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More on Bubbles
Speaking of asset bubbles, Steve Randy Waldman takes a crack at explaining why an expanding money supply sometimes creates ordinary consumer price inflation and other times creates asset price inflation:
Whether an economy generates asset price inflation or consumer price inflation depends on the details of to whom cash flows. In particular, cash flows to the relatively wealthy lead
to asset price inflation, while cash-flows to the relatively poor lead to consumer price inflation.
Why? In Keynesian terms, poorer people have a higher marginal propensity to consume....Poorer people disproportionately use their cash to purchase goods, while richer people disproportionately "save" by purchasing financial assets. If the supply of both goods and financial assets is not perfectly elastic, then increases in demand will be associated with increases in price. If relative demand for goods and financial assets is a function of the distribution of cash, what price changes occur will be a function of who gets what.
So: as income inequality goes up, more money flows to the well-off, who use it to buy financial assets. Conversely, less money flows to the poor and middle class, who respond by increasing their debt level. Both of these mechanisms produce a higher demand for financial assets and therefore promote asset inflation.
Turn that around, of course, and you limit asset inflation but promote consumer inflation instead, which has to be held in check via periodic recessions. So the question is, which would you rather have: periodic modest recessions or long periods of stability interrupted by occasional huge bubbles bursting? The latter is typical of the "Great Moderation" of the post-1980 era, and Steve argues that it's been economically destructive in multiple ways:
First, in exchange for apparent stability, the central-bank-backstopped "great moderation" has rendered asset prices unreliable as guides to real investment. I think the United States has made terrible aggregate investment decisions over the last 30 years, and will continue to do so as long as a "ride the bubble then hide in banks" strategy pays off. Under the moderation dynamic, resource allocation is managed alternately by compromised capital markets and fiscal stimulators, neither of which make remotely good choices.
Second, by relying on credit rather than wages to fund middle-class consumption, the moderation dynamic causes great harm in the form of stress from unwanted financial risk, loss of freedom to pursue nonremunerative activities, and unnecessary catastrophes for isolated families.
Finally, maintaining the dynamic requires active use of policy instruments to sustain an inequitable distribution of wealth and income in a manner that I view as unjust. In "good times", central bankers actively suppress the median wage (while applauding increases in the mean wages driven by the upper tail). During the reset phase, policymakers bail out creditors. There is nothing "natural" or "efficient" about these choices.
Regular readers will be unsurprised that I generally agree with all this, although I might put it a little more pithily: rich people tend to do really stupid things when they have too much money lying around for too long. So do poor people, of course, but in their case "too much money" is only enough to buy a bigger TV, not enough to blow up the world. That's why I think getting a handle on rising income inequality is important. To paraphrase William F. Buckley, if I had an extra million dollars to divvy up, I'd rather give it to the first thousand names in the New York City phone book than to the CEO of Goldman Sachs.
One of the things that
One of the things that bothers me most about the way our society handles money is the push that has been on since the 70's to saddle people with as much debt as possible. Borrowed money is what banks thrive on and nothing a banker loves so much as someone who borrow a lot and makes the payments on time. Instead of a chicken in every pot, our government (under the management of the financial services industry) delivered a lifetime of debt in every household. No one is encouraged to pay off their car, they're encouraged to trade it in regularly and NEVER get out from under the payments. No one pays off their house anymore, they are encouraged to keep moving up and keep acquiring yet another loan to keep them paying interest for as long as possible.
An entire generation of people is growing up expecting to be saddled with debt for their entire lives. The banker boys have blown a bubble that eclipses anything we've yet seen -- the bubble is our entire lifestyle and economy. Our standard of living is all based on the middle class taking on as much debt as possible. Housing prices, retail, car prices....without the ability to take on greater and greater levels of debt the economy stagnates. Unless you raise wages. Bit every wage gain for the past 30 years has gone to health care premiums and CEO compensation packages.
The power to change is for people to stop taking on new debt. Put the damn credit cards away. Pay off your car. Change your mortgage to a 15 year. Pay it off. Stop shoveling your money into interest payments keeping this rotten and corrupt system afloat. Here's an idea: Starve the Beast. Wall Street can't exist without your 401k and your debt. Get out of the game, walk away. Invest in family and education.
Save.
I'm all for avoiding
I'm all for avoiding unnecessary consumption (these days not really an optional policy), but I'm not sure individuals have any way of avoiding feeding the beast.
Suppose you scrimp and avoid debt and save a certain amount. What do you do with it? If it's not invested in the market, you could put it into a CD or a money market fund, but, news flash, right now these pay next to nothing. I looked into turning over a CD recently and the rates were fractions of a percent. Money markets are similar.
