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The cold war continues (going with the missile crisis line), and it is thus the Fed is preparing for QE3. I agree strongly with another comment: Sequoia was ri

The cold war continues (going with the missile crisis line), and it is thus the Fed is preparing for QE3. I agree strongly with another comment: Sequoia was right, and then some. Nothing actually got better, it's just that people think it did. A moment of respite from the turmoil is all the last two or three years represents. That moment of respite cost between $8 and $15 trillion depending on what you're counting (total deficits + Fed bailouts). In fact, things are far worse today than they were at the height of the crisis, as we've loaded up on $6 or so trillion more in public debt we can never pay back. We've added about $400 to $500 billion more in student loan debt, and a few million college graduates are sitting on the sidelines without jobs and experience, and we've got millions more living on food stamps without jobs. The only thing separating our system from absolute implosion is the global reserve currency that we're currently massively abusing at our leisure. If mortgage rates had to rise to their natural rates (absent Fed manipulation holding down both long term and short term rates), housing would quickly plunge another 1/3, and that alone would rupture the entire financial system and bring it to its knees. The truth is, we look a lot like the imploding EU zone across the Federal and State levels. Except we've got the dollar, for now.

paulsutter 14y ago
You're right, but we can be part of the solution. As Max Levchin says, the long term question is not whether the US is printing too much or too little - it's whether we (that's us, here, reading Hacker News) can focus on real innovation, which causes real productivity improvements, and thus real growth. That's the best way out and it rests on us.
- cynicalkane 14y ago
  The Republicans were saying the same sort of stuff in 1929. America learned, at great cost, that macroeconomics matters. We'd do well to remember those lessons.
  - paulsutter 14y ago
    Macroeconomics matters enormously. The financial crisis was caused by illusory growth from the ponzi innovation of a bonus culture + fraudulent ratings agencies. Real growth comes from technological innovation. That has been equally true in 1929, 1933, 2006, 2008, and 2012. Go read Wealth of Nations (published in 1776). And I invite you to come out here to Silicon Valley. EDIT: can't reply / too deep. I've never read Ron Paul newsletters, and I'd love to hear you explain how CDOs of highly correlated assets deserve AAA ratings. Love even more to hear how you think macroeconomic policy caused the shock.
    - cynicalkane 14y ago
      That's not macroeconomics, that's classical economics. You do not get macroeconomics by applying microeconomics to everything at once. Macroeconomics is concerned with things like money, interest, employment, and aggregate supply+demand of whole economies. Macroeconomics became popular once it became clear the the classical theories couldn't remotely explain the Great Depression. You don't get a 25% aggregate shock because people stopped innovating or a production glut or "illusory growth" or whatever the Internet libertarian crowd feels like blaming today. In the classical theory, you don't get people starving because bankers misjudged their balanced sheets because classical theory is not capable of explaining how the two are connected.
      - tsunamifury 14y ago
        You really should read Wealth of Nations if you haven't. There are several macroeconomic trends that he retells from 300, 500 and almost 1000 years ago.
  - hollerith 14y ago
    Macroeconomics and the health of the financial system matter, but they no longer matter as much as they did in 1929. The reason a meltdown of the financial system is a danger to the average man or woman is that he or she depends on goods and services whose manufacture or provision are coordinated by the financial system. But unlike the situation in 1929, there is now another powerful way of coordinating activities that most people in the developed world are, uh, plugged in to which could take over a significant fraction of the coordination that used to be done by the financial system (although the transition to new ways of coordination can of course be very painful). I would also point out that the typical elite journalist is a woman living in NYC married to a financial professional, which will tend to cause the reporting on the consequences of any serious threat to the livelihoods of financial professionals to be exaggerated. (I am indebted to Penelope Trunk, who used to live in NYC, for this insight.)
herdrick 14y ago
between $8 and $15 trillion... (total deficits + Fed bailouts) I was thinking that we got lucky and TARP ended up not costing much (not counting 2nd order effects pushed into the future). Also, I'm seeing 'only' about $5.3 trillion of new debt from 2008 to now: http://www.usgovernmentdebt.us/federal_deficit_chart.html http://www.usgovernmentdebt.us/federal_deficit_chart.html
- ferringham 14y ago
