In this post I’ll talk primarily to people who, like me, lean libertarian. The rest of you can take a break. Libertarians want to move more products and services from being provided directly by government, to being provided privately. And for those that are provided privately, libertarians want to weaken regulations. These changes would increase liberty.
OK fair point. There is no "problem". Friedman *did*, however, say that with freely floating exchange rates the balance of payments would always be equal. And they aren't.
Dan, this is getting far, far off topic. But the short answer is that there is no balance of payments "problem". E.g. http://www.themoneyillusion..., and from http://www.themoneyillusion... let me quote Sumner: "Australia’s been running big current account deficits for decades, and they can continue doing so for many centuries to come. ... Australia gets some cars and TVs built with Chinese labor, and China gets some retirement condos on the Gold Coast built with Australian labor. Believe it or not economists call that sort of mutually beneficial business deal a “deficit.” ... Don’t be fooled by words, focus on reality."
Don,I'll debate you on Friedman. I love Friedman's position mostly but he stated that he believed going on to fully floating exchange rates would have solved the balance of payments problem. But it hasn't. He has missed something.
"The collapse of any major industry that is intricately linked to other major industries can lead to a depression." I don't believe you, sorry.
"Even to this day it's noticeably harder for small businesses to get credit" Yes, agreed. "because no one trusts each other anymore" No, that's not the reason at all. (Instead, it's because we've been in a multiyear recession, so projected future revenues are too low for many projects.)
"there'd probably still be a severe boom-bust cycle." No, bank failures are not the cause of a boom-bust cycle. (Case in point: the "Great Moderation" of good monetary policy lasted ~1982-2007. The huge Savings & Loan crisis happened ~1986-1995, right smack in the middle. ~1000 out of ~3000 total S&Ls in the US failed. And it had essentially ZERO impact on the overall macroeconomy. Your claim that bank failures cause recessions is supported by neither historical evidence nor theory.)
The collapse of any major industry that is intricately linked to other major industries can lead to a depression. When the banking industry pretty much collapsed that hit financial reserves, insurance contracts, investments, savings, pensions, etc... of many other industries. Even to this day it's noticeably harder for small businesses to get credit because no one trusts each other anymore. Below Dan Browne touches on savings and that's a very good point: savings, pensions and mortgages are all threatened by weak banks and cause the consumer to spend less. The major banks are so f-ing huge that they take everyone down with them when they fall, I mean when a bank falls it could easily owe $10 trillion to other banks and businesses, most of that used to be virtual "poker chips" but becomes a real debt when the bank falls, imagine you own pieces of that bank's debt or you're their insurance company, or a government that has guaranteed the savings stored in that bank. Retail and investment banks really need to be split up to prevent this whole thing from happening again (most governments probably couldn't handle it if something like the events from 2008/2009 (continued into the Greek crisis) were to happen again within the next five years.
If a more libertarian society wants to prevent such things it might help that in their society the banks know they won't get a bailout or savings guarantees from the government, but there'd probably still be a severe boom-bust cycle.
I agree the widely different levels of funding are the main problem.
It's amazing how progressive Americans always think their teachers aren't paid enough, almost as amazing as the conservative Americans who want "intelligent design" to be taught and yet want America to compete with Asia and Europe in science (almost). American teacher pay isn't actually that low, it's at least on par with their European counterparts, it gives a lot of security, is one of the few jobs that allows highly educated people to earn a livelihood outside of the big cities and there's the health insurance benefit that often gets overlooked. Perhaps it would be a good thing to pay rare teachers a bit more, ie the ones who teach physics, math or any foreign language besides Spanish.
Remember, IMASBA: the argument is not whether the entire banking industry might or might not collapse (the way dot coms crashed in 2000). The question instead is whether a collapse of the banking industry necessarily causes widespread unemployment in steel, airlines, agriculture, railroads, etc. I.e., a depression. I'm offering no comment on the health of the banking system. I'm only questioning your assumption that there must be a linkage between that, and a subsequent Depression.
