US Fiscal Cliff

Alchemist

Administrator
Staff member
#21
All this is speculation.
I don't think so.

It is a 100% certainty.

The modern banking system is based on a simple assumption - that all depositors will never withdraw their deposits at the same time.

The real amount of money (M0) in any economy is a tiny fraction of the total bank deposits in the economy.

It is not possible to give back cash to even 10% of bank depositors at the same time.

If in 2008, the US government had refused to support the banks, all major banks would have faced bank runs and the whole system would have collapsed.

Bank runs were a major feature and according to some the biggest cause of the great depression.

Bailouts and printing money reward people who screwed up. This is just not fair.
Under normal circumstances US does not bailout any business or bank. However, circumstances were not normal in 2008.

The 2008-2009 bailouts were not done to reward those who screwed up, but to protect those who were not responsible for the crisis. We all benefited from the bailouts.

While doing justice, protecting the innocent is more important than punishing the guilty.

Whatever you have suggested like gold standard and government non-intervention have already been tested during the great depression. The consequences are well known.

The Federal Reserve allowed some large public bank failures – particularly that of the New York Bank of the United States – which produced panic and widespread runs on local banks, and the Federal Reserve sat idly by while banks collapsed. He claimed that, if the Fed had provided emergency lending to these key banks, or simply bought government bonds on the open market to provide liquidity and increase the quantity of money after the key banks fell, all the rest of the banks would not have fallen after the large ones did, and the money supply would not have fallen as far and as fast as it did.

With significantly less money to go around, businessmen could not get new loans and could not even get their old loans renewed, forcing many to stop investing. This interpretation blames the Federal Reserve for inaction, especially the New York branch.
Great Depression - Wikipedia, the free encyclopedia
 
#22
Do you really feel the two banks would be functioning in isolation. The operations of the two banks would reasonably intertwined directly and indirectly through their customers that the better bank may find itself in jeopardy.
I am not saying everything will be hunky-dory with the first bank. But it will end up in a better situation than the second bank.
In this scenario when one has all the wealth and the other nothing, and money supply dries up, neither of them has any incentive to produce and exchange goods. How will the economy move forward? It is absolutely necessary for the government to ensure adequate money supply in the system.
There aren't just 2 people. This is an example - if 25% of the people belong to the first category, the economy will move forward.

Germany also benefited substantially and unduly from the common currency. Without it, due to the trade imbalance, the German currency would have appreciated making the German companies less competitive against the local companies of the peripheral countries and this would have acted as a self regulating mechanism. However this didn't happen and Germany found a huge ready market for its goods for a long time without losing competitiveness.
I don't see how any of this is relevant.

The beauty of it is that there is no free lunch.
Everybody pays eventually in one way or the other.
I don't understand what exactly was the free lunch or lack of it.
Same will play out with US and China. For far too long US reaped the benefits of the rest of the world's hard work on the basis of its strong currency resulting in this huge deficit and rendering many of its industries uncompetitive.
This happened because China kept devaluing it's currency, not because US overvalued their currency. Even more important that labour was cheaper in China - plus the huge difference in the amount of regulations needed to be followed in the US as compared to China adding to the costs.

It is not speculation. It most certainly would have happened.
There would have been a crisis. But the world wouldn't have ended.

If Ford would have really benefited from GM's collapse why did Ford accompany GM when GM was asking for a bailout.
Because GM was was getting a free money. If your competitor is getting free money, why shouldn't also try to get some. That was the sole reason for Ford to accompany GM. What do you think was the reason?

Actions should have consequences. If there are no consequences, there is nothing to stop people from doing the same stupidity again.

I don't think so.

It is a 100% certainty.
Here an alternate theory.

http://www.forbes.com/sites/johntam...-fraudulent-nature-of-the-2008-bank-bailouts/

Another thing to note is that 25 US banks did shut down in 2008. Their problem was that they didn't stuff enough money into the pockets of the politicians.

More about crony capitalism - http://www.npr.org/blogs/itsallpoli...rge-may-ring-true-for-leaders-of-both-parties

Politicians are by nature corrupt. But 16 continuous years of 2 of the worst 'crony capitalist' presidents will most certainly screw the US badly.
 