  The problem with Government numbers is that they are cooked. Example: The Government numbers will tell you that deflation is a threat. Can you remember a single year in the past decade when your health insurance, gas, food or other neccessities went down in price? No way! They always go up! What the Government does is cooking the CPI (inflation) number by mixing neccessities with gadgets and telling you that you're better off with 100% more expensive healthcare for the past decade because TV sets are 50% cheaper. That's not true economics. That's why start-ups like this: http://www.shadowstats.com/ http://www.shadowstats.com/ make a killing. Because no serious investor trusts Government numbers. Another great example: Did you know that if we counted unemployment rate as we did during Reagan years it would be closer to 20% now? And what is the official number they just reported? 8.2% ? That's wishful thinking and fantasy land, not the unemployment number. They change the way they calculate data hoping people will trust it more than their own eyes. The truth is we have been getting poorer every year for decades now.
- muzz 14y ago
  and this affects startups how?
  - adventureful 14y ago
    The Fed fires up funding bubbles by encouraging risk. It pushes capital out of low risk paper and into high risk speculation (startups, stocks, whatever). It's why we saw incredible funding bubbles in the late 1990s, the mid 2000's, and just recently, all timed very well to the Fed encouraging risk booms through artificially low rates and other similar manipulation. Understanding how the system functions, helps you understand the funding environment, which benefits anybody trying to work on a startup that has to concern themselves with financing. It's not ideal to overly focus on this of course, but it matters.
photon137 14y ago
cost between $8 and $15 trillion depending on what you're counting (total deficits + Fed bailouts) I always cringe when somebody calls the Fed's actions bailouts. These are asset purchases by the Fed versus injecting cash into the monetary system. The Fed will have to unwind these at some point in the future. But essentially, what the Fed has done is that it has made a market for securities nobody was willing to make a market for. Net "bailout" performed by the Fed: zero. Actually that's wrong - the Fed added around $78 billion worth of profit via its open market operations to the Treasury last year (it's obliged to do so after deducting servicing costs/salaries etc.) Pray, what are the "natural" mortgage rates you're talking about - ie you mean rates absent Fed intervention (via Operation Twist)? There wouldn't be a mortgage rates market in existence if the Fed were not there to make one! And no, you're not imploding like the EU. Their banks are woefully undercapitalized and can't lend to the corporate sector. Plus, they have one monetary policy and 17 different fiscal policies - that simply doesn't work! Your banks and your corporate sector are flush with money. It's your consumers who are broke. Even then, they aren't broke - they are just not making long-term investments(ie purchasing durable goods) as credit has dried up and there is no good quality collateral left in the market against which people are willing to lend. Homes used to be the collateral earlier on - but that's no longer the case. That's what the Fed is trying to do - lower mortgage rates (ie assume credit risk on your behalf - it can do so because it can print money - inflation is not a risk in this economy) to enable credit to flow in the economy so that the consumer can start becoming active again. Deleveraging is painful - but it's not the end of the world as you've portrayed it. Edit: fixed typos
- adventureful 14y ago
  The Fed's actions were extreme bailouts. They've been busy bailing out almost everybody: home owners, Wall Street, Europe, the Treasury, the states. Net bailouts performed by the Fed: trillions http://www.bloomberg.com/news/2011-11-28/secret-fed-loans-undisclosed-to-congress-gave-banks-13-billion-in-income.html http://www.bloomberg.com/news/2011-11-28/secret-fed-loans-un... They gave banks and others at least $7.7 trillion and there is zero proof that it was paid back. Citi had at least a $1 trillion blackhole on their balance sheet, and there is no possibility they were able to fill it. Bank of America was in the same situation, and their profits could never fill that. The Fed took over trillions in toxic waste mortgages to bail out the banks, and most of those 'assets' still sit on the Fed's balance sheet. I'm sure the money supply continuing to skyrocket means the Fed isn't bailing anybody out. Surely those trillions aren't going toward bailouts for the government, Wall St, big banks, or the housing market. http://www.shadowstats.com/charts/monetary-base-money-supply http://www.shadowstats.com/charts/monetary-base-money-supply The Fed is currently bailing out the US Government by buying 95% of all long term govt paper. The US Treasury has been bailing out California among other states, by using the Fed money. The US Government is completely insolvent without the Fed bailouts, it would have to slash 1/3 of all spending just to correct the imbalances in the system if the Fed stopped the QE programs. The Fed is bailing out home owners, investors, realtors 24/7 using trillions in QE to push rates lower to prop up the housing market. The Fed is pushing risk into equities and out of paper by driving rates down, which is providing a bailout to big institutional investors by keeping the stock market artificially high. It's a bailout bonanza. Natural mortgage rates would be the mortgage rates you'd get when you remove all Federal Reserve manipulation of short and long term rates. That is, when they stop all QE / monetization programs that are designed to specifically hold rates down, thus we have sub 4% 30 year mortgage rates. It would be something closer to a historical norm, 6% to 8% would be a lot closer to normal based on the last 50 years, than 4%, for example. But if you know anything about any of this, you already know that.
