7 ms·

This is standard neo Keynesianism (neo because nowadays governments just roll over the debt while Keynes advocated repayment in full at the end of the recession

by lzw 16y ago

This is standard neo Keynesianism (neo because nowadays governments just roll over the debt while Keynes advocated repayment in full at the end of the recession.) The counter argument to it is very simple: this spending is spending money that comes out of the economy, and taking money out of the economy hurts economic growth. Further, many argue that the spending produces less froth than the money destroys when taken out- lower profits at the personal or corporate level mean less investment in growth via consumer spending or business expansion. Further we have just witnessed a perfect implementation of this theory- after the dot com crash, government lowered interest rates below inflation, making free money and spent massively running up record deficits. It managed to spark a housing boom and a lot of consumer spending... But the situation we find ourselves in now is simply the hangover from that party. If we get drunk again, it isn't going to banish hangovers and each time we do it, it gets worse while the body gets closer to death.

dasil003 16y ago
Medical analogies for financial markets are pretty tenuous, but I find myself in agreement. A big issue from my perspective is that everyone is ringing their hands about home values and trying to prop up the deflating bubble. As someone with aspirations to own a home, this is infuriating. I can't afford a home, and neither could all the people who bought them. They need to let the prices fall to where people can actually afford them instead of trying to save the speculative value which we already know was based on hot air.
- walkon 16y ago
  That was (and is) the ironic thing about all the government sponsored home ownership programs and legislation. They pumped up demand at an unreasonable rate, causing ever increasing prices, which made it harder to afford a house, which prompted further government stimulation...an endless loop, at least until the fiat charade ends.
  - anigbrowl 16y ago
    So why didn't the banks try to throttle the supply? It's funny, I don't recall any CEOs complaining about the economy being driven off a cliff in the runup to the bust. On the contrary, I was astonished at their readiness to give money away. Don't you recall the endless stream of refinancing commercials on TV? shows like 'flip that house'? The way everyone and their dog suddenly seemed eager to have a realtor's license? The guy at my local pizza shop had his realtor business cards on the counter next to the delivery menus. Edit: I see the truth is uncomfortable for some people. But the fact is that government promotion of home ownership is one thing, and instant approval of jumbo loans with 0% down are quite another. I got burned in a property boom when I was about 20 and this time I decided to stay out of the market.
- matwood 16y ago
  The second option, and the one the gov. appears to be attempting, is to keep home prices steady and eventually let inflation catch up. This stinks for people who want to buy because they have to wait, but looks good for the gov. in charge. I'm with you and think they should just let prices fall. I can't find the video right now, but at one point President Bush was asked why he wasn't doing anything to prop up home prices. He responded that it's giving people who were priced out the opportunity to buy so he didn't see the need to do anything. His statement was early on in the recession and eventually he was pressed to do something though.
  - anigbrowl 16y ago
    The government hasn't been propping up prices, and the homebuyer's tax credit expired last April. If you talk to people in the real estate biz (I too have been looking for a house), you'll find that banks have about twice as many properties sitting empty as they do out in the market, and they are trickling them out because if they put them all on the market at once prices would crater (which would incidentally trigger another wave of repossessions). According to the banks, this is the tgovernment's fault, because the government is not throwing any money at them to invest in the future value of homes: http://www.housingwire.com/2010/09/27/bofa-analysts-call-for-ppip-2-0-to-reduce-shadow-inventory http://www.housingwire.com/2010/09/27/bofa-analysts-call-for... If it's the government propping up house prices, kidly explain why prices are stable when there are ~300,000 homes in various stages of foreclosure: http://www.realtytrac.com/content/press-releases/foreclosure-activity-increases-4-percent-in-august-6041 http://www.realtytrac.com/content/press-releases/foreclosure... Seriously, what information are you basing these conclusions on?
    - matwood 16y ago
      If you talk to people in the real estate biz (I too have been looking for a house), you'll find that banks have about twice as many properties sitting empty as they do out in the market, and they are trickling them out because if they put them all on the market at once prices would crater (which would incidentally trigger another wave of repossessions). That right there should tell you that prices are still artificially high. In this case banks are controlling the market to hold them up. By the way, putting them all on the market would not necessarily lead to another wave of foreclosures. If it's the government propping up house prices, kidly explain why prices are stable when there are ~300,000 homes in various stages of foreclosure: Foreclosures are primarily driven by the owners ability to make their mortgage payment. Current house prices have little to do with that ability. A lower price could prevent the owner from being able to sell, but that assumes there would have been buyers at the higher price. Seriously, what information are you basing these conclusions on? Prices have come down, but the government has done it's best to hold interest rates artificially low so that people could refi and possibly get out of the idiotic loans they took on. These low rates have also helped those with money buy houses at the still over priced prices thus propping them up. There are also government sponsored loan modifications that help to keep people in homes that they can't afford. House prices are 'sticky' on