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I don't buy it. The world used to let highly interconnected financial institutions fail and we had sharper, nastier recessions (we called them 'panics') but th

I don't buy it. The world used to let highly interconnected financial institutions fail and we had sharper, nastier recessions (we called them 'panics') but they were over sooner. I think that, much like the reaction to the WTC/Pentagon terror attacks was worse than the attacks, the panicky reaction - bailouts and stimulus - has been much worse than the problem they tried to fix.

trevelyan 14y ago
You should read Alan Blinder about "The Great Moderation" -- recessions since the late 1970s have been shorter and shallower than their predecessors. And far shorter and shallower than their counterparts under the gold standard in the 19th century. Also empirically, the reason the United States is doing better than Europe is because of the stimulus/bailout. It might be hard to think of the United States as a success story since it is only a relative one, but look at the much more dire situation in countries like Britain and Greece and Spain where governments were forced or choose to embrace austerity. There is no reason the world cannot produce the same amount of goods as it was producing in 2007 - there are more rather than less people willing to work and the cost of borrowing money is very low. The only big outside constraint is energy costs, which are being offset by some fairly amazing reductions in the prices of alternative energy, including solar power. So why the mess? The problem is a classic liquidity trap, a preference of investors for highly-liquid and safe assets that results in less money being spent in the private sector. This is visible in the way the borrowing rates of the Federal Government have fallen despite the best efforts of the Republican Party to drum up a debt scare the moment it fell from power and stopped spending the money itself. Bailing out the banks did somewhat stabilize the banking system and probably prevented catastrophe. What remains necessary is getting out of the liquidity trap, which means increasing the amount of spending in the private sector. One way to do this would be having the government borrow at essentially zero cost and invest that money in public infrastructure projects which offer a return on investment. Another approach would be having the Federal Reserve declare an inflation target of 4% until the economic crisis is over. This would reduce the expected ROI from parking money in Treasuries and provide a greater incentive for firms to make private sector investments instead of just parking cash in the bank.
- GFKjunior 14y ago
  I only want to point out the absurdity of your first sentence "recessions since the late 1970s" So the timeline for your analysis is ~30 years? That is not convincing to me, this current recession is already going on 4 years and shows no signs of stopping. The extreme cherry picking of data and reasoning like yours is exactly why I stopped studying economics in college, but hey at least you were able to throw in some partisan politics in your post right?
  - trevelyan 14y ago
    Back when I was in graduate school, the general belief around the economics department was that the unemployment rate was whatever Alan Greenspan wanted it to be, plus or minus a bit to account for the fact he was not God. So I didn't invent the term "Great Moderation" and you have a lot of reading to do if you think the phenomenon it describes has anything to do with me. On your second point, it's hardly partisan to point out that Republicans have consistently raised the specter of a debt crisis and soaring interest rates to attack the feasibility of further monetary or fiscal stimulus directed at anything but the banking sector. Or even at the banking sector (it wasn't Democrats who derailed the first bailout vote). And yet during this time US borrowing costs have fallen to the point where the ten year rate is now basically below expected inflation and everything points to the United States being caught in a liquidity trap. People are even paying the US government to hold money at a loss! http://www.marketwatch.com/investing/bond/10_year/charts http://www.marketwatch.com/investing/bond/10_year/charts I don't know why someone pointing this out should hurt your feelings, since your complaint is with reality. It might feel nice to think that this is a partisan instead of a policy critique, but harping at me isn't going to make Republican economic policy less destructive or make the bond market change direction.
- herdrick 14y ago
  Yeah, well, I suppose I should admit don't buy the classic liquidity trap theory either. If you put a dollar into T-bills, you drive the interest rate a little lower, which causes, say, 70 cents of other investors' money to leave in disgust. Where do they go? To other assets. And it's only 70 cents only because the suppliers of new debt, the US authorities, are sensitive to interest rates too. Investors can, net, only buy as much debt as the government is issuing, right? So if the Federal authorities are so worried about a liquidity trap, let them limit their debt issuance! If they do that, then your dollar put into Treasury securities means a dollar worth of other investors' leaving. No more liquidity trap. (At least as far as "highly-liquid and safe assets" == US govt debt. They could find other safe and liquid harbors, perhaps Japanese govt debt.) But the Feds aren't doing that, thus, I think that "having the government borrow at essentially zero cost and invest that money in public infrastructure projects" would in fact be bad for real wealth and prosperity because that borrowing brings some more money to T-bills and away from other investments, some of which would be private investments, for example. Of course if those projects are needed on their merits, not as make-work, then great, do them. The same is true of your example of "parking cash in the bank". Parking cash in the bank means making investments. Where does the bank put it? They invest it. A bank is not a destination for money, it's a conduit.

