this question: where does the demand for talent in the finance industry come from? On a basic level, banks exist to facilitate loans. Someone with money gives it to the bank. The bank loans it out to someone who pays it back plus interest over a period of time. At the end, the bank and the original investor get some return on his/her money. The hardest part about this chain on events is picking people who wont default on their loans. But clearly the demand for talent in banking is much higher than that. These people get paid extraordinary amounts of money. So where is that demand coming from? What service is being provided by banks that warrants the compensation?
- barrkel 17y ago
  If you can structure derivatives and other products in such a way that you can sell them to other people for more than they're worth, then you come out ahead. The cleverer you are at structuring them, and the better able you are to model their valuation, the more you can profit from other folks' stupidity. Basically, mugging people with your brains rather than your brawn. As far as I understand it, beyond the basics of arbitrage, risk hedging and market making etc., investment banks are a zero-sum game - which after you add in the overheads and the profits, they destroy value.
  - tsally 17y ago
    So increased skill leads to markets that are less efficient because of complicated bundles of investments/loans? Why are complicated investments/loans even legal? What's the given justification for them? My own train of thought lead in a similar direction as yours. What I'm really hoping for is the opinion of a hard core classical economist, because I feel like that's what I'm lacking. Are you familiar with such arguments? The free market determines salary, after all.
    - barry-cotter 17y ago
      No, the markets are still efficient. It's just that intellectual capital is devoted to playing the market that could be devoted to other more productive things. If you want to borrow money, hedge risk or issue new stock you can do all that but there are fat profits to be had from being the smartest guy on the market or the one who figured out one particular arbitrage opportunity before anyone else. Finance as waste: There's an arbitrage opportunity somewhere worth 100,000, and it will be picked up within a week of emerging. It is privately profitable to spend up to (100,000 - trading costs) to be the first to notice this, but the social benefits of it being discovered in 2 days rather than seven verge on zero.
coffeemug 17y ago
I know I only see a small part of a whole and I lack full perspective on things, but from where I'm standing the biggest challenge of every funded/profitable company I know is hiring good people fast enough. All the good people I know (even in non-tech fields, including finance and real estate) are employed. Even most pretty marginal people I know are employed (at salaries they aren't happy with, but certainly nothing unbearable). Perhaps the people that are losing jobs weren't that good at them to begin with? I realize that not everyone can be super-professional at what they do, and that's fine. But in my social circle (which includes all kinds of people from no skills/no education immigrants to highly specialized professionals in a variety of locations throughout the U.S.), nobody is really struggling. So what gives?
- akgerber 17y ago
  Do they have babies? Are any of them sick or old? Are there any low-skill Americans that don't have the tenacious work ethic of most immigrants?
- orangecat 17y ago
  That's actually a common effect of a recession. People with halfway decent jobs are much more likely to stay put, because they don't want to take the risk of switching to a new company and having it fail soon after.
Dlev_ 17y ago
...and this is why programmers should just program, vs. spreading some unsupported gutty-feely conjeture of an economic problem way too complex. Crap... anybody feels they can write about economy after misreading a couple lousy quotes from a guy who actively proposes inflation to any bleeping crisis around the globe.
- natrius 17y ago
  For what it's worth, I doubt Krugman would support eliminating the independence of the central bank. For those of you unfamiliar with Krugman's writing, Aaron's wrongness shouldn't lead to a wholesale condemnation of Krugman.
- scotty79 17y ago
  Are you saying that grease monkeys should be rarely seen, never heard, should stick to their crap and let real specialist to handle the money? After all they do so well.
  - jbooth 17y ago
    I think it's more along the lines of "better to be thought a fool and remain silent, than to speak up and remove all doubt"
  - mortenjorck 17y ago
    Would you like to see a code check-in by Paul Krugman? There's nothing wrong with expanding your horizons (I'm an armchair economist as well) but trying to write critically on a subject you don't really have the background to do so on is counterproductive.
    - scotty79 17y ago
      > Would you like to see a code check-in by Paul Krugman? I'd gladly welcomed code check-in from 8 year old if it nailed the problem.
- gcb 17y ago
  Q.E.D.
djcapelis 17y ago
I thought this was an excellent explanation, but I really don't appreciate the impeachment of the Fed. The author starts with a very nice explanation, but then goes to an extreme simplification of the complex process of balancing inflationary pressure with the rest of the economy. It's certainly fair to criticize the Fed, but to present their objectives as one-sided where inflation is always good is as equally foolish as the people calling for the gold standard again. Frankly the Fed is probably only doing their job if everyone is angry at them. Which seems to be the case, so I tend to think they're probably making a decent trade-off at this point, as hard as it is for both sides to stomach.
TomOfTTB 17y ago
The problem I have is his basic premise is flawed. He's using the dropping of the Gold Standard as proof that pumping money into the economy will create new jobs. But if you look at unemployment after 1933 (http://bit.ly/9k4xVu http://bit.ly/9k4xVu) you see it did dip but then started to rise again. Because eventually printing that money devalued the dollar. See the inflation charts here: http://bit.ly/aA5MXb http://bit.ly/aA5MXb So Roosevelt's plan failed (and it did fail) because the dollar's value dropped. So while more money was getting pumped in to the economy that was being negated by the assets of U.S. companies dropping in value. That drop caused business owners to stop hiring again. My understanding of the Obama administration's basic plan is to pump money into the economy while trying to control inflation. That way companies will get the benefit of the Government's money without having their own assets devalued (and Ideally that will cause them to start hiring again)
- codexon 17y ago
  It is also flawed for you to conclude that dropping the gold standard was the reason behind the unemployment. There were many things happening that could also have contributed to it. Here is a more complete graph of unemployment during the Great Depression where you will notice the unemployment levels never reaching the peak, and dropping back down with Roosevelt enacting even more policies and spending bills. http://www.inewscatcher.com/timages/50154f373744ae8603a614495378049c.jpg http://www.inewscatcher.com/timages/50154f373744ae8603a61449...