the way down by nature, but the government has helped make them stickier through all the help they have been giving. Historically house prices have been set by the average income of a given area (and in general prices raised along with inflation like salaries)[1]. This is because people buy a house based on the monthly payment that they can afford. Low interest rates lead to higher priced homes and and vice versa (as an aside the best time to buy a house would be when irates are sky high and likely to fall because the absolute price of the house would have to be lower for anyone to afford it), but what stays roughly the same is the payment. What happened during the bubble is that money was so cheap that house prices ran way out in front of most peoples ability to afford a house without taking on a crazy loan. Even in areas where prices have fallen, if you compare prices to average income you'll see that many houses are still way beyond the average persons ability to afford them. In addition to the supply situation you mentioned, if you also add in that many people have been permanently put out of the market with banks now requiring down payments, better credit scores, and conventional loans the demand side of the equation has also fallen (and may never return to those levels). [1] Like most rules there are exceptions, in particular location. An area where many rich people buy second homes for vacation purposes may not reflect house price as a function of average salary for the area. Common sense will tell you if you're in one of those neighborhoods versus one where the people living there work nearby.
anigbrowl 16y ago
We agree on the basic economics, ie repayment in full (which is also what Wolf advocates). Further we have just witnessed a perfect implementation of this theory- after the dot com crash, government lowered interest rates below inflation, making free money and spent massively running up record deficits. Ah...see I have a problem with this - with luck we can disagree without falling into partisan bickering. 'Government' is not this indifferent entity that does whatever it wants, it's people implementing policies, and I think you're glossing over the details. So we had a small notional surplus at the end of the last decade, and in 2000 we got a change of administration. We agree (I hope) that the seeds of the dot-com bust were already rooted; I don't blame any political figures in particular for that. Greenspan warned about 'irrational exuberance' etc., and pretty much everyone I knew told him to shut and stop being a party pooper. Sometimes people just have to learn the hard way. But the new administration came in and gave people a tax cut, on the principle that if the treasury was running a surplus then it should be giving the American people's money to them (the same tax cuts which are supposed to be expiring soon). Just so we're on the same page, when I refer to EGGTRA I'm talking about the 2001 tax cut and by JGGTRA I mean the 2003 (post dot-com bust) one: http://en.wikipedia.org/wiki/Economic_Growth_and_Tax_Relief_Reconciliation_Act_of_2001 http://en.wikipedia.org/wiki/Economic_Growth_and_Tax_Relief_... http://en.wikipedia.org/wiki/Jobs_and_Growth_Tax_Relief_Reconciliation_Act_of_2003 http://en.wikipedia.org/wiki/Jobs_and_Growth_Tax_Relief_Reco... Now, I say you're 'glossing over' things with your analysis, because while there are policy justifications for both cutting taxes to stimulate growth and paying off debt (less lovely cash in your pocket, but less long-term interest accruing while you sleep), it seems rather disingenuous to complain about government failing to pay off the debt and ignore the fact that the administration of the day opted to cut taxes and make up any shortfall with borrowing. Even the budget director at the time, Paul O'Neil, thought this was a dreadful idea, and by 2002 was expressing his alarm at the ballooning deficit, allegedly causing VP Cheney to respond with the argument that "Reagan proved deficits don't matter." O'Neil departed the White House by the end of that year. Now, several people have argued that the Clinton 'surplus' was no such thing, and amounted to little more than an accounting trick (for example http://www.craigsteiner.us/articles/16 http://www.craigsteiner.us/articles/16). There is some merit to this argument, but it is not disputed the the rate of increase in the national debt slowed down during that period, nor that it was ~$5.8t when the White House changed hands in early 2001. After that, deficits ballooned and the debt swelled considerably. A lot of people (like me) expressed the belief that cutting taxes like this was a terrible idea - a justifiable war of the kind the US undertook after 9/11 is one of the few occasions where you can persuade people to tolerate higher taxes, because a situation of genuine military necessity exists. It would have been better (in my view) to either use available revenue to slow the rate of deficit growth, or at least to pay for the Afghan war. Come 2003, and the administration launched a second war and another tax cut. At the time, objections to this were generally dismissed as loony leftism or sour grapes or lack of patriotism. I don't want to rehash all of those political issues, but from an economic point of view war is expensive and I haven't seen evidence to suggest that the tax cuts significantly boosted revenue - in fact, I agree with you that low, low interest rates had more to do with the asset bubble which followed. Now those tax cuts are set to expire, and because one party has suggested that perhaps it would be sensible to extend them for the great majority of people who earn under $250k/year (and that the increase on those making above would still leave them paying less than in Reagan era), the other party has taken its ball and gone home - rather than roll them back partially for now and fully later, they've instead committed to making them permanent, which means a ~$4t hole in projected revenues, right around the time we are entering a demographic retirement bulge, and a good deal of our infrastructure is in very poor shape. It's all very well to wag the finger and say it's time to lay off the fiscal moonshine, but I find it really hard to take seriously lectures about debt which blithely a policy of repeatedly substituting borrowing for revenue.

