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Oil has contributed. But the real culprit is monetary policy. The Keynesian model, where every dollar in your pocket is someone else's obligation, is a balloon

by teilo 18y ago

Oil has contributed. But the real culprit is monetary policy. The Keynesian model, where every dollar in your pocket is someone else's obligation, is a balloon that always grows too big and has to either deflate or pop. You cannot borrow your way out of debt. If all money is created by debt, then ultimately things like oil, speculative investments, and creative financial instruments can only pop the bubble faster. Even without them, the bubble will continue to grow beyond the breaking point. It will just take longer to get there. It's simple math. You can argue against the principles of sound currency and the laws of supply and demand about as successfully as you can argue against the law of gravity. What do you expect to happen, honestly? When you push out cheap money, when you take away risk, when you create a moral hazard which prevents investors from being burned by their own bad choices, they WILL spend and invest recklessly. Wall Street is not the problem. Oil is not the problem. The man behind the curtain who is setting interest rates at artificially low levels such that the expenditures exceed the available capital in the economy, IS the problem. And that man is called the Fed. This is the fundamental force driving our economy, and it is broken. Until this is addressed, all the focus on oil, investment banks, and Wall Street is just a stage show.

anigbrowl 18y ago
There is no such thing as 'sound money'. Being on a gold standard is not a panacea: you're just exchanging one kind of debt marker for another. The US was on the gold standard in 1929 and other countries were on it much later. Booms and busts will still occur. As soon as you move away from a barter system and give up trading bullets for beans, then whatever you substitute, whether it's gold, greenbacks, or cowrie shells, is someone's obligation to pay - with a bank or government treasury acting as their proxy. The Dutch Tulip mania in the 17th century is a case in point. No matter how treasury power is configured, it will be open to abuse. This is not to dispute your valid points about moral hazard. However, the 'sound money' meme is nothing more than a fetish which appeals to people who have trouble dealing with the abstractions of economics. In the simplest possible therms: gold is only valuable because a lot of people believe it to be so. Blaming the Fed for everything is a rabbit-hole down which intelligent analysis goes to die. Countries with an independent central back are almost always more stable than those where the government has direct control of the money supply. Today's outstanding example of that is Zimbabwe.
ewjordan 18y ago
What caused this bubble is what causes almost every bubble that has ever happened: people see some item that they can buy and sell going up in price over a reasonably long period, they leverage the ever loving crap out of it because it's fairly easy to borrow money to buy something that always goes up, and eventually the damn thing comes down once there's nobody left to speculate on it. Boom! End of story, at least until 10 years later when the economy has picked up again to more or less match where it would have been if the bubble had never happened. The particulars of any individual bubble are not even worth analyzing or assigning blame over, because the fact is, someone is always going to be willing to lend money out so that someone else can "invest" in a "sure thing." Thus far, I've never heard anyone offer a solution to that fundamental problem short of flat-out illegalizing lending, which would cause a host of other economic woes. Unless you have some idea to magically smooth out the risks inherent in any market, there will always be leverage, and there will always be bubbles; there may be some reasonable arguments for getting rid of the Fed, but the idea that without them we'd be immune to unpredictable major corrections is just ludicrous (and it doesn't count as a "prediction" if your economic school has always claimed that a crash is imminent because our economic model is too Keynesian). The Fed is the "fundamental force driving our economy," really? Here I was thinking that what drove our economy was the production and sale of useful goods and services...guess I have a lot to learn.
- teilo 18y ago
  The magic to "smooth out the risk inherent in any market" is to let the interest rates be set by market forces, which will inevitably (almost magically one might say) through the principle of competition, set the interest rates at the level which the available capital in the market can bear. The speculative investing which you assume as a given is not a given if money is only so cheap as the resources in the economy which support it. However, decouple the market from interest rates, and drive those rates down to a level which the capital in the economy cannot support, and you create a demand glut for resources. The market, if left to itself, is automatically self regulating, both in regards to the price of consumable goods, and in regards to the ability of speculative investors to obtain cheap money. Such a market punishes speculators who fail with interest rates appropriate to the level of risk. It cannot do this, however, when those rates are set artificially by a central bank. Though the Fed is an independent institution on paper, they serve at the behest of Congress and the President. For all practical purposes they are an arm of the Federal government, exercising power from on high, and dictating to the market how it will run. Appealing to Zimbabwe as a counter-example, as did the previous commenter, is an example of cognitive dissonance. Zimbabwe is a perfect example of what happens when the government does NOT let the market self-regulate, when, rather, the government sets prices and interest rates, distributes property, and prints massive quantities of fiat money to compensate for its inability to create true wealth. No government, no matter how much control it exercises, can possibly manage an economy better than the economy can manage itself. It is too big a beast, too complex, with too many interlocking parts.