- cynicalkane 17y ago
  The chart you linked shows a cliff-dive from 1929 to 1933, followed by a more or less steady, small rise from 33 to 37. If the value of the currency is the main problem, I'm wondering why you are looking at the molehill instead of the mountain.
ankeshk 17y ago
The article makes wrong conclusions. Money doesn't run the economy. Confidence does. Economy is and has always been a confidence game. If people in the baby-sitting co-op are confident to find / earn more scrips in the future, they will spend their scrip today - even if its their last remaining scrip. But if they have no confidence of earning a scrip in the future, they will save it. But if everyone starts saving the scrip, exchange doesn't happen. And economy suffers. And because the economy suffers, people save more scrips. And it creates a downward spiral loop. On the other hand - if everyone gets over-confident and starts spending scrips they don't have, we see a bubble and then a bubble-burst. Which leads to some very bad consequences too. So the trick has always been: make sure the people remain confident about the future. But that they don't become over-confident.
known 17y ago
Wondering what % of Americans invest their money via stock markets?
dbz 17y ago
This would have been an amazing read if the author had included something more than a few quotes. Charts and Graphs and Statistics and Links Full of Research. I don't have the time to check up on this information myself (hence reading the article), but if the author had backed up all of his crazy theories with tangible evidence- this article would have been amazing. So to answer your question, Mr. Author, I will listen to you when you back up what you say with something tangible I can hold onto.
po 17y ago
An interesting atlantic article on a similar topic: http://www.theatlantic.com/magazine/archive/2010/04/my-inflation-nightmare/7995 http://www.theatlantic.com/magazine/archive/2010/04/my-infla... This writer also comes to the conclusion that inflation might be the way out.
ars 17y ago
If what he says is true, then the U.S. can print lots of money, pay off the national debt, and create jobs. Sounds like a win win. Probably it isn't though.
- fexl 17y ago
  Right, that would destroy the value of the property people have already earned and somehow managed to keep. That would be wrong. If you want jobs, let people accumulate capital and invest it how they like.
- kowen 17y ago
  Actually, if what he says is true (and I'm reading it correctly), then the Fed can print lots of money, lend it to the US Government so that they can pay off the national debt... but then the US Government owes the Fed, and we're kind of right where we started, except with a good deal more money in circulation.
cousin_it 17y ago
In Aaron's very first example with scrip, people would just start babysitting for half a piece. "Not enough dollars" you say?
- 3pt14159 17y ago
  Came here to say that. The fact that the script was called "1 hr slots" distorts the mental exercise, and deceitfully leads the reader to a logical outcome that would not be the case.
swah 17y ago
Youtube: "Quants: The Alchemists of Wall Street."
scotty79 17y ago
I think there is some good insights in this. As I see it: FED + Banks is a system of issuing money. As economy grows it needs more money. FED decides how much money is needed and banks determine who needs it and gives it to them (getting healthy profit if they were right). Banks found a way to circumvent FED limits on making money. They made much more money then the FED intending them to make. That money was pushed mostly to real estate market driving prices of houses up so they became completely disassociated with their real value that they may present to anyone. It was kind of spotlight hyperinflation. Each dollar was worth lower and lower fraction of average home. Money was seeping to the rest of the economy but since due to technical advancements real value of economy was growing probably faster then FED expected that inflation was not noticeable in other markets. When credit is paid back the money that was created when credit was given is destroyed. When situation is stable and credits are paid back at predictable rate then banks just give new credit in place of old ones if they are needed and allowed by FED and everything goes just fine. But when credit defaults money all borrowed money not paid back yet is also destroyed. If huge quantity of credit default at once huge quantity of money is destroyed. What is more it's money that belongs to bank is seriously crippled by this. Not only he didn't earned interest rate but also he has less money to give new credits and create more money to profit out of. Defaulting on massive scale is something that current system of issuing money is not protected against. I'm not entirely sure what happens if bank needs to destroy more money for defaulting credits than it has. Bank obviously goes broke but is the rest of the money still destroyed or not? Since a lot of money was destroyed there is possibility that there is too little money now. As far as I know there really are no good ways to estimate how much money is needed (FED and equivalents in other countries do it by more or less educated guess). Maybe issuing more money could help, maybe that is not needed. It's not that obvious as post author has stated but it may be worth a try. Also grudge about wealthy is not very polite but it might be true that they fear inflation more then they should because of their wealth. Disclaimer: By 'creating money' I don't mean literally printing it, just borrowing many times over the money that bank has (or borrowed). By destroying money I don't mean burning it but just owing people who deposited money in the bank and not having cash to give them back their money.
tewks 17y ago
The anecdote about the babysitters and the lesson he's explaining is lifted directly from Krugman's Depression Economics. He mentions Krugman briefly later, in support of his argument, but doesn't properly cite the material in question or mention the fact that Krugman is in fact the one making the argument...
byrneseyeview 17y ago
This is basically the same article Aaron wrote early last year: http://www.aaronsw.com/weblog/depressions http://www.aaronsw.com/weblog/depressions The difference is that now he says it's all because Ben Bernanke wants to, um, profit on his dollar-denominated holdings. Which is sort of like claiming that the CEO of Exxon really believes in global warming, but he wants his next beach vacation to be .1 degrees warmer.
CulturalNgineer 17y ago