You are correct, Stephen, and you offer a very well-worded criticism. In response, I would suggest Milton Friedman's "Monetary History" analysis of the Great Depression, and the compelling arguments offered by the Market Monetarist economists analyzing the current Great Recession. The counters by other macro schools are weak, and it's actually shameful and an embarrassment for the whole field, that the economics profession does not have consensus on this topic. But you state the facts correctly: at the moment, they don't have consensus.
I'm going to play the contrarian here and say Americans complain too much about their primary and secondary education systems and complain about the wrong things. Private schools get the majority of their edge from being selective in their choice of pupils and teachers and even then they don't do much better than the countries with the best state-run education systems.
American schools perform comparatively worse per dollar because a) American wages and costs are high, b) American schools pay for many extracurricular activities, c) funding is locally based: rich districts have rich schools, but that brings diminishing returns so they doesn't compensate for the poor schools.
Last but not least, many Americans who complain about government in schools and the performance of schools are themselves part of the problem, they are often the ones preventing proper science or history classes when they think there isn't enough "god, guns & gays" in them. It never ceases to amaze me how people who want "intelligent design" and/or some mythical version of history and geography to be taught in schools subsequently complain that foreign education systems are performing better.
That's right. The banks would never have gotten to the scale they are today without being allowed to operate in the merchant banking space. The scale of losses is so big more than 90% of the banking sector is insolvent. As a result, since the rest of us in the real economy have our savings in those banks, we have effectively lost our savings. So have all the corporations with bank accounts. Then there are the linkages to the counterparties of the corporations. The scale of the mess is crazy. "Letting the banks fail" won't work right now unless *all* of the banks are split and returend to retail banking on the one hand and investment/merchant banking on the other. We also need the losses somehow absorbed by the financial sector and the financial sector only. After that happens, then, yes, retail banks can be allowed to go bankrupt in any crisis in the future.
I don't think you appreciate the scale of these banks. FDIC is not unlimited, several countries opted to give emergency loans to the banks precisely because invoking their national savings insurance would have been even more expensive or even impossible. Most of the banking system was, and is, rotten to the core, not even the banks themselves trust each other anymore and you don't just replace multitrillion banks with new ones in a day.
No, Dan, you're still not correct. The banking system is ALREADY "decoupled" from the real economy. You say "the scale [of banks] is ... too big for the real economy to handle". That's false. You don't need to re-regulate the banks. They can go bankrupt exactly as they are. That does NOT mean the real economy would need to suffer a recession.
"their classical banking savings are forfeit". Also false. FDIC insurance means that, while the OWNERS of a bank may lose their wealth when a bank goes bankrupt, the DEPOSITORS do not. (At least, most of the ordinary ones.)
"hybrid banks ... with the losses ... are unable to service the real economy side" Also false. In general, profitable retail banking business units generally continue operations (and typically get sold to a more healthy bank as a unit), even when the original bank conglomerate declares bankruptcy.
No, IMASBA, what you are narrating may be "common-sense" economics, but it is not correct.
Individual industries have booms & busts all the time. There was a stock market crash in 1987, a dot-com crash in 2000, a housing crash in 2006, 2011 Japanese tsunami. But none of that necessarily causes a Depression, an economy-wide elevated unemployment for an extended time. Destroying capital (like the tsunami!) can of course depress real output (RGDP) ... but that's not at all the same thing as a recession.
You're correct that you could get a depression if you were on a gold standard, and then had sudden major changes in gold supply. That's exactly my point: recessions are caused by sudden unexpected major changes in the value of the unit of account, Fortunately, we're no longer on the gold standard, so lack of stability in the value of money is solely the responsibility of the central bank (monetary policy). And, with fiat currency, they have all the power they need to keep it stable.
Bank failures have no direct link to widespread unemployment. You're just wrong about that.
OK fair point. There is no "problem". Friedman *did*, however, say that with freely floating exchange rates the balance of payments would always be equal. And they aren't.