Rates are where they are due to the fed pushing prime rates close to 0 to prop up the overall economy in the wake of the crash; still, lots of people have debt that they pay real interest on. Thanks to the wide spread, the banksters are making themselves whole. (Thanks, Obama/Geithner.)
So saving without investing means you agree to get fleeced in order to enrich the ruling classes. Nice.
As to spending on education, that's yet another thing that feeds the beast. College tuition (particularly for prestige universities) has gone up by multiples of inflation for decades, so now anybody paying it is contributing to bloated institutions which are a big part of the overall problem.
Not taking on debt is a fine idea, but it won't starve the beast.
How do you think bank runs
How do you think bank runs happen? It's the little guy pulling all his cash out.
Produce your own power, grow your own food
Invest your money in home solar and wind power installations, improving the energy efficiency of your home, and get an electric car. Rip out purely ornamental trees and shrubs and replace them with ornamental edibles, and plant an organic vegetable garden. Put in drip irrigation for all of it, with a cistern to collect runoff from your roof.
Sound finance, and good for the planet. And even if the financial system collapses, you'll still benefit from these investments.
You have to look at the
You have to look at the bigger picture. If you divert money to the poor -- you tear down two cornerstones of capitalism: credit card debt and the lack of affordable healthcare. Without debt and abscessed teeth, the common man is lazy and unwilling to hold three or four jobs. The cycle of increasing productivity drops off and America loses to countries in asia where people will work for 100 hours a week for the privilege of not eating dirt.
Maybe Socialism isn't So Bad After All
Seriously. The best stimulus would be for the government to employ those who want to work and can't find jobs. Kind of like the military, but we could solve other problems.
How has this worked elsewhere (having the government as the employer of last resort)?
"Turn that around, of
"Turn that around, of course, and you limit asset inflation but promote consumer inflation instead, which has to be held in check via periodic recessions."
How about taxing the wealthy a little more and investing the extra revenue generated in infrastructure, health care, clean energy and the environment? A little less of both asset and consumer inflation, and a little better quality of life.
Asset price inflation
Asset price inflation doesn't imply a "bubble." If the demand for savings (i.e. postponing consumption) goes up, the price of assets should go up, leading to a lower rate of return. This isn't a bubble. The existence of a bubble requires more explanation.
Furthermore, the biggest asset rises and falls, and the ones that set off the crisis, were houses sold to lower income people. Assets purchased by "consumers," not by "savers." So the explanation fails.
Am I missing something?
Dude, you're not even making
Dude, you're not even making sense.
Yes, you're missing something
". . . the price of assets should go up, leading to a lower rate of return."
I'm not sure I follow that logic. People who invested in residential real estate weren't investing to collect rent. If that were the case, your statement might make some sense. When people invest with the expectation that they can turn over the investment in a short time and reap a hefty capital gain, the rate of return depends on how much the asset will appreciate. What many investors ignore is the fact that an asset's real value isn't unlimited, and rapid increase in value may well mean that what the market will bear at the moment is the beginning of a bubble, not a reflection of true value. When folks like AGI are allowed to bamboozle investors into buying sliced and diced mortgage backed securities that appear safer than they are, and then sell insurance in the form of credit default swaps without the assets to back them up, and mortgage lenders are rewarded for disregarding the traditional creditworthiness requirements, greed and deceit combine to create the imbalance that, in a truly unfettered market, would correct itself in the form of a burst bubble.
Investors who buy stock to hold and collect dividends are providing capital for business to use - a useful commodity. They contribute to economic prosperity. Investors who invest - whether buying homes to flip or stocks to sell for a quick profit or derivatives - aren't adding anything of value to the economy, except some commissions for sales people and perhaps a bit of liquidity. They're basically just gamblers. When they are allowed to gamble with other people's money, they're crooks, and they wield too much leverage, creating the market imbalances that result in destructive bursts. Poor people who buy houses they can't afford are both consumers and investors (and gamblers, but they at least bear the brunt of their risk-taking). Most of them didn't just walk away from their homes when market values plunged. It was the speculators who could buy cheap and walk away when the properties were upside down. So in answer to the question "Am I missing something?" yes, you are. The whole point of the article.
i would be cautious.
I would be cautious in rushing to blame consumers for this bubble. Fannie mae and Freddie mac only handled a fraction of the subprime loans.
To put it succintly: an intricate house of cards built from the top down, collapsed.