leptons 14y ago
" $6 or so trillion more in public debt we can never pay back" This statement makes all your other statements wreak of sensationalist bullshit.
- adventureful 14y ago
  Not at all, it's accurate. We're going to stack another $5 trillion on in the next four years. Since when are facts sensationalist bullshit? From this day four years ago to now, we've added roughly $5.89 trillion to the public debt ($9.869t to $15.765t), and that doesn't count all of our liabilities, that's merely a fraction of it represented by the so called "public debt." I'd love to see the math on how you propose we ever pay back the $11 trillion in new public debt added from 2008 to 2016/17. Clinton ran the biggest surplus we've had in a very long time ($236b), and it was fake, because it didn't include the money borrowed from inbound Social Security money for the non-existent trust. If we could magically run that Clinton surplus rate from 2017 to 2102 (about 85 years), we'd finally pay off the $20 trillion in public debt we're going to have four years from now. That assumes we never once slip up again, and constantly pay $236 billion per year strictly toward only the public debt. So, a mere 100 years of record surplus' ought to do the trick.
  - snowwrestler 14y ago
    You do not need to run a surplus to pay back government debt. Debt payments are and will be included in the regular annual budget of the U.S. government. In fact an annual surplus creates additional government debt because the only place the U.S. federal government can store profit is in U.S. Treasury bonds (see: the Social Security "trust fund"). This is why there was so much interest in refunding the surplus to taxpayers. Now is a great time for the U.S. to be borrowing, because everyone wants to give us their money. Treasury yields continue to hover well below their historical averages. Even at long-run average rates of economic growth and inflation, we will stay ahead of today's Treasury yields and afford our payments. So: your numbers might be accurate (I don't have the time to check them), but your assumption that we can never pay our debt is flawed.
guelo 14y ago
Calm down, the US government can never run out of dollars, they own the printing presses. I am not being sarcastic.
raheemm 14y ago
The history of 1929 crash has shown that stimulus is the best medicine for financial turmoil. Austerity was the first medicine prescribed by president Hoover and it failed. FDR initially provided stimulus but he had to abandon those due to political sentiments similar to the ones you echo. What finally ended the depression is the stimulus from the overwhelming spending on WW2. Whether stimulus triggered by war or via the fed, its the only way to resolve financial turmoil. The time to address deficit/debt is when the economy is strong, as was done in the mid to late 90s.
- gaius 14y ago
  Stimulus has to go on stuff that has lasting value greater than the value of the stimulus. That is the mistake that Gordon Brown made - you can't just slosh money around. The WW2 stimulus worked because when the dust settled, there was an industry expert at mass production, a trained and disciplined workforce, and a pent-up demand for exports. In other words, what is at least as important as how much. You can't just blindly spend your way out.
- temphn 14y ago
  This is the mainstream view. The alternative view is that FDR made the Great Depression great, with arbitrary orders like NIRA and attacks on business. He ruled for four terms and the Depression coincidentally lifted after his death. Out of necessity business was given a freeer hand during the war, sort of like Lenin's NEP in the 1920s. With FDR's death that free hand continued. Read "The Forgotten Man" or John T. Flynn if interested in this point of view. By the middle of his second term, much criticism of Roosevelt centered on fears that he was heading toward a dictatorship, by attempting to seize control of the Supreme Court in the Court-packing incident of 1937, attempting to eliminate dissent within the Democratic party in the South during the 1938 elections, and by breaking the tradition established by George Washington of not seeking a third term when he again ran for re- election in 1940. As two historians explain, "In 1940, with the two-term issue as a weapon, anti-New Dealers... argued that the time had come to disarm the "dictator" and to dismantle the machinery."[1] These criticisms largely ended after the Attack on Pearl Harbor. In key respects, Pearl Harbor was to FDR what 9/11 was to Bush. It shut down criticism and gave him two terms. Because victors write history, we need to be skeptical of presidents surrounded by war propaganda, whether Bush or Obama or FDR. Did a president lead us through war and depression? Or did he get us into war and turn an ordinary recession into a depression?
bconway 14y ago
In fact, things are far worse today than they were at the height of the crisis Are you sure? The President was just on TV this morning saying "The private sector is doing just fine."