Dan, this is getting far, far off topic. But the short answer is that there is no balance of payments "problem". E.g. http://www.themoneyillusion..., and from http://www.themoneyillusion... let me quote Sumner: "Australia’s been running big current account deficits for decades, and they can continue doing so for many centuries to come. ... Australia gets some cars and TVs built with Chinese labor, and China gets some retirement condos on the Gold Coast built with Australian labor. Believe it or not economists call that sort of mutually beneficial business deal a “deficit.” ... Don’t be fooled by words, focus on reality."
Don,I'll debate you on Friedman. I love Friedman's position mostly but he stated that he believed going on to fully floating exchange rates would have solved the balance of payments problem. But it hasn't. He has missed something.
"The collapse of any major industry that is intricately linked to other major industries can lead to a depression." I don't believe you, sorry.
"Even to this day it's noticeably harder for small businesses to get credit" Yes, agreed. "because no one trusts each other anymore" No, that's not the reason at all. (Instead, it's because we've been in a multiyear recession, so projected future revenues are too low for many projects.)
"there'd probably still be a severe boom-bust cycle." No, bank failures are not the cause of a boom-bust cycle. (Case in point: the "Great Moderation" of good monetary policy lasted ~1982-2007. The huge Savings & Loan crisis happened ~1986-1995, right smack in the middle. ~1000 out of ~3000 total S&Ls in the US failed. And it had essentially ZERO impact on the overall macroeconomy. Your claim that bank failures cause recessions is supported by neither historical evidence nor theory.)
The collapse of any major industry that is intricately linked to other major industries can lead to a depression. When the banking industry pretty much collapsed that hit financial reserves, insurance contracts, investments, savings, pensions, etc... of many other industries. Even to this day it's noticeably harder for small businesses to get credit because no one trusts each other anymore. Below Dan Browne touches on savings and that's a very good point: savings, pensions and mortgages are all threatened by weak banks and cause the consumer to spend less. The major banks are so f-ing huge that they take everyone down with them when they fall, I mean when a bank falls it could easily owe $10 trillion to other banks and businesses, most of that used to be virtual "poker chips" but becomes a real debt when the bank falls, imagine you own pieces of that bank's debt or you're their insurance company, or a government that has guaranteed the savings stored in that bank. Retail and investment banks really need to be split up to prevent this whole thing from happening again (most governments probably couldn't handle it if something like the events from 2008/2009 (continued into the Greek crisis) were to happen again within the next five years.
If a more libertarian society wants to prevent such things it might help that in their society the banks know they won't get a bailout or savings guarantees from the government, but there'd probably still be a severe boom-bust cycle.
I agree the widely different levels of funding are the main problem.
It's amazing how progressive Americans always think their teachers aren't paid enough, almost as amazing as the conservative Americans who want "intelligent design" to be taught and yet want America to compete with Asia and Europe in science (almost). American teacher pay isn't actually that low, it's at least on par with their European counterparts, it gives a lot of security, is one of the few jobs that allows highly educated people to earn a livelihood outside of the big cities and there's the health insurance benefit that often gets overlooked. Perhaps it would be a good thing to pay rare teachers a bit more, ie the ones who teach physics, math or any foreign language besides Spanish.
c) funding is locally based: rich districts have rich schools, but that brings diminishing returns so they doesn't compensate for the poor schools
There you have the main problem, but it's something to complain about.
[I don't think you'll get many good teachers until we decide to pay them far more than anyone is today willing.]
Remember, IMASBA: the argument is not whether the entire banking industry might or might not collapse (the way dot coms crashed in 2000). The question instead is whether a collapse of the banking industry necessarily causes widespread unemployment in steel, airlines, agriculture, railroads, etc. I.e., a depression. I'm offering no comment on the health of the banking system. I'm only questioning your assumption that there must be a linkage between that, and a subsequent Depression.