To put it verbosely: The financial institutions, that were trading the mortgages like baseball cards--never thought they would have to deal with the inventory left behind when (not if) these poor bastards defaulted. The insurance plan was credit swap whachamacalits. But when the cards started to drop, they insurers had chump change to try to solve the muti-billion dollar debts.
That's part of how this collapse happened. This is not a values issue. This is a hubris issue.
America feeds on its own young.
This is all well and good -
This is all well and good - but those with "lots of money lying around" are the ones who contribute to political campaigns. They get first crack at our tax dollars. Is it any wonder that Bill Buckley - no friend of big government - understood the problems with government manipulation of our economy.
Maybe some day the term "Too big to fail" will fall into the dustbin of history as a failed and discredited rationale for government behavior. I would hope that - long before this happens - the concept of using governmental intervention in our lives along with governmental penalties as a means for "protection" is equally laughable.
Today we "protect" our minor children from "dangerous drugs" by empowering criminal gangs to initiate an underground delivery system that provides drugs catered to hard core abusers for teenagers who would otherwise have very restricted access to less harmful drugs in the free market. We also "protect???" crime victims by providing obscene untaxable profits to criminals in a drug policy that is directly responsible for over 75% of our crime and over 90% of our violent crime. Wouldn't a policy that reduced the number of crime victims be far more preferable to our current criminal justice system? Of course, William F Buckley, no friend of big government, was an early and savage critic of our current drug policy.
May God's will be done on earth and let it begin - and end - with myself. If it happens any other way it's not God's will.
This is all well and good -
This is all well and good - but those with "lots of money lying around" are the ones who contribute to political campaigns. They get first crack at our tax dollars. Is it any wonder that Bill Buckley - no friend of big government - understood the problems with government manipulation of our economy.
Maybe some day the term "Too big to fail" will fall into the dustbin of history as a failed and discredited rationale for government behavior. I would hope that - long before this happens - the concept of using governmental intervention in our lives along with governmental penalties as a means for "protection" is equally laughable.
Today we "protect" our minor children from "dangerous drugs" by empowering criminal gangs to initiate an underground delivery system that provides drugs catered to hard core abusers for teenagers who would otherwise have very restricted access to less harmful drugs in the free market. We also "protect???" crime victims by providing obscene untaxable profits to criminals in a drug policy that is directly responsible for over 75% of our crime and over 90% of our violent crime. Wouldn't a policy that reduced the number of crime victims be far more preferable to our current criminal justice system? Of course, William F Buckley, no friend of big government, was an early and savage critic of our current drug policy.
May God's will be done on earth and let it begin - and end - with myself. If it happens any other way it's not God's will.
I think there's a dangerous
I think there's a dangerous misuse of the word capitalism in use today.
Capitalism is the free market.
We haven't had pure capitalism in this country for at least 100 years if ever.
What we have is a government that makes inefficient rules that micromanage the markets.
We all know that micromanaging doesn't work because the boss doesn't know how to do the job.
What we need are broad simple rules.
You borrow = you pay back. You buy = you own. You pollute = you pay society for the damage.
Thus we empower the entrepreneurs and hard workers to solve the problems efficiently.
These would be rules that would fit on a few sheets of paper and would like the constitution has to hold the country together.
What do you think of this statement?
In life I've begun to realize that complexity is normally due to a lie, or someone tying to get something that they don't have a logical right to while excluding others who do have a logical right. The true and right is simple.
Government micromanagement
I agree with that part of your statement that says "If you pollute, you pay." If only that were possible. Since the industrial revolution began, businesses have made profits at public expense, from clearcutting forests to strip mining coal, gold, silver, copper, etc. to appropriating water to polluting water, air and ground, to monopolizing airways. What they have paid voluntarily is next to nothing. What the government has required of them doesn't begin to cover the cost of cleaning up the mess or replenishing the sources of what they have appropriated. So now that the public has come to realize the cost of allowing this unfettered exploitation and begun to try to recoup the cost, businesses complain of being micromanaged and regulated. Without the government looking after the public interest we would soon have no clean water, clean air, mountaintops, wilderness, wildlife, fish, whales, and on and on. The free market does not address these issues at all - period. It is based entirely on the principle that people will pursue what benefits them personally, regardless of the cost to others. Once you realize that capitalism does not provide the solution to all of society's problems, perhaps you can get off the "true capitalism" bandwagon and join the real world.
I think the "true
I think the "true capitalism" argument is correct but you gotta believe in the line "What we need are broad simple rules" - rules that are enforced. Not red tape, but rules. I think that the constitution was on the right track.
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