paulsutter 14y ago

You're right, but we can be part of the solution. As Max Levchin says, the long term question is not whether the US is printing too much or too little - it's whether we (that's us, here, reading Hacker News) can focus on real innovation, which causes real productivity improvements, and thus real growth. That's the best way out and it rests on us.

cynicalkane 14y ago
The Republicans were saying the same sort of stuff in 1929. America learned, at great cost, that macroeconomics matters. We'd do well to remember those lessons.
- paulsutter 14y ago
  Macroeconomics matters enormously. The financial crisis was caused by illusory growth from the ponzi innovation of a bonus culture + fraudulent ratings agencies. Real growth comes from technological innovation. That has been equally true in 1929, 1933, 2006, 2008, and 2012. Go read Wealth of Nations (published in 1776). And I invite you to come out here to Silicon Valley. EDIT: can't reply / too deep. I've never read Ron Paul newsletters, and I'd love to hear you explain how CDOs of highly correlated assets deserve AAA ratings. Love even more to hear how you think macroeconomic policy caused the shock.
  - cynicalkane 14y ago
    That's not macroeconomics, that's classical economics. You do not get macroeconomics by applying microeconomics to everything at once. Macroeconomics is concerned with things like money, interest, employment, and aggregate supply+demand of whole economies. Macroeconomics became popular once it became clear the the classical theories couldn't remotely explain the Great Depression. You don't get a 25% aggregate shock because people stopped innovating or a production glut or "illusory growth" or whatever the Internet libertarian crowd feels like blaming today. In the classical theory, you don't get people starving because bankers misjudged their balanced sheets because classical theory is not capable of explaining how the two are connected.
    - tsunamifury 14y ago
      You really should read Wealth of Nations if you haven't. There are several macroeconomic trends that he retells from 300, 500 and almost 1000 years ago.
- hollerith 14y ago
  Macroeconomics and the health of the financial system matter, but they no longer matter as much as they did in 1929. The reason a meltdown of the financial system is a danger to the average man or woman is that he or she depends on goods and services whose manufacture or provision are coordinated by the financial system. But unlike the situation in 1929, there is now another powerful way of coordinating activities that most people in the developed world are, uh, plugged in to which could take over a significant fraction of the coordination that used to be done by the financial system (although the transition to new ways of coordination can of course be very painful). I would also point out that the typical elite journalist is a woman living in NYC married to a financial professional, which will tend to cause the reporting on the consequences of any serious threat to the livelihoods of financial professionals to be exaggerated. (I am indebted to Penelope Trunk, who used to live in NYC, for this insight.)

herdrick 14y ago

between $8 and $15 trillion... (total deficits + Fed bailouts) I was thinking that we got lucky and TARP ended up not costing much (not counting 2nd order effects pushed into the future). Also, I'm seeing 'only' about $5.3 trillion of new debt from 2008 to now: http://www.usgovernmentdebt.us/federal_deficit_chart.html http://www.usgovernmentdebt.us/federal_deficit_chart.html