Great Post! He's on to vital fundamentals. It's helpful to look at civilizations as products of 'social energy'... countless decisions by individuals and groups. (A decision is an idea + an action). Money and credit are very imperfect technologies for the storage and allocation of this 'social energy' with an inherent bias in favor of any with the power to create it. So, since this 'creator' bias is inevitable the solution has to lie in democratizing (with important checks and balances) the process. This inherent bias also makes the Fed’s claim of independence ridiculous on its face and is a core problem with the monopoly of central banking. (This doesn’t suggest its elimination, only elimination of its monopoly). After all… who has the right to create and than allocate YOUR ’social energy’ without your input? That’s worse than taxation without representation… that’s potentially multi-generational enslavement without having an ounce of input into that allocation of your life’s energy. The thought process that rationalizes it for the ‘credit creator’ and those most closely benefitting is tied to a problem of scaling biological altruism but that’s a separate essay. I believe this inherent bias may suggest that more than one type of credit creation may be desirable. For example local currencies geared to local products and services to function alongside one or more global currencies… in an attempt to overcome a ‘proximity’ bias which goes along with a social bias. This approach can encourage asset-based-community-development and economic and financial resiliency while preserving the advantages of global trade and markets as well. Again, I’m not an economist but it seems to me these are ideas worth investigating. A brief post on some of this here: On Social Energy, Enterprise & Expanding the Technology of Money http://culturalengineer.blogspot.com/2010/01/on-social-energy-enterprise-expanding.html http://culturalengineer.blogspot.com/2010/01/on-social-energ... I also believe the Individually-controlled / Commons-dedicated Account facilitating the microtransaction in Commons focussed activities (politics and charity) is an essential piece of this puzzle. Opinion and influence are also aspects of ’social energy’ which money powerfully conveys(though we might wish it weren’t so). Current money technology inhibits the free flow and networking of this energy which distorts opinion markets. And, in fact, tends to further entrench the problem.
ckuehne 17y ago
See http://mises.org/Community/forums/t/7037.aspx http://mises.org/Community/forums/t/7037.aspx for a rebuttal of the baby sitting co-op story.
- dhume 17y ago
  Their attempts to reconcile their love of the gold standard with their kvetching about price fixing are hilarious.
mjw 17y ago
For one thing, he completely ignores the fact that the US economy doesn't exist in a vacuum. Inflation can have a big affect on exchange rates, importers and exporters, the attitude of people like China to all the USD debt they own, etc etc.
nkassis 17y ago
It seems like there is a lot of contradiction in how the Fed/Gov are trying to restore the Banking system. On the one side they are telling banks to keep more cash in reserve. (This is a worldwide phenomena). On the other side they are asking them to ease credit a complete contradiction to keeping more reserve. At the moment, banks are building up stock with cheap money from the Fed (at least that what I think they are doing) and credit should ease once they do so (as I believe it is doing currently). Inflation in this scheme would not be a factor because the money is being soaked up by banks as reserve. At least this is what I'm getting from all the CNBC/Bloomberg watching ;p
- lallysingh 17y ago
  Given credit isn't the only thing that affects the reserve amount. For example, the bank buying securities themselves.
wdewind 17y ago
This just dances around the edges of the key point: the gap between rich and poor. It's not that there isn't ENOUGH money, it's WHERE the money is. Of course printing new money, and redistributing actual physical units of money are kind of similar things to do (they both equate to wealth redistribution), so while I agree with a lot of what Aaron says, he's only CLOSE to the issue at hand, not actually hitting it on the head. If you want a TLDR version of the economic crisis, like Aaron attempts here, you really want to just look at the increasing divide between rich and poor in the country (aka the unbalanced distribution of resources = unbalanced distribution of power = system susceptible to corruption, greed etc = incentives lined up to benefit small portions of society not large = economic failure.)
- gaius 17y ago
  I can't believe I'm reading this here of all places. http://www.paulgraham.com/gap.html http://www.paulgraham.com/gap.html
  - wdewind 17y ago
    I'm not talking about bankers or CEOs being paid a lot of money and whether or not it's too much. The argument there isn't about whether or not their actions generate wealth/value, it's just about how much. A basketball player doesn't take wealth away from anyone, he just prevents others from earning it in his spot. What greatly exacerbated the economic crisis were decisions made for small amounts of people wall street that impacted large amounts of people everywhere. Many of these decisions were corrupt (ie they did more than prevent others from making wealth, they actually took it out of their pockets), but even in the times when they could be simply considered "competitive," the ability to make such decisions that impact such large portions of the population should be limited greatly. This is a systemic problem, not a person problem. The quick response to that one is that you need a system of incentives that get people to work hard enough, and part of that system is having positions like that where people can make decisions like that. I disagree, and actually take something like the NBA as an example: basketball players accumulate great deals of wealth (monetary and otherwise), enough so to keep people training at the peak of their abilities. Yet I can't remember the last time someone accused Michael Jordan of destroying jobs or the economy...
johngalt 17y ago
What substantiative actions are being taken by the reserve? To me it appears they are gunning for inflation with the low rates. If I have $billions then I can invest my money in a way that hedges against inflation. Conversely if I make $20k/year I can't insist that my employer pay me in a fixed number of long oil positions. So it's not true that inflation always hurts the bourgeoisie and helps the proletariat. It is true that inflation hurts a lender and helps a debtor. If inflation is at 10% and your mortgage at 6% then you're effectively making a 4% return on debt. Conversely the bank is losing money because the money repaid is worth so much less than the money lent. Bonus points for anyone that figures out why the banks aren't lending As for Bernanke/cronies motivations; the federal government would like inflation to be as high as possible without risking collapse. So if "money for their masters" was the Fed's goal they will keep gunning for sustainable inflation. Bernanke/cronies can hedge against it, and the largest debtor in the world would prefer to pay a low interest rate.
- mmt 17y ago
  Conversely the bank is losing money because the money repaid is worth so much less than the money lent. Bonus points for anyone that figures out why the banks aren't lending Except that the bank isn't really lending its own money. It lends its depositors' money, amplified through fractional reserve banking. They can also borrow from the Fed, making their own bundle on inflation, as a debtor.