by lzw 16y ago

dasil003 16y ago

Medical analogies for financial markets are pretty tenuous, but I find myself in agreement. A big issue from my perspective is that everyone is ringing their hands about home values and trying to prop up the deflating bubble. As someone with aspirations to own a home, this is infuriating. I can't afford a home, and neither could all the people who bought them. They need to let the prices fall to where people can actually afford them instead of trying to save the speculative value which we already know was based on hot air.

walkon 16y ago
That was (and is) the ironic thing about all the government sponsored home ownership programs and legislation. They pumped up demand at an unreasonable rate, causing ever increasing prices, which made it harder to afford a house, which prompted further government stimulation...an endless loop, at least until the fiat charade ends.
- anigbrowl 16y ago
  So why didn't the banks try to throttle the supply? It's funny, I don't recall any CEOs complaining about the economy being driven off a cliff in the runup to the bust. On the contrary, I was astonished at their readiness to give money away. Don't you recall the endless stream of refinancing commercials on TV? shows like 'flip that house'? The way everyone and their dog suddenly seemed eager to have a realtor's license? The guy at my local pizza shop had his realtor business cards on the counter next to the delivery menus. Edit: I see the truth is uncomfortable for some people. But the fact is that government promotion of home ownership is one thing, and instant approval of jumbo loans with 0% down are quite another. I got burned in a property boom when I was about 20 and this time I decided to stay out of the market.
matwood 16y ago
The second option, and the one the gov. appears to be attempting, is to keep home prices steady and eventually let inflation catch up. This stinks for people who want to buy because they have to wait, but looks good for the gov. in charge. I'm with you and think they should just let prices fall. I can't find the video right now, but at one point President Bush was asked why he wasn't doing anything to prop up home prices. He responded that it's giving people who were priced out the opportunity to buy so he didn't see the need to do anything. His statement was early on in the recession and eventually he was pressed to do something though.
- anigbrowl 16y ago
  The government hasn't been propping up prices, and the homebuyer's tax credit expired last April. If you talk to people in the real estate biz (I too have been looking for a house), you'll find that banks have about twice as many properties sitting empty as they do out in the market, and they are trickling them out because if they put them all on the market at once prices would crater (which would incidentally trigger another wave of repossessions). According to the banks, this is the tgovernment's fault, because the government is not throwing any money at them to invest in the future value of homes: http://www.housingwire.com/2010/09/27/bofa-analysts-call-for-ppip-2-0-to-reduce-shadow-inventory http://www.housingwire.com/2010/09/27/bofa-analysts-call-for... If it's the government propping up house prices, kidly explain why prices are stable when there are ~300,000 homes in various stages of foreclosure: http://www.realtytrac.com/content/press-releases/foreclosure-activity-increases-4-percent-in-august-6041 http://www.realtytrac.com/content/press-releases/foreclosure... Seriously, what information are you basing these conclusions on?
  - matwood 16y ago
    If you talk to people in the real estate biz (I too have been looking for a house), you'll find that banks have about twice as many properties sitting empty as they do out in the market, and they are trickling them out because if they put them all on the market at once prices would crater (which would incidentally trigger another wave of repossessions). That right there should tell you that prices are still artificially high. In this case banks are controlling the market to hold them up. By the way, putting them all on the market would not necessarily lead to another wave of foreclosures. If it's the government propping up house prices, kidly explain why prices are stable when there are ~300,000 homes in various stages of foreclosure: Foreclosures are primarily driven by the owners ability to make their mortgage payment. Current house prices have little to do with that ability. A lower price could prevent the owner from being able to sell, but that assumes there would have been buyers at the higher price. Seriously, what information are you basing these conclusions on? Prices have come down, but the government has done it's best to hold interest rates artificially low so that people could refi and possibly get out of the idiotic loans they took on. These low rates have also helped those with money buy houses at the still over priced prices thus propping them up. There are also government sponsored loan modifications that help to keep people in homes that they can't afford. House prices are 'sticky' on the way down by nature, but the government has helped make them stickier through all the help they have been giving. Historically house prices have been set by the average income of a given area (and in general prices raised along with inflation like salaries)[1]. This is because people buy a house based on the monthly payment that they can afford. Low interest rates lead to higher priced homes and and vice versa (as an aside the best time to buy a house would be when irates are sky high and likely to fall because the absolute price of the house would have to be lower for anyone to afford it), but what stays roughly the same is the payment. What happened during the bubble is that money was so cheap that house prices ran way out in front of most peoples ability to afford a house without taking on a crazy loan. Even in areas where prices have fallen, if you compare prices to average income you'll see that many houses are still way beyond the average persons ability to afford them. In addition to the supply situation you mentioned, if you also add in that many people have been permanently put out of the market with banks now requiring down payments, better credit scores, and conventional loans the demand side of the equation has also fallen (and may never return to those levels). [1] Like most rules there are exceptions, in particular location. An area where many rich people buy second homes for vacation purposes may not reflect house price as a function of average salary for the area. Common sense will tell you if you're in one of those neighborhoods versus one where the people living there work nearby.

