Republicans & Conservatives Archives

George Bush caused the great recession.

Of course it’s a bit more complicated. There is a saying in economics that stability brings instability and instability brings stability. This is true because the more stable an ecnoomy is, the more risk it is willing to accept because the more predictable a society believes the outcome will be.

There was a theory called “the great moderation”, that was put forth by economist James Stock of Harvard that noted the standard deviation of our economy was in decline from the 1980’s.

Ben Bernanke later brought this phrase to greater acceptance in a speech called “The great moderation”

http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2004/20040220/default.htm

It is interesting to me that at the same time as our leading economists were giving speeches on “the great moderation”, those in Congress were lamblasting Fannie Mae critics.

http://www.youtube.com/watch?v=Yga7TlsA-1A

Connect the dots between a wide held belief that the economy was moderating that was held clear to the top of the food chain (Ben Bernanke), and then in this case to House Democrats.

Belief in stability implies a greater willingness to take risk. For instance, every year we see where vehicles go through the ice when ice fisherman believe the ice is thick. The greater the believe the larger the truck they drive until one goes through. Then of course all the trucks are left on the bank.

So finally as a society we reached too far and “the great moderation” was followed by “the great recession”.

Now of course we are going to move to the flip side of the equation. Instability brings stability. Now we are risk averse for a season. Volitility is in decline. This can be tracked is you choose to by googling VIX. VIX is the Volatility index from the chicago board of trade.

Here is a link:

http://finance.yahoo.com/echarts?s=%5Evix#chart1:symbol=^vix;range=5y;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=off;source=undefined

Clearly you can see volatility leaving the markets.

The cause of “The Great Recession” was the believe system called “The Great Moderation” that was held by some of our greatest economists that changed all of our behavior by making us all far to willing to accept risk. These economists were the ones who briefed our leaders both Democrats and Republicans which allowed them psycholocally to remove restrictions on credit.

Our best economists were wrong.

Understanding the psychology of risk and risk aversion and herd mentality is the key to this, but as Greenspan noted, it may well be beyond the ability of man to alter this behavior.

I will dispute the description by John and Christine of our “recessions”. The Great Depression and this “recession” were significantly different in their cyclical natures. While there were similar economic panics in the 1800’s, these two events were associated with significant money supply shrinkage. The difference, so far, has been the government response. In the 30’s government intervention was minimal, although unemployment was significantly reduced by government efforts. It is true trade policies did more damage than good. It wasn’t until WWII that money supply was significantly increased to have the desirous effects on GDP. Moreover a refocusing of people’s attention to the war rather than their own misery was helpful in reversing the psychological issues. In this contraction there was timely and significant money supply response, whether that can be maintained or we can avoid stupid trade policies is yet to be seen with the moronic Republican drumbeat about deficit reduction.

BTW, before you delve off into the world of make believe of “The Forgotten Man“‘s revisionist history, it might be worthwhile to read this review:

http://www.newyorker.com/arts/critics/books/2007/07/02/070702crbo_books_updike?currentPage=1

Craig

The world you describe is very simple. It must be nice to live in such a place and also evidently be one of the smartest residents. I assume that anyone who understands all that complexity must be fabulously wealthy.

BTW - experts are usually wrong in details. That is not their fault. The world is just too complex to be encompassed by any theory. That is one reason I am suspicious of any master plans, especially those that project results more than a couple years out.

Gergle

I think you are right about the money supply. In 1929 anon, the Fed did exactly the wrong thing and shrunk the money supply. Bernake is a student of that era and I think he did exactly the right thing by adding liquidity. The problem will be wringing it back out when the economy improves. It is always easier to give than than to take back.

Re the “Forgotten Man” it is a good history and well received, I suppose depending on your pre-existing ideas about government intervention.

I do think that we needed a new look. When I learned history way back, we just were told that the New Deal more or less solved the Depression but the that WWII finished the job. The WWII part is right but the rest is not.