112 points by stuntgoat 17y ago

> "Mr. Bernanke has a lot of money, as do the other bankers on the committee and the people who selected them. So they’ve decided to let millions and millions of people be unemployed and the rest of us experience the resulting recession rather than risk the chance that some of their money might be worth a little less." Okay, I was with you until this part - that's a pretty serious claim to make without any substantiating evidence, or even something that kind of looks like evidence. This seems like a gross oversimplification of a complex problem to me, and like most other gross oversimplifications of the recession, seems to just pin the blame on "greedy bankers".

CoreDumpling 17y ago
I agree. I "work for a living" (whatever that means, though in the context used here it's as opposed to being a "greedy banker"), and I can sympathize with the plight of the unemployed, but I've also made sure I had sufficient savings as a rainy day fund and am also prepared to reduce my living expenses if necessary. I think that I have every reason to be concerned that my little nest egg might be devalued. More apropos to the community here, this could also mean a shorter runway for a bootstrapped startup; I don't see how founders would be pleased by such a move.
- potatolicious 17y ago
  More relevant to the general population: when your nest egg's value is anything but safe, you are going to spend your money as soon as you get it - this has more ill effects than I can enumerate This reminds me of my grandfather's stories during the Chinese Civil War (or shortly after the capitulation of the Nationalists anyway), where he'd get his pay and immediately bike at lightning speed to the market to trade it for sustenance. Of course, the only thing that fixed that was a complete currency reset: http://en.wikipedia.org/wiki/New_Taiwan_dollar http://en.wikipedia.org/wiki/New_Taiwan_dollar I'm not sure if the US would really be better off with that.
  - fnid2 17y ago
    The same thing happened in Argentina and the same thing could happen in the U.S. Countless fiat currencies in history have experienced the same fate. The only solution I have ever seen in my research is to return to a commodity backed currency. If there are other solutions, I don't know of them, but would like to.
    - cynicalkane 17y ago
      Currencies backed by anything are a terrible idea. Most economists now believe that deflation caused by a gold-backed currency was one of the primary causes of the Great Depression. Imagine how much worse it will be with, say, an oil-backed currency. What would 2007 have done to our economy? Central fiat banking is the best known solution to the currency problem. This solution gets hated on by a lot of people who don't know any better, but think they do. The central requirement is that the currency-makers be independent of just about everyone, so that nobody can debase the integrity of the currency for political reasons. This angers everyone who thinks they know better than the central bank, but the anger of the average anti-establishment type is fickle and transient. It also angers the politicans, who are more dangerous--the examples of Argentina and Taiwan given here demonstrate not the dangers of fiat currencies, but rather that any currency should be kept far, far away from politicians.
      - Nwallins 17y ago
        > The central requirement is that the currency-makers be independent of just about everyone Thus ignoring our entire system of checks and balances. Do you not see the danger, here? > This angers everyone who thinks they know better than the central bank AKA, every market participant. > but rather that any currency should be kept far, far away from politicians. In what sense are central bankers not politicians? They are not elected, that's for sure. However, they exercise a large amount of control over our economy and very much influence official political action. In a sense, they are very much a separate executive branch of our political system.
        17y ago
- gcb 17y ago
  they would be pleased because loosing the funds for dragging their clientles company for a few more months would be replaced by having a profit faster.
barrkel 17y ago
I'm not trying to justify Aaron's economically illiterate conspiracy theorizing, but I would like to reiterate some of what I first emailed Aaron a few years ago when he first started talking about this (e.g. http://www.aaronsw.com/weblog/predatorstate http://www.aaronsw.com/weblog/predatorstate ). It's true to a degree that bankers don't aim for zero unemployment - i.e. implicitly they "let millions and millions of people be unemployed" - because to do so would create inflationary effects. Such an economy would be overheating. In an economy the size of the US, you would expect there to be a few million people unemployed at any given moment, simply because of turnover. But this is pretty basic stuff. See e.g.: http://www.investinganswers.com/term/unemployment-rate-809 http://www.investinganswers.com/term/unemployment-rate-809 http://en.wikipedia.org/wiki/NAIRU http://en.wikipedia.org/wiki/NAIRU It is however true that the Fed has a rather ridiculously overloaded mandate. It has basically one lever - the interest rate - with which it is supposed to target multiple goals - "maximum employment, stable prices, and moderate long-term interest rates". If you think about this for a moment, you'll realize it's not possible.
- scotty79 17y ago
  In my country equivalent of FED has only one goal: Keep inflation moderate and manageable. It works out pretty well.
  - pinstriped_dude 17y ago
    And "my country" would be _______ ?
    - scotty79 17y ago
      Poland I was a bit imprecise. Not equivalent of whole FED but equivalent of part of FED that makes decisions about monetary policy. http://en.wikipedia.org/wiki/Monetary_Policy_Council http://en.wikipedia.org/wiki/Monetary_Policy_Council In Poland monetary policy is understood as keeping prices stable not as attaining a set of objectives oriented towards the growth and stability of the economy.
  - 17y ago
shawndrost 17y ago
I agree. Although Aaron does offer support for the idea that Bernanke is choosing unemployment over inflation [1], he doesn't support the idea that the bankers are motivated by selfishness. (For example, they may be motivated by the fact that inflation would make the dollar an unattractive investment vehicle to other countries.) [1] Via quoting from the Economist: “Mr Bernanke does not want to risk a de-anchoring of inflation expectations. He is willing to accept 10% or greater unemployment and the resulting economic and political fall-out in order to avoid that risk.”
- scotty79 17y ago
  > ... he doesn't support the idea that the bankers are motivated by selfishness. ... Isn't that assumption always taken by default when considering nearly all market actions? That actors in the market are primarily motivated by selfish goals?
  - drunkpotato 17y ago
    Unless that assumption would lay the blame for a catastrophe on wealthy people and require changes that would make them less wealthy, in which case we cannot take selfishness for granted and have to assume their motivations are altruistic (if misguided). You really need to be up-to-date on modern market ideology.
    - yummyfajitas 17y ago
      Modern market ideology does tend to assume people controlling the government and various agencies (for instance, Bernake) are motivated by selfishness. It also assumes that the home-borrowers, politicians, realtors and bankers who created the housing bubble were motivated by selfishness, as were the hedge fund managers and bankers who helped pop the bubble.
      - eru 17y ago
        Those market actors also only have limited rationality (and not perfect foresight), and skewed incentives (-> principal agent problems). That needn't hinder one from constructing a conspiracy theory, though.
fnid2 17y ago
Just ask yourself this question: If I have $1M and I can decide between two options a) tomorrow my money is worth $2M b) tomorrow my money is worth $500k Which option would you choose? These bankers are human beings. They are naturally and understandably biased. Not only are they making these decisions for themselves, but they are making them for all their friends, family, and business associates -- all of whom are also millionaires and billionaires. I don't see it as much a conspiracy theory as an understanding of human nature. Originally, the fed was created by a secret committee of bankers on a remote island. It was rushed through congress quietly -- I know, because I read the decades old NY Times article covering the legislation at the Will Rogers Museum. Then, if you watch the recent Moore film, you'll see that the current bail out was voted down in congress, then secret meetings led by many of these bankers, GS and the like, prompted a revote and they rushed it through again -- when it passed. What Aaron said is pretty accurate. The bankers aren't looking out for main street and the jobs won't be back for a while. I've been trying to sell a house now for almost a year and many people want it and none of them can get a loan -- they've tried. They have jobs. They have income and the ability to repay the loan, but the banks just aren't giving out any money. Contrast that to 4 years ago when you didn't even have to have a job at all or verify income to get a million dollar loan -- I know, because it was my job to build information systems to help the subprime match makers connect home buyers with the banks who wanted to give them the loans. When I realized how dirty it all was -- I quit and started my own company and I'm very glad I did.
- byrneseyeview 17y ago
  But it's really more like his choices are: a) His $1 million earns ~3% interest and depreciates by 2% per year, or b) His $1 million earns ~4% interest and depreciates by 3% per year. You're arguing that these guys are promoting multi-trillion dollar swings in the country's wealth in order to earn a couple more basis points on their investments. If you're going to posit a Greedy Ben Bernanke, why is he being so slow and cautious? He can probably make, at most, 1% per year extra by manipulating the value of the dollar. Or he could take a suitcase full of cash.
  - yummyfajitas 17y ago
johnl 17y ago
I think the article is misdirected. A few years ago Japan increased their money supply by 30% to dig themselves out of their depression and it failed to work. So increasing the money supply I doubt will work any better here in the U.S. All those people now being foreclosed on should have had their loan applications disqualified. That responsibility falls to Washington to regulate, not the Federal Reserve, and the biggest scream that "you can't do that" would have been Washington, not the Federal Reserve I believe.