You are correct, Stephen, and you offer a very well-worded criticism. In response, I would suggest Milton Friedman's "Monetary History" analysis of the Great Depression, and the compelling arguments offered by the Market Monetarist economists analyzing the current Great Recession. The counters by other macro schools are weak, and it's actually shameful and an embarrassment for the whole field, that the economics profession does not have consensus on this topic. But you state the facts correctly: at the moment, they don't have consensus.
I'm going to play the contrarian here and say Americans complain too much about their primary and secondary education systems and complain about the wrong things. Private schools get the majority of their edge from being selective in their choice of pupils and teachers and even then they don't do much better than the countries with the best state-run education systems.
American schools perform comparatively worse per dollar because a) American wages and costs are high, b) American schools pay for many extracurricular activities, c) funding is locally based: rich districts have rich schools, but that brings diminishing returns so they doesn't compensate for the poor schools.
Last but not least, many Americans who complain about government in schools and the performance of schools are themselves part of the problem, they are often the ones preventing proper science or history classes when they think there isn't enough "god, guns & gays" in them. It never ceases to amaze me how people who want "intelligent design" and/or some mythical version of history and geography to be taught in schools subsequently complain that foreign education systems are performing better.
That's right. The banks would never have gotten to the scale they are today without being allowed to operate in the merchant banking space. The scale of losses is so big more than 90% of the banking sector is insolvent. As a result, since the rest of us in the real economy have our savings in those banks, we have effectively lost our savings. So have all the corporations with bank accounts. Then there are the linkages to the counterparties of the corporations. The scale of the mess is crazy. "Letting the banks fail" won't work right now unless *all* of the banks are split and returend to retail banking on the one hand and investment/merchant banking on the other. We also need the losses somehow absorbed by the financial sector and the financial sector only. After that happens, then, yes, retail banks can be allowed to go bankrupt in any crisis in the future.
OK Don. I'm going to bow out gracefully. The numbers don't back your case so I'm not going to continue the line of debate any more.
Your notion that currency regulation alone can prevent depressions is far from being the professional consensus in economics.
I don't think you appreciate the scale of these banks. FDIC is not unlimited, several countries opted to give emergency loans to the banks precisely because invoking their national savings insurance would have been even more expensive or even impossible. Most of the banking system was, and is, rotten to the core, not even the banks themselves trust each other anymore and you don't just replace multitrillion banks with new ones in a day.
No, Dan, you're still not correct. The banking system is ALREADY "decoupled" from the real economy. You say "the scale [of banks] is ... too big for the real economy to handle". That's false. You don't need to re-regulate the banks. They can go bankrupt exactly as they are. That does NOT mean the real economy would need to suffer a recession.
"their classical banking savings are forfeit". Also false. FDIC insurance means that, while the OWNERS of a bank may lose their wealth when a bank goes bankrupt, the DEPOSITORS do not. (At least, most of the ordinary ones.)
"hybrid banks ... with the losses ... are unable to service the real economy side" Also false. In general, profitable retail banking business units generally continue operations (and typically get sold to a more healthy bank as a unit), even when the original bank conglomerate declares bankruptcy.
No, IMASBA, what you are narrating may be "common-sense" economics, but it is not correct.
Individual industries have booms & busts all the time. There was a stock market crash in 1987, a dot-com crash in 2000, a housing crash in 2006, 2011 Japanese tsunami. But none of that necessarily causes a Depression, an economy-wide elevated unemployment for an extended time. Destroying capital (like the tsunami!) can of course depress real output (RGDP) ... but that's not at all the same thing as a recession.
You're correct that you could get a depression if you were on a gold standard, and then had sudden major changes in gold supply. That's exactly my point: recessions are caused by sudden unexpected major changes in the value of the unit of account, Fortunately, we're no longer on the gold standard, so lack of stability in the value of money is solely the responsibility of the central bank (monetary policy). And, with fiat currency, they have all the power they need to keep it stable.
Bank failures have no direct link to widespread unemployment. You're just wrong about that.