trevelyan 14y ago

You should read Alan Blinder about "The Great Moderation" -- recessions since the late 1970s have been shorter and shallower than their predecessors. And far shorter and shallower than their counterparts under the gold standard in the 19th century. Also empirically, the reason the United States is doing better than Europe is because of the stimulus/bailout. It might be hard to think of the United States as a success story since it is only a relative one, but look at the much more dire situation in countries like Britain and Greece and Spain where governments were forced or choose to embrace austerity. There is no reason the world cannot produce the same amount of goods as it was producing in 2007 - there are more rather than less people willing to work and the cost of borrowing money is very low. The only big outside constraint is energy costs, which are being offset by some fairly amazing reductions in the prices of alternative energy, including solar power. So why the mess? The problem is a classic liquidity trap, a preference of investors for highly-liquid and safe assets that results in less money being spent in the private sector. This is visible in the way the borrowing rates of the Federal Government have fallen despite the best efforts of the Republican Party to drum up a debt scare the moment it fell from power and stopped spending the money itself. Bailing out the banks did somewhat stabilize the banking system and probably prevented catastrophe. What remains necessary is getting out of the liquidity trap, which means increasing the amount of spending in the private sector. One way to do this would be having the government borrow at essentially zero cost and invest that money in public infrastructure projects which offer a return on investment. Another approach would be having the Federal Reserve declare an inflation target of 4% until the economic crisis is over. This would reduce the expected ROI from parking money in Treasuries and provide a greater incentive for firms to make private sector investments instead of just parking cash in the bank.

GFKjunior 14y ago
I only want to point out the absurdity of your first sentence "recessions since the late 1970s" So the timeline for your analysis is ~30 years? That is not convincing to me, this current recession is already going on 4 years and shows no signs of stopping. The extreme cherry picking of data and reasoning like yours is exactly why I stopped studying economics in college, but hey at least you were able to throw in some partisan politics in your post right?
- trevelyan 14y ago
  Back when I was in graduate school, the general belief around the economics department was that the unemployment rate was whatever Alan Greenspan wanted it to be, plus or minus a bit to account for the fact he was not God. So I didn't invent the term "Great Moderation" and you have a lot of reading to do if you think the phenomenon it describes has anything to do with me. On your second point, it's hardly partisan to point out that Republicans have consistently raised the specter of a debt crisis and soaring interest rates to attack the feasibility of further monetary or fiscal stimulus directed at anything but the banking sector. Or even at the banking sector (it wasn't Democrats who derailed the first bailout vote). And yet during this time US borrowing costs have fallen to the point where the ten year rate is now basically below expected inflation and everything points to the United States being caught in a liquidity trap. People are even paying the US government to hold money at a loss! http://www.marketwatch.com/investing/bond/10_year/charts http://www.marketwatch.com/investing/bond/10_year/charts I don't know why someone pointing this out should hurt your feelings, since your complaint is with reality. It might feel nice to think that this is a partisan instead of a policy critique, but harping at me isn't going to make Republican economic policy less destructive or make the bond market change direction.
herdrick 14y ago
Yeah, well, I suppose I should admit don't buy the classic liquidity trap theory either. If you put a dollar into T-bills, you drive the interest rate a little lower, which causes, say, 70 cents of other investors' money to leave in disgust. Where do they go? To other assets. And it's only 70 cents only because the suppliers of new debt, the US authorities, are sensitive to interest rates too. Investors can, net, only buy as much debt as the government is issuing, right? So if the Federal authorities are so worried about a liquidity trap, let them limit their debt issuance! If they do that, then your dollar put into Treasury securities means a dollar worth of other investors' leaving. No more liquidity trap. (At least as far as "highly-liquid and safe assets" == US govt debt. They could find other safe and liquid harbors, perhaps Japanese govt debt.) But the Feds aren't doing that, thus, I think that "having the government borrow at essentially zero cost and invest that money in public infrastructure projects" would in fact be bad for real wealth and prosperity because that borrowing brings some more money to T-bills and away from other investments, some of which would be private investments, for example. Of course if those projects are needed on their merits, not as make-work, then great, do them. The same is true of your example of "parking cash in the bank". Parking cash in the bank means making investments. Where does the bank put it? They invest it. A bank is not a destination for money, it's a conduit.