garply 17y ago

"It all worked great for a while, until one day they found they had too few pieces of scrip. Every couple had only a couple hours left and, having so little, they didn’t want to waste it." Wait... where did the old pieces of scrip go?

potatolicious 17y ago
Mr. and Mrs. Jones from down the street were saving them all in the hopes of getting rid of the kids for good?
philk 17y ago
He's getting the story a bit wrong. One or two of the couples will have a whole lot more scrip than the others that they've saved up.
jbert 17y ago
Some possibilities: Some are lost (you need to print money to replace torn/lost bills). Some people join the group without new scrip being added (money supply needs to grow with population). Some people de-facto left the group (kids grew up/they moved away) while holding scrip (people stuffed cash into their mattresses and forgot about it/died).

philk 17y ago

Keeping inflation under control isn't just something done to protect "wealthy bankers". The stability of the financial system as a whole is predicated upon the fact that money that I earn today will be worth something tomorrow.

codexon 17y ago
The stability of the financial system as a whole is predicated upon the fact that money that I earn today will be worth something tomorrow. The main purpose of currency is not the eternal accumulation of wealth. It is for liquidity: making bartering easier. If you want long-term stability, you can invest in gold or bonds. The reason why the US has planned inflation is to maintain liquidity when productivity rises or currency becomes horded. Economists such as Bernanke have learned from the Great Depression that rising deflation with the same productivity results in spiraling unemployment: ...a town full of shoe factories that closed during the Depression, leaving the community so poor that its children went barefoot. "I kept asking, Why didn't they just open the factories and make the kids shoes?" The reason is because companies know that consumers do not have money to spend so they fire people to preserve their appreciating currency. By doing nothing, these companies gain wealth while children walk without shoes. From a purely capitalist view, these companies have the right to do so. But would you really still hold that belief if all the farms shut down in this manner?
- philk 17y ago
  I'm advocating keeping inflation under control, not deflation. These are two entirely different things.
  - codexon 17y ago
    If you don't inflate the currency to a certain level when productivity increases due to technology or population growth (such as right now), it may result in a deflationary spiral. As Aaron said, it is a personal opinion of how much inflation you prefer. Do you prefer a relatively high inflation because you want to be employed? Or do you want a relatively low one so your assets appreciate or keep their value?

Tichy 17y ago

I wish there was more than that baby-sitting co-op to support those ideas. One story doesn't make a proof. Krugman brings it up all the time - so the hopes of the nation apparently rest on a single baby-sitting co-op. It's been too long since I thought about it, but back then I felt there were some aspects missing from the story. Must think about it again, but overall, it is a very limited experiment, hardly the same as a full economy. Also, doesn't the co-op story show that people can also create their own money? If lack of money was the problem, why don't they just exchange services and products (I mow your lawn and you clean my car)? Money is just a tool to make exchanges more efficient, but it's not that without money they become impossible. Of course, it is always appealing to blame everything on some rich elite.

davidw 17y ago
> I wish there was more than that baby-sitting co-op to support those ideas There are people who dedicate their careers to studying this stuff... and they have better examples. That's just a simplified example used to communicate the idea. > why don't they just exchange services and products What money makes possible is more complex exchanges. Say, I make a web site for some guy, who gives a book to some other guy, who gives some steaks to another guy, who gives some pasta sauce to another guy, who gives some milk to me. Without money, complex interactions necessary for a modern economy wouldn't be possible. > Of course, it is always appealing to blame everything on some rich elite. Actual economists generally don't do that. I wish if people wanted to post economics articles, they'd 1) do so on reddit, but if they really can't contain themselves, that at least they'd 2) post actual papers by real economists (and not just their opinion pieces) or something more than politicized handwaving.
- Tichy 17y ago
  "There are people who dedicate their careers to studying this stuff... and they have better examples." Yeah, but last I heard, not all of them agree with Keynes. Also, please point to some examples. I have heard Krugman repeat that baby-co-op several times now. You'd think he'd provide some other examples occasionally if they are so abundant. I know that money is a very useful tool, but it still seems to me that if only money was the problem, people could find workarounds. They could create their own money, if the state did not provide enough. The baby co-op did just that, it seems. It just takes a little more than one baby co-op to convince me that availability of money is the only factor that makes an economy work. It is however a very appealing theory to governments, because it justifies them printing more money. And as we see, it appeals to conspiracy theoreticians, too. My own view (without academic seal of approval) is that efficiency is the main factor that determines our well-being.