ferringham 14y ago
The problem with Government numbers is that they are cooked. Example: The Government numbers will tell you that deflation is a threat. Can you remember a single year in the past decade when your health insurance, gas, food or other neccessities went down in price? No way! They always go up! What the Government does is cooking the CPI (inflation) number by mixing neccessities with gadgets and telling you that you're better off with 100% more expensive healthcare for the past decade because TV sets are 50% cheaper. That's not true economics. That's why start-ups like this: http://www.shadowstats.com/ http://www.shadowstats.com/ make a killing. Because no serious investor trusts Government numbers. Another great example: Did you know that if we counted unemployment rate as we did during Reagan years it would be closer to 20% now? And what is the official number they just reported? 8.2% ? That's wishful thinking and fantasy land, not the unemployment number. They change the way they calculate data hoping people will trust it more than their own eyes. The truth is we have been getting poorer every year for decades now.
muzz 14y ago
and this affects startups how?
- adventureful 14y ago
  The Fed fires up funding bubbles by encouraging risk. It pushes capital out of low risk paper and into high risk speculation (startups, stocks, whatever). It's why we saw incredible funding bubbles in the late 1990s, the mid 2000's, and just recently, all timed very well to the Fed encouraging risk booms through artificially low rates and other similar manipulation. Understanding how the system functions, helps you understand the funding environment, which benefits anybody trying to work on a startup that has to concern themselves with financing. It's not ideal to overly focus on this of course, but it matters.

photon137 14y ago

cost between $8 and $15 trillion depending on what you're counting (total deficits + Fed bailouts) I always cringe when somebody calls the Fed's actions bailouts. These are asset purchases by the Fed versus injecting cash into the monetary system. The Fed will have to unwind these at some point in the future. But essentially, what the Fed has done is that it has made a market for securities nobody was willing to make a market for. Net "bailout" performed by the Fed: zero. Actually that's wrong - the Fed added around $78 billion worth of profit via its open market operations to the Treasury last year (it's obliged to do so after deducting servicing costs/salaries etc.) Pray, what are the "natural" mortgage rates you're talking about - ie you mean rates absent Fed intervention (via Operation Twist)? There wouldn't be a mortgage rates market in existence if the Fed were not there to make one! And no, you're not imploding like the EU. Their banks are woefully undercapitalized and can't lend to the corporate sector. Plus, they have one monetary policy and 17 different fiscal policies - that simply doesn't work! Your banks and your corporate sector are flush with money. It's your consumers who are broke. Even then, they aren't broke - they are just not making long-term investments(ie purchasing durable goods) as credit has dried up and there is no good quality collateral left in the market against which people are willing to lend. Homes used to be the collateral earlier on - but that's no longer the case. That's what the Fed is trying to do - lower mortgage rates (ie assume credit risk on your behalf - it can do so because it can print money - inflation is not a risk in this economy) to enable credit to flow in the economy so that the consumer can start becoming active again. Deleveraging is painful - but it's not the end of the world as you've portrayed it. Edit: fixed typos

adventureful 14y ago
The Fed's actions were extreme bailouts. They've been busy bailing out almost everybody: home owners, Wall Street, Europe, the Treasury, the states. Net bailouts performed by the Fed: trillions http://www.bloomberg.com/news/2011-11-28/secret-fed-loans-undisclosed-to-congress-gave-banks-13-billion-in-income.html http://www.bloomberg.com/news/2011-11-28/secret-fed-loans-un... They gave banks and others at least $7.7 trillion and there is zero proof that it was paid back. Citi had at least a $1 trillion blackhole on their balance sheet, and there is no possibility they were able to fill it. Bank of America was in the same situation, and their profits could never fill that. The Fed took over trillions in toxic waste mortgages to bail out the banks, and most of those 'assets' still sit on the Fed's balance sheet. I'm sure the money supply continuing to skyrocket means the Fed isn't bailing anybody out. Surely those trillions aren't going toward bailouts for the government, Wall St, big banks, or the housing market. http://www.shadowstats.com/charts/monetary-base-money-supply http://www.shadowstats.com/charts/monetary-base-money-supply The Fed is currently bailing out the US Government by buying 95% of all long term govt paper. The US Treasury has been bailing out California among other states, by using the Fed money. The US Government is completely insolvent without the Fed bailouts, it would have to slash 1/3 of all spending just to correct the imbalances in the system if the Fed stopped the QE programs. The Fed is bailing out home owners, investors, realtors 24/7 using trillions in QE to push rates lower to prop up the housing market. The Fed is pushing risk into equities and out of paper by driving rates down, which is providing a bailout to big institutional investors by keeping the stock market artificially high. It's a bailout bonanza. Natural mortgage rates would be the mortgage rates you'd get when you remove all Federal Reserve manipulation of short and long term rates. That is, when they stop all QE / monetization programs that are designed to specifically hold rates down, thus we have sub 4% 30 year mortgage rates. It would be something closer to a historical norm, 6% to 8% would be a lot closer to normal based on the last 50 years, than 4%, for example. But if you know anything about any of this, you already know that.