anigbrowl 16y ago

We agree on the basic economics, ie repayment in full (which is also what Wolf advocates). Further we have just witnessed a perfect implementation of this theory- after the dot com crash, government lowered interest rates below inflation, making free money and spent massively running up record deficits. Ah...see I have a problem with this - with luck we can disagree without falling into partisan bickering. 'Government' is not this indifferent entity that does whatever it wants, it's people implementing policies, and I think you're glossing over the details. So we had a small notional surplus at the end of the last decade, and in 2000 we got a change of administration. We agree (I hope) that the seeds of the dot-com bust were already rooted; I don't blame any political figures in particular for that. Greenspan warned about 'irrational exuberance' etc., and pretty much everyone I knew told him to shut and stop being a party pooper. Sometimes people just have to learn the hard way. But the new administration came in and gave people a tax cut, on the principle that if the treasury was running a surplus then it should be giving the American people's money to them (the same tax cuts which are supposed to be expiring soon). Just so we're on the same page, when I refer to EGGTRA I'm talking about the 2001 tax cut and by JGGTRA I mean the 2003 (post dot-com bust) one: http://en.wikipedia.org/wiki/Economic_Growth_and_Tax_Relief_Reconciliation_Act_of_2001 http://en.wikipedia.org/wiki/Economic_Growth_and_Tax_Relief_... http://en.wikipedia.org/wiki/Jobs_and_Growth_Tax_Relief_Reconciliation_Act_of_2003 http://en.wikipedia.org/wiki/Jobs_and_Growth_Tax_Relief_Reco... Now, I say you're 'glossing over' things with your analysis, because while there are policy justifications for both cutting taxes to stimulate growth and paying off debt (less lovely cash in your pocket, but less long-term interest accruing while you sleep), it seems rather disingenuous to complain about government failing to pay off the debt and ignore the fact that the administration of the day opted to cut taxes and make up any shortfall with borrowing. Even the budget director at the time, Paul O'Neil, thought this was a dreadful idea, and by 2002 was expressing his alarm at the ballooning deficit, allegedly causing VP Cheney to respond with the argument that "Reagan proved deficits don't matter." O'Neil departed the White House by the end of that year. Now, several people have argued that the Clinton 'surplus' was no such thing, and amounted to little more than an accounting trick (for example http://www.craigsteiner.us/articles/16 http://www.craigsteiner.us/articles/16). There is some merit to this argument, but it is not disputed the the rate of increase in the national debt slowed down during that period, nor that it was ~$5.8t when the White House changed hands in early 2001. After that, deficits ballooned and the debt swelled considerably. A lot of people (like me) expressed the belief that cutting taxes like this was a terrible idea - a justifiable war of the kind the US undertook after 9/11 is one of the few occasions where you can persuade people to tolerate higher taxes, because a situation of genuine military necessity exists. It would have been better (in my view) to either use available revenue to slow the rate of deficit growth, or at least to pay for the Afghan war. Come 2003, and the administration launched a second war and another tax cut. At the time, objections to this were generally dismissed as loony leftism or sour grapes or lack of patriotism. I don't want to rehash all of those political issues, but from an economic point of view war is expensive and I haven't seen evidence to suggest that the tax cuts significantly boosted revenue - in fact, I agree with you that low, low interest rates had more to do with the asset bubble which followed. Now those tax cuts are set to expire, and because one party has suggested that perhaps it would be sensible to extend them for the great majority of people who earn under $250k/year (and that the increase on those making above would still leave them paying less than in Reagan era), the other party has taken its ball and gone home - rather than roll them back partially for now and fully later, they've instead committed to making them permanent, which means a ~$4t hole in projected revenues, right around the time we are entering a demographic retirement bulge, and a good deal of our infrastructure is in very poor shape. It's all very well to wag the finger and say it's time to lay off the fiscal moonshine, but I find it really hard to take seriously lectures about debt which blithely a policy of repeatedly substituting borrowing for revenue.