tsally 17y ago

I was having a discussion with my friend today on related topics and I couldn't figure out the answer to this question: where does the demand for talent in the finance industry come from? On a basic level, banks exist to facilitate loans. Someone with money gives it to the bank. The bank loans it out to someone who pays it back plus interest over a period of time. At the end, the bank and the original investor get some return on his/her money. The hardest part about this chain on events is picking people who wont default on their loans. But clearly the demand for talent in banking is much higher than that. These people get paid extraordinary amounts of money. So where is that demand coming from? What service is being provided by banks that warrants the compensation?

barrkel 17y ago
If you can structure derivatives and other products in such a way that you can sell them to other people for more than they're worth, then you come out ahead. The cleverer you are at structuring them, and the better able you are to model their valuation, the more you can profit from other folks' stupidity. Basically, mugging people with your brains rather than your brawn. As far as I understand it, beyond the basics of arbitrage, risk hedging and market making etc., investment banks are a zero-sum game - which after you add in the overheads and the profits, they destroy value.
- tsally 17y ago
  So increased skill leads to markets that are less efficient because of complicated bundles of investments/loans? Why are complicated investments/loans even legal? What's the given justification for them? My own train of thought lead in a similar direction as yours. What I'm really hoping for is the opinion of a hard core classical economist, because I feel like that's what I'm lacking. Are you familiar with such arguments? The free market determines salary, after all.
  - barry-cotter 17y ago
    No, the markets are still efficient. It's just that intellectual capital is devoted to playing the market that could be devoted to other more productive things. If you want to borrow money, hedge risk or issue new stock you can do all that but there are fat profits to be had from being the smartest guy on the market or the one who figured out one particular arbitrage opportunity before anyone else. Finance as waste: There's an arbitrage opportunity somewhere worth 100,000, and it will be picked up within a week of emerging. It is privately profitable to spend up to (100,000 - trading costs) to be the first to notice this, but the social benefits of it being discovered in 2 days rather than seven verge on zero.

coffeemug 17y ago

I know I only see a small part of a whole and I lack full perspective on things, but from where I'm standing the biggest challenge of every funded/profitable company I know is hiring good people fast enough. All the good people I know (even in non-tech fields, including finance and real estate) are employed. Even most pretty marginal people I know are employed (at salaries they aren't happy with, but certainly nothing unbearable). Perhaps the people that are losing jobs weren't that good at them to begin with? I realize that not everyone can be super-professional at what they do, and that's fine. But in my social circle (which includes all kinds of people from no skills/no education immigrants to highly specialized professionals in a variety of locations throughout the U.S.), nobody is really struggling. So what gives?

akgerber 17y ago
Do they have babies? Are any of them sick or old? Are there any low-skill Americans that don't have the tenacious work ethic of most immigrants?
orangecat 17y ago
That's actually a common effect of a recession. People with halfway decent jobs are much more likely to stay put, because they don't want to take the risk of switching to a new company and having it fail soon after.

Dlev_ 17y ago

...and this is why programmers should just program, vs. spreading some unsupported gutty-feely conjeture of an economic problem way too complex. Crap... anybody feels they can write about economy after misreading a couple lousy quotes from a guy who actively proposes inflation to any bleeping crisis around the globe.

natrius 17y ago
For what it's worth, I doubt Krugman would support eliminating the independence of the central bank. For those of you unfamiliar with Krugman's writing, Aaron's wrongness shouldn't lead to a wholesale condemnation of Krugman.
scotty79 17y ago
Are you saying that grease monkeys should be rarely seen, never heard, should stick to their crap and let real specialist to handle the money? After all they do so well.
- jbooth 17y ago
  I think it's more along the lines of "better to be thought a fool and remain silent, than to speak up and remove all doubt"
- mortenjorck 17y ago
  Would you like to see a code check-in by Paul Krugman? There's nothing wrong with expanding your horizons (I'm an armchair economist as well) but trying to write critically on a subject you don't really have the background to do so on is counterproductive.
  - scotty79 17y ago
    > Would you like to see a code check-in by Paul Krugman? I'd gladly welcomed code check-in from 8 year old if it nailed the problem.
gcb 17y ago
Q.E.D.

djcapelis 17y ago

I thought this was an excellent explanation, but I really don't appreciate the impeachment of the Fed. The author starts with a very nice explanation, but then goes to an extreme simplification of the complex process of balancing inflationary pressure with the rest of the economy. It's certainly fair to criticize the Fed, but to present their objectives as one-sided where inflation is always good is as equally foolish as the people calling for the gold standard again. Frankly the Fed is probably only doing their job if everyone is angry at them. Which seems to be the case, so I tend to think they're probably making a decent trade-off at this point, as hard as it is for both sides to stomach.