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#23
I am not saying everything will be hunky-dory with the first bank. But it will end up in a better situation than the second bank.
The most likely outcome is that the other bank would also collapse. People would be deprived of funds due the collapse of second bank and then try to withdraw funds from the first. All it needs is for more than 10% of the first bank's customer to do this assuming it keeps 10% reserves and the second bank would also collapse.


There aren't just 2 people. This is an example - if 25% of the people belong to the first category, the economy will move forward.
Now the consumption of 75% of the people will collapse. Will the 25% remain unaffected?

I don't see how any of this is relevant.
You said Germany did nothing wrong. All of them came up with a ill-thought out arrangement because of which Germany got easy access to markets and the PIIGS got cheaps funds. Now all of they are paying the price. None of them are wrong or right.


I don't understand what exactly was the free lunch or lack of it

This happened because China kept devaluing it's currency, not because US overvalued their currency. Even more important that labour was cheaper in China - plus the huge difference in the amount of regulations needed to be followed in the US as compared to China adding to the costs.
What I meant was China and US both will pay in their own way in due course. Dollar is overvalued just by virtue of being the reserve currency and US is getting undue benefit because of this. If it keeps abusing this like it is by endlessly is it will be in serious trouble.

By free lunch I meant any undue benefit doesn't last forever. Usually the situation reverses and the beneficiary ends up paying one way or the other. That's how economics seems to work. European countries are paying now and so will US and China if they don't take measures in time.

There would have been a crisis. But the world wouldn't have ended.
The world would not have ended. But when economy grinds to a standstill it causes serious disruption to livelihoods of huge part of the population. And when so many people are cut off from their basic necessities at once law and order become unmaintable and innocent lives would be lost. Is it really worth it.


Because GM was was getting a free money. If your competitor is getting free money, why shouldn't also try to get some. That was the sole reason for Ford to accompany GM. What do you think was the reason?
As far as I can remember Ford didn't need a bailout. But went along because they feared the US auto sector would collapse. I may be wrong on this.

Actions should have consequences. If there are no consequences, there is nothing to stop people from doing the same stupidity again.
You are absolutely right. But I can't put it any better than Alchemist did. Protecting the innocent is more important than punishing the guilty.
 
#24
The most likely outcome is that the other bank would also collapse. People would be deprived of funds due the collapse of second bank and then try to withdraw funds from the first. All it needs is for more than 10% of the first bank's customer to do this assuming it keeps 10% reserves and the second bank would also collapse.
Half the banks survived the great depression. The ones which collapsed were the ones which were weak and risky even before the great depression.

Now the consumption of 75% of the people will collapse. Will the 25% remain unaffected?
No, but they will do much better than the others.

You said Germany did nothing wrong. All of them came up with a ill-thought out arrangement because of which Germany got easy access to markets and the PIIGS got cheaps funds. Now all of they are paying the price. None of them are wrong or right.
Spending more than what you earn and then expect others to pay for it is wrong.

What I meant was China and US both will pay in their own way in due course. Dollar is overvalued just by virtue of being the reserve currency and US is getting undue benefit because of this. If it keeps abusing this like it is by endlessly is it will be in serious trouble.

By free lunch I meant any undue benefit doesn't last forever. Usually the situation reverses and the beneficiary ends up paying one way or the other. That's how economics seems to work. European countries are paying now and so will US and China if they don't take measures in time.
I agree, but the measure I am recommending is to actually reduce spending. The measure you are recommending is to devalue the currency to make it look like they are reducing spending.

The world would not have ended. But when economy grinds to a standstill it causes serious disruption to livelihoods of huge part of the population. And when so many people are cut off from their basic necessities at once law and order become unmaintable and innocent lives would be lost. Is it really worth it.
This is speculation.

As far as I can remember Ford didn't need a bailout. But went along because they feared the US auto sector would collapse. I may be wrong on this.
You are wrong. They went because they didn't want to lose the chance of free money which their competitors were getting. But the Govt didn't give them money. So only the bad performers were rewarded. And I see no reason why the Auto Sector would have collapsed.

You are absolutely right. But I can't put it any better than Alchemist did. Protecting the innocent is more important than punishing the guilty.
I am not asking for an artificial punishment. I am asking for normal course of events. The US banks and financial institutions went from being cowboys to a strong sector post the great depression. Unfortunately after 50-60 years, the lessons learnt were lost. Hence they became cowboys again. And this time they didn't pay. So no lessens were learnt. They remain cowboys.
 