leptons 14y ago

" $6 or so trillion more in public debt we can never pay back" This statement makes all your other statements wreak of sensationalist bullshit.

adventureful 14y ago
Not at all, it's accurate. We're going to stack another $5 trillion on in the next four years. Since when are facts sensationalist bullshit? From this day four years ago to now, we've added roughly $5.89 trillion to the public debt ($9.869t to $15.765t), and that doesn't count all of our liabilities, that's merely a fraction of it represented by the so called "public debt." I'd love to see the math on how you propose we ever pay back the $11 trillion in new public debt added from 2008 to 2016/17. Clinton ran the biggest surplus we've had in a very long time ($236b), and it was fake, because it didn't include the money borrowed from inbound Social Security money for the non-existent trust. If we could magically run that Clinton surplus rate from 2017 to 2102 (about 85 years), we'd finally pay off the $20 trillion in public debt we're going to have four years from now. That assumes we never once slip up again, and constantly pay $236 billion per year strictly toward only the public debt. So, a mere 100 years of record surplus' ought to do the trick.
- snowwrestler 14y ago
  You do not need to run a surplus to pay back government debt. Debt payments are and will be included in the regular annual budget of the U.S. government. In fact an annual surplus creates additional government debt because the only place the U.S. federal government can store profit is in U.S. Treasury bonds (see: the Social Security "trust fund"). This is why there was so much interest in refunding the surplus to taxpayers. Now is a great time for the U.S. to be borrowing, because everyone wants to give us their money. Treasury yields continue to hover well below their historical averages. Even at long-run average rates of economic growth and inflation, we will stay ahead of today's Treasury yields and afford our payments. So: your numbers might be accurate (I don't have the time to check them), but your assumption that we can never pay our debt is flawed.

guelo 14y ago

Calm down, the US government can never run out of dollars, they own the printing presses. I am not being sarcastic.

raheemm 14y ago

The history of 1929 crash has shown that stimulus is the best medicine for financial turmoil. Austerity was the first medicine prescribed by president Hoover and it failed. FDR initially provided stimulus but he had to abandon those due to political sentiments similar to the ones you echo. What finally ended the depression is the stimulus from the overwhelming spending on WW2. Whether stimulus triggered by war or via the fed, its the only way to resolve financial turmoil. The time to address deficit/debt is when the economy is strong, as was done in the mid to late 90s.

gaius 14y ago
Stimulus has to go on stuff that has lasting value greater than the value of the stimulus. That is the mistake that Gordon Brown made - you can't just slosh money around. The WW2 stimulus worked because when the dust settled, there was an industry expert at mass production, a trained and disciplined workforce, and a pent-up demand for exports. In other words, what is at least as important as how much. You can't just blindly spend your way out.
temphn 14y ago
This is the mainstream view. The alternative view is that FDR made the Great Depression great, with arbitrary orders like NIRA and attacks on business. He ruled for four terms and the Depression coincidentally lifted after his death. Out of necessity business was given a freeer hand during the war, sort of like Lenin's NEP in the 1920s. With FDR's death that free hand continued. Read "The Forgotten Man" or John T. Flynn if interested in this point of view. By the middle of his second term, much criticism of Roosevelt centered on fears that he was heading toward a dictatorship, by attempting to seize control of the Supreme Court in the Court-packing incident of 1937, attempting to eliminate dissent within the Democratic party in the South during the 1938 elections, and by breaking the tradition established by George Washington of not seeking a third term when he again ran for re- election in 1940. As two historians explain, "In 1940, with the two-term issue as a weapon, anti-New Dealers... argued that the time had come to disarm the "dictator" and to dismantle the machinery."[1] These criticisms largely ended after the Attack on Pearl Harbor. In key respects, Pearl Harbor was to FDR what 9/11 was to Bush. It shut down criticism and gave him two terms. Because victors write history, we need to be skeptical of presidents surrounded by war propaganda, whether Bush or Obama or FDR. Did a president lead us through war and depression? Or did he get us into war and turn an ordinary recession into a depression?

bconway 14y ago

In fact, things are far worse today than they were at the height of the crisis Are you sure? The President was just on TV this morning saying "The private sector is doing just fine."