TomOfTTB 17y ago

The problem I have is his basic premise is flawed. He's using the dropping of the Gold Standard as proof that pumping money into the economy will create new jobs. But if you look at unemployment after 1933 (http://bit.ly/9k4xVu http://bit.ly/9k4xVu) you see it did dip but then started to rise again. Because eventually printing that money devalued the dollar. See the inflation charts here: http://bit.ly/aA5MXb http://bit.ly/aA5MXb So Roosevelt's plan failed (and it did fail) because the dollar's value dropped. So while more money was getting pumped in to the economy that was being negated by the assets of U.S. companies dropping in value. That drop caused business owners to stop hiring again. My understanding of the Obama administration's basic plan is to pump money into the economy while trying to control inflation. That way companies will get the benefit of the Government's money without having their own assets devalued (and Ideally that will cause them to start hiring again)

codexon 17y ago
It is also flawed for you to conclude that dropping the gold standard was the reason behind the unemployment. There were many things happening that could also have contributed to it. Here is a more complete graph of unemployment during the Great Depression where you will notice the unemployment levels never reaching the peak, and dropping back down with Roosevelt enacting even more policies and spending bills. http://www.inewscatcher.com/timages/50154f373744ae8603a614495378049c.jpg http://www.inewscatcher.com/timages/50154f373744ae8603a61449...
cynicalkane 17y ago
The chart you linked shows a cliff-dive from 1929 to 1933, followed by a more or less steady, small rise from 33 to 37. If the value of the currency is the main problem, I'm wondering why you are looking at the molehill instead of the mountain.

ankeshk 17y ago

The article makes wrong conclusions. Money doesn't run the economy. Confidence does. Economy is and has always been a confidence game. If people in the baby-sitting co-op are confident to find / earn more scrips in the future, they will spend their scrip today - even if its their last remaining scrip. But if they have no confidence of earning a scrip in the future, they will save it. But if everyone starts saving the scrip, exchange doesn't happen. And economy suffers. And because the economy suffers, people save more scrips. And it creates a downward spiral loop. On the other hand - if everyone gets over-confident and starts spending scrips they don't have, we see a bubble and then a bubble-burst. Which leads to some very bad consequences too. So the trick has always been: make sure the people remain confident about the future. But that they don't become over-confident.

known 17y ago

Wondering what % of Americans invest their money via stock markets?

dbz 17y ago

This would have been an amazing read if the author had included something more than a few quotes. Charts and Graphs and Statistics and Links Full of Research. I don't have the time to check up on this information myself (hence reading the article), but if the author had backed up all of his crazy theories with tangible evidence- this article would have been amazing. So to answer your question, Mr. Author, I will listen to you when you back up what you say with something tangible I can hold onto.

po 17y ago

An interesting atlantic article on a similar topic: http://www.theatlantic.com/magazine/archive/2010/04/my-inflation-nightmare/7995 http://www.theatlantic.com/magazine/archive/2010/04/my-infla... This writer also comes to the conclusion that inflation might be the way out.

ars 17y ago

If what he says is true, then the U.S. can print lots of money, pay off the national debt, and create jobs. Sounds like a win win. Probably it isn't though.

fexl 17y ago
Right, that would destroy the value of the property people have already earned and somehow managed to keep. That would be wrong. If you want jobs, let people accumulate capital and invest it how they like.
kowen 17y ago
Actually, if what he says is true (and I'm reading it correctly), then the Fed can print lots of money, lend it to the US Government so that they can pay off the national debt... but then the US Government owes the Fed, and we're kind of right where we started, except with a good deal more money in circulation.

cousin_it 17y ago

In Aaron's very first example with scrip, people would just start babysitting for half a piece. "Not enough dollars" you say?

3pt14159 17y ago
Came here to say that. The fact that the script was called "1 hr slots" distorts the mental exercise, and deceitfully leads the reader to a logical outcome that would not be the case.

swah 17y ago

Youtube: "Quants: The Alchemists of Wall Street."

scotty79 17y ago

I think there is some good insights in this. As I see it: FED + Banks is a system of issuing money. As economy grows it needs more money. FED decides how much money is needed and banks determine who needs it and gives it to them (getting healthy profit if they were right). Banks found a way to circumvent FED limits on making money. They made much more money then the FED intending them to make. That money was pushed mostly to real estate market driving prices of houses up so they became completely disassociated with their real value that they may present to anyone. It was kind of spotlight hyperinflation. Each dollar was worth lower and lower fraction of average home. Money was seeping to the rest of the economy but since due to technical advancements real value of economy was growing probably faster then FED expected that inflation was not noticeable in other markets. When credit is paid back the money that was created when credit was given is destroyed. When situation is stable and credits are paid back at predictable rate then banks just give new credit in place of old ones if they are needed and allowed by FED and everything goes just fine. But when credit defaults money all borrowed money not paid back yet is also destroyed. If huge quantity of credit default at once huge quantity of money is destroyed. What is more it's money that belongs to bank is seriously crippled by this. Not only he didn't earned interest rate but also he has less money to give new credits and create more money to profit out of. Defaulting on massive scale is something that current system of issuing money is not protected against. I'm not entirely sure what happens if bank needs to destroy more money for defaulting credits than it has. Bank obviously goes broke but is the rest of the money still destroyed or not? Since a lot of money was destroyed there is possibility that there is too little money now. As far as I know there really are no good ways to estimate how much money is needed (FED and equivalents in other countries do it by more or less educated guess). Maybe issuing more money could help, maybe that is not needed. It's not that obvious as post author has stated but it may be worth a try. Also grudge about wealthy is not very polite but it might be true that they fear inflation more then they should because of their wealth. Disclaimer: By 'creating money' I don't mean literally printing it, just borrowing many times over the money that bank has (or borrowed). By destroying money I don't mean burning it but just owing people who deposited money in the bank and not having cash to give them back their money.

tewks 17y ago

The anecdote about the babysitters and the lesson he's explaining is lifted directly from Krugman's Depression Economics. He mentions Krugman briefly later, in support of his argument, but doesn't properly cite the material in question or mention the fact that Krugman is in fact the one making the argument...

byrneseyeview 17y ago

This is basically the same article Aaron wrote early last year: http://www.aaronsw.com/weblog/depressions http://www.aaronsw.com/weblog/depressions The difference is that now he says it's all because Ben Bernanke wants to, um, profit on his dollar-denominated holdings. Which is sort of like claiming that the CEO of Exxon really believes in global warming, but he wants his next beach vacation to be .1 degrees warmer.