Alchemist

Administrator
Staff member
#25
Half the banks survived the great depression. The ones which collapsed were the ones which were weak and risky even before the great depression.
Nearly half of the banks that failed during the great depression did not have any major asset quality issues.

They failed either because of bank runs or failures of their correspondents.

Hence they became cowboys again. And this time they didn't pay. So no lessens were learnt. They remain cowboys.
On the contrary, banks have become overcautious and that is one reason why the US economy is still subdued.

If it weren't for that and the Eurozone crisis, US economy would have regained its growth momentum by now.
 
#26
Nearly half of the banks that failed during the great depression did not have any major asset quality issues.

They failed either because of bank runs or failures of their correspondents.
That does mean that half of them had poor quality assets. About the others, businesses fail all the time even if it's not a fault of theirs. It's not the govt's job to shore them up. It's the inherent risk in running a business.
 

Alchemist

Administrator
Staff member
#28
It's the inherent risk in running a business.
All risks are not equal.

There are usual risks and there are unusual risks.

The onus of managing usual risk is individual, but unusual risks cannot be handled by individuals.

That is why we have a society and a government.

When there are large scale accidents, governments always step in.
 
#29
All risks are not equal.

There are usual risks and there are unusual risks.

The onus of managing usual risk is individual, but unusual risks cannot be handled by individuals.

That is why we have a society and a government.

When there are large scale accidents, governments always step in.
This is the best explanation I can find for what was one of the leading causes for the last crisis - Dilbert.com - The Official Dilbert Website with Scott Adams' color strips, Dilbert animation, mashups and more!

I don't know if this kind of risk falls under usual risk or unusual risk - but it most certainly falls under stupid risk. If Govt should be there for protecting businesses from this kind of risk, then tomorrow I will jump from the terrace of my building and expect the Govt to be there to catch me.
 
#30
On the one hand you say that economy is impossbile to predict. On the other hand you say that an oversimplified analogy given by a comic strip for humour's sake as the best explaination for the cause of the financial crisis. If it was that simple it would have been very easy to predict don't you think.

Fact is organizations don't operate in isolation. They interact and affect each other in complicated ways. In extreme conditions, systemic risk is a very legitimate concern. A collapse of one very big organization may impact others in unforeseen ways. In such situations goverment is forced to intervene.

Systemic risk - Wikipedia, the free encyclopedia
 
#31
On the one hand you say that economy is impossbile to predict. On the other hand you say that an oversimplified analogy given by a comic strip for humour's sake as the best explaination for the cause of the financial crisis. If it was that simple it would have been very easy to predict don't you think.
I don't see what is oversimplified about the comic strip's explanation. It's almost exactly what happened with the MBS, CDOs and CDSs.

Fact is organizations don't operate in isolation. They interact and affect each other in complicated ways. In extreme conditions, systemic risk is a very legitimate concern. A collapse of one very big organization may impact others in unforeseen ways. In such situations goverment is forced to intervene.
Nobody is forced to intervene - especially when no one knows accurately what will happen if they intervene or if they don't intervene - especially when they are intervening with tax payer money and causing a loss of value of money for people who made wise choices. The reason why the US Govt intervened is not because of the concern for people - but because banks and insurance companies donate very heavily to both Political Party. And Auto unions are a huge base for the Democrats. Check the amount of money Obama has received from Wall Street and also many of main bundlers are from the Wall Street. Many people who should have been in jail are not just because of this reason. Instead the DOJ concentrated on teaching Aaron Swartz a lesson and the world lost a genius.

As it was said in the Australian article, the sole purpose of economic predictions seems to be to make weather predictions look good.

Here is a chart showing Obama's prediction of what kind of jobs the stimulus would create as compared to the actual jobs they created

http://cdn.pjmedia.com/instapundit/wp-content/uploads/2012/07/OBAMAFAILJOBS.jpg

Prediction is very difficult, especially about the future.
 
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Alchemist

Administrator
Staff member
#32
I don't know if this kind of risk falls under usual risk or unusual risk - but it most certainly falls under stupid risk.
By "unusual risk", I mean risk associated with occurrence of a very low probability event.

Both in real world and in financial world, some risks have to be ignored.

e.g.