by teilo 18y ago

anigbrowl 18y ago

There is no such thing as 'sound money'. Being on a gold standard is not a panacea: you're just exchanging one kind of debt marker for another. The US was on the gold standard in 1929 and other countries were on it much later. Booms and busts will still occur. As soon as you move away from a barter system and give up trading bullets for beans, then whatever you substitute, whether it's gold, greenbacks, or cowrie shells, is someone's obligation to pay - with a bank or government treasury acting as their proxy. The Dutch Tulip mania in the 17th century is a case in point. No matter how treasury power is configured, it will be open to abuse. This is not to dispute your valid points about moral hazard. However, the 'sound money' meme is nothing more than a fetish which appeals to people who have trouble dealing with the abstractions of economics. In the simplest possible therms: gold is only valuable because a lot of people believe it to be so. Blaming the Fed for everything is a rabbit-hole down which intelligent analysis goes to die. Countries with an independent central back are almost always more stable than those where the government has direct control of the money supply. Today's outstanding example of that is Zimbabwe.

ewjordan 18y ago

What caused this bubble is what causes almost every bubble that has ever happened: people see some item that they can buy and sell going up in price over a reasonably long period, they leverage the ever loving crap out of it because it's fairly easy to borrow money to buy something that always goes up, and eventually the damn thing comes down once there's nobody left to speculate on it. Boom! End of story, at least until 10 years later when the economy has picked up again to more or less match where it would have been if the bubble had never happened. The particulars of any individual bubble are not even worth analyzing or assigning blame over, because the fact is, someone is always going to be willing to lend money out so that someone else can "invest" in a "sure thing." Thus far, I've never heard anyone offer a solution to that fundamental problem short of flat-out illegalizing lending, which would cause a host of other economic woes. Unless you have some idea to magically smooth out the risks inherent in any market, there will always be leverage, and there will always be bubbles; there may be some reasonable arguments for getting rid of the Fed, but the idea that without them we'd be immune to unpredictable major corrections is just ludicrous (and it doesn't count as a "prediction" if your economic school has always claimed that a crash is imminent because our economic model is too Keynesian). The Fed is the "fundamental force driving our economy," really? Here I was thinking that what drove our economy was the production and sale of useful goods and services...guess I have a lot to learn.

teilo 18y ago
The magic to "smooth out the risk inherent in any market" is to let the interest rates be set by market forces, which will inevitably (almost magically one might say) through the principle of competition, set the interest rates at the level which the available capital in the market can bear. The speculative investing which you assume as a given is not a given if money is only so cheap as the resources in the economy which support it. However, decouple the market from interest rates, and drive those rates down to a level which the capital in the economy cannot support, and you create a demand glut for resources. The market, if left to itself, is automatically self regulating, both in regards to the price of consumable goods, and in regards to the ability of speculative investors to obtain cheap money. Such a market punishes speculators who fail with interest rates appropriate to the level of risk. It cannot do this, however, when those rates are set artificially by a central bank. Though the Fed is an independent institution on paper, they serve at the behest of Congress and the President. For all practical purposes they are an arm of the Federal government, exercising power from on high, and dictating to the market how it will run. Appealing to Zimbabwe as a counter-example, as did the previous commenter, is an example of cognitive dissonance. Zimbabwe is a perfect example of what happens when the government does NOT let the market self-regulate, when, rather, the government sets prices and interest rates, distributes property, and prints massive quantities of fiat money to compensate for its inability to create true wealth. No government, no matter how much control it exercises, can possibly manage an economy better than the economy can manage itself. It is too big a beast, too complex, with too many interlocking parts.