CulturalNgineer 17y ago

Great Post! He's on to vital fundamentals. It's helpful to look at civilizations as products of 'social energy'... countless decisions by individuals and groups. (A decision is an idea + an action). Money and credit are very imperfect technologies for the storage and allocation of this 'social energy' with an inherent bias in favor of any with the power to create it. So, since this 'creator' bias is inevitable the solution has to lie in democratizing (with important checks and balances) the process. This inherent bias also makes the Fed’s claim of independence ridiculous on its face and is a core problem with the monopoly of central banking. (This doesn’t suggest its elimination, only elimination of its monopoly). After all… who has the right to create and than allocate YOUR ’social energy’ without your input? That’s worse than taxation without representation… that’s potentially multi-generational enslavement without having an ounce of input into that allocation of your life’s energy. The thought process that rationalizes it for the ‘credit creator’ and those most closely benefitting is tied to a problem of scaling biological altruism but that’s a separate essay. I believe this inherent bias may suggest that more than one type of credit creation may be desirable. For example local currencies geared to local products and services to function alongside one or more global currencies… in an attempt to overcome a ‘proximity’ bias which goes along with a social bias. This approach can encourage asset-based-community-development and economic and financial resiliency while preserving the advantages of global trade and markets as well. Again, I’m not an economist but it seems to me these are ideas worth investigating. A brief post on some of this here: On Social Energy, Enterprise & Expanding the Technology of Money http://culturalengineer.blogspot.com/2010/01/on-social-energy-enterprise-expanding.html http://culturalengineer.blogspot.com/2010/01/on-social-energ... I also believe the Individually-controlled / Commons-dedicated Account facilitating the microtransaction in Commons focussed activities (politics and charity) is an essential piece of this puzzle. Opinion and influence are also aspects of ’social energy’ which money powerfully conveys(though we might wish it weren’t so). Current money technology inhibits the free flow and networking of this energy which distorts opinion markets. And, in fact, tends to further entrench the problem.

ckuehne 17y ago

See http://mises.org/Community/forums/t/7037.aspx http://mises.org/Community/forums/t/7037.aspx for a rebuttal of the baby sitting co-op story.

dhume 17y ago
Their attempts to reconcile their love of the gold standard with their kvetching about price fixing are hilarious.

mjw 17y ago

For one thing, he completely ignores the fact that the US economy doesn't exist in a vacuum. Inflation can have a big affect on exchange rates, importers and exporters, the attitude of people like China to all the USD debt they own, etc etc.

nkassis 17y ago

It seems like there is a lot of contradiction in how the Fed/Gov are trying to restore the Banking system. On the one side they are telling banks to keep more cash in reserve. (This is a worldwide phenomena). On the other side they are asking them to ease credit a complete contradiction to keeping more reserve. At the moment, banks are building up stock with cheap money from the Fed (at least that what I think they are doing) and credit should ease once they do so (as I believe it is doing currently). Inflation in this scheme would not be a factor because the money is being soaked up by banks as reserve. At least this is what I'm getting from all the CNBC/Bloomberg watching ;p

lallysingh 17y ago
Given credit isn't the only thing that affects the reserve amount. For example, the bank buying securities themselves.

wdewind 17y ago

This just dances around the edges of the key point: the gap between rich and poor. It's not that there isn't ENOUGH money, it's WHERE the money is. Of course printing new money, and redistributing actual physical units of money are kind of similar things to do (they both equate to wealth redistribution), so while I agree with a lot of what Aaron says, he's only CLOSE to the issue at hand, not actually hitting it on the head. If you want a TLDR version of the economic crisis, like Aaron attempts here, you really want to just look at the increasing divide between rich and poor in the country (aka the unbalanced distribution of resources = unbalanced distribution of power = system susceptible to corruption, greed etc = incentives lined up to benefit small portions of society not large = economic failure.)

gaius 17y ago
I can't believe I'm reading this here of all places. http://www.paulgraham.com/gap.html http://www.paulgraham.com/gap.html
- wdewind 17y ago
  I'm not talking about bankers or CEOs being paid a lot of money and whether or not it's too much. The argument there isn't about whether or not their actions generate wealth/value, it's just about how much. A basketball player doesn't take wealth away from anyone, he just prevents others from earning it in his spot. What greatly exacerbated the economic crisis were decisions made for small amounts of people wall street that impacted large amounts of people everywhere. Many of these decisions were corrupt (ie they did more than prevent others from making wealth, they actually took it out of their pockets), but even in the times when they could be simply considered "competitive," the ability to make such decisions that impact such large portions of the population should be limited greatly. This is a systemic problem, not a person problem. The quick response to that one is that you need a system of incentives that get people to work hard enough, and part of that system is having positions like that where people can make decisions like that. I disagree, and actually take something like the NBA as an example: basketball players accumulate great deals of wealth (monetary and otherwise), enough so to keep people training at the peak of their abilities. Yet I can't remember the last time someone accused Michael Jordan of destroying jobs or the economy...

johngalt 17y ago

What substantiative actions are being taken by the reserve? To me it appears they are gunning for inflation with the low rates. If I have $billions then I can invest my money in a way that hedges against inflation. Conversely if I make $20k/year I can't insist that my employer pay me in a fixed number of long oil positions. So it's not true that inflation always hurts the bourgeoisie and helps the proletariat. It is true that inflation hurts a lender and helps a debtor. If inflation is at 10% and your mortgage at 6% then you're effectively making a 4% return on debt. Conversely the bank is losing money because the money repaid is worth so much less than the money lent. Bonus points for anyone that figures out why the banks aren't lending As for Bernanke/cronies motivations; the federal government would like inflation to be as high as possible without risking collapse. So if "money for their masters" was the Fed's goal they will keep gunning for sustainable inflation. Bernanke/cronies can hedge against it, and the largest debtor in the world would prefer to pay a low interest rate.

mmt 17y ago
Conversely the bank is losing money because the money repaid is worth so much less than the money lent. Bonus points for anyone that figures out why the banks aren't lending Except that the bank isn't really lending its own money. It lends its depositors' money, amplified through fractional reserve banking. They can also borrow from the Fed, making their own bundle on inflation, as a debtor.