Insurance companies work on the assumption that all their customers will not die together in a short time period.

Even though the risk of such an event exists, insurance companies cannot function if they have to provide for such a risk.

$$Money$$ got my point.

In the banking system, banks can manage risk associated with individual assets or a group of assets, but they cannot manage systemic risks on their own.

Only central banks are in a position to manage systemic risks.

Nobody is forced to intervene - especially when no one knows accurately what will happen if they intervene or if they don't intervene
"No one" is a very small group of people in this case.

What was already happening in the financial markets in 2008 was a clear indication of what was coming ahead.

Credit markets had been already frozen by mid-2008.

The malady had spread to all continents. Even in India, corporate bonds were crashing.



(Source of image: Economic Survey 2008-2009).

Non-intervention proved to be a costly mistake during the great depression. There was no point in repeating the same mistake again.
 
#33
Both in real world and in financial world, some risks have to be ignored.

e.g.

Insurance companies work on the assumption that all their customers will not die together in a short time period.

Even though the risk of such an event exists, insurance companies cannot function if they have to provide for such a risk.
That's the risk they take. It doesn't mean that Govt should bail them out if that risk turns into reality.

$$Money$$ got my point.
I also fully get your point - it's just that I don't agree with it.

"No one" is a very small group of people in this case.
Consensus is not proof.

This is an excellent lecture by Michael Crichton on 'Consensus' - It's a critique of consensus in science (mostly about Environmentalists and the science they follow) - but the same holds good in any field - https://www.cfa.harvard.edu/~scranmer/SPD/crichton.html

The whole world isn't Keynesian. I find the Austrian School of Economics more plausible.

They believe
- that the Govt caused the Great Depression and most other recessions.
- you should let the depression run it's course.

You believe in Keynesian School, I believe in the Austrian School. In the end, as far as economics goes, it's not an exact science - you can never apply the rigours and standards demanded by Crichton in science - so it's very difficult to prove that one side is correct and the other is wrong.

Basically, human beings do not want to accept that they can do nothing about a situation (good or bad). Human beings do not want to ever accept that they are helpless and not in control all the time. That's why Govts indulge in constant tinkering and this is believed by the Austrian school to cause problems.

Even Taleb (not from the Austrian School) describes Rubin, Stuglitz and Krugman as fragilistas and Alan Greenspan as the Uber Fragilista.
 
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Alchemist

Administrator
Staff member
#34
That's the risk they take. It doesn't mean that Govt should bail them out if that risk turns into reality.
People take a risk when they hold money.

Central banks have the mandate to print money. People should not complain if central banks print money.

If people are so troubled by decisions of the central banks, they should convert their money to other assets.

No one is forced to hold money. It's a choice too and it comes with its own risks too.
 
#35
People take a risk when they hold money.
Sure - I agree.

However, I still don't see a reason for Govt to bail businesses out. If some business it to big to fail, then they should be compulsorily broken up before they become that big. Ideally I don't want either things to happen - company being broken up or company being bailed out.
 
#36
Banks by the very nature of their business are very interlinked. That's why they co-operate(inter-bank lending,etc) as well as compete. Failure of one bank has serious consequenses for other banks as well. A stable banking is very critical for rest of the economy as well. Thus bailouts in extreme conditions become necessary.

Also contrary to what Austrian economist claim about less government involvement, financial crisis happened because of under regulation of a part banks' activities like OTC derivatives. A complete hands off approach does not always work.

It may not be able to predict accurately what happen in the economy as it is by nature very complex. But it is possible to analyses what are the probable possibilities. Sometimes it might go wrong. It doesn't mean it is an exercise in futility.

It is not possible to predict the future. But people plan for the future all the time.
 
#37
ALso contrary to what Austrian economist claim about less government involvement, financial crisis happened becaue of under regulation of a part banks' activities like OTC derivatives. A complete hands off approach does not always work.
IMHO, the last recession happened because of many reasons

- Repeal of Glass-Steagall by Clinton
- Fannie Mae and Freddie Mac (both Govt) easing credit to aid Mortgage Lending.
- Stupid Risks taken by Banks/Financial institutions
- Fraud committed by Banks/Financial institutions.

Re the Great Depression, the Austrian school thought is that the central bank's "easy credit policy" led to an unsustainable credit-driven boom.
 
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