New Deal programs clearly did not make much of an economic contribution and may have slowed recovered. HOWEVER, they had the important cultural/political consequence of probably preventing more radical approaches (i.e. avoiding the more virulent forms of intervention such as communism or fascism). They also served to organize and regiment the country. W/o the regimentation of the New Deal, winning WWII would have been harder.

My father was in the CCC. He enjoyed his experience and it helped him personally. He told me that it was very military and a preparation for war. When he was drafted into the army in WWII, he said that all the CCC boys were singled out for leadership positions because they essentially had prior military training.

C&J wrote: “We don’t know what will bring us back to prosperity this time, but I have confidence that we will recover. We always do. “

Famous last words of the dead tempting fate. I am sure the Romans had the same confidence, as did the Athenians, Babylonians, Macedonians, Persians, etc. etc. Sure, they recovered over the centuries, but, never again to be the great wealthy civilizations they once were.

Your article is factual as far as it goes. I know it is a blog article and not a text book, and therefore must limit its scope of variables that played crucial roles in the historical events cited. However, it must be said, that the history of economics and civilization cannot be accurately reflected in Cliff Notes fashion, and attempts to present single variable analyses of necessity, must inaccurately tell the tale of history.

Your article’s conclusion however, that our nation has been challenged before, and come back, is anything but foregone. In fact, it is false in its extrapolation. America recovered from the Great Depression and WWII debt due its ability to tap vast potential labor resources in the production of innovative products and technologies, thereby producing incredible revenues for both the private and public sector.

That context does not exist today. In fact, we are witnessing this fact in the confluence of rising stock markets (private sector profits) without renewed employment. A very large component of the private sector has and will forego hiring human beings in favor of new automation processes and equipment. Jobless recoveries are the new paradigm of 21st century post recessionary recovery.

And that spells a potentially insurmountable problem for our federal government, which must deficit spend to stem recessions, but, which can no longer look forward to private sector employment recovery replenishing lost tax revenues. Which means dealing with national debt, especially growing debt, is the most difficult challenge our federal government faces.

Obama gets it. Cutting federal spending, and investing in new national infrastructure and the education required to provide labor for the new jobs coming from these new infrastructures, is a way to begin to address the debt challenge.

Political vetoes of progress by the minority party however, can and will only exacerbate our nation’s enormous and costly challenges. To save our nation’s future, the minority political party must redefine its role from that of political foe and obstructionist, to that of modifier and contributor to solutions proffered by the majority.

Anything less results in America’s failure to meet its challenges, and arrest its future from bankruptcy under the weight of growing debt and service on that debt, undermining the government’s ability to infuse remedial cash stimulus into the economy during and after economic downturns.

We have built an economic house of cards. Securing our future depends upon building a wind barrier at least around the bottom 2/3 of this structure. As long as Republicans are huffing and puffing to blow this man down, however, our nation’s house of cards is entirely vulnerable.

Christine:

Thank you for your very kind reply.

In economics stability does bring instability and the reverse. Here is an article that explains the concept.

http://www.ritholtz.com/blog/2009/12/galbraith-financial-stability-creates-instability/

This is also evident in your post. You say for instance that:

The Panic of 1907, which I include only for the sake of completeness, because it spurred the creation of the Federal Reserve and because I just finished reading the book in the link, was also precipitated by rapid growth and investment in the U.S.

Since the creation of the Federal Reserve, the numbers of panics has decreased dramatically. (Obvious exeption of the Great Depression).

During the great Depression many great regulations were put into place. Long term stability was the result.

What was hard this last time was the issue of why the standard deviation of the economy was declining from the 1980’s and beyond.

Here is a graph:

http://research.stlouisfed.org/publications/es/03/ES0324.pdf

If you read Bernanke he gave the Fed credit for superior management of the economy. For instance he says:

The Great Moderation, the substantial decline in macroeconomic volatility over the past twenty years, is a striking economic development. Whether the dominant cause of the Great Moderation is structural change, improved monetary policy, or simply good luck is an important question about which no consensus has yet formed. I have argued today that improved monetary policy has likely made an important contribution not only to the reduced volatility of inflation (which is not particularly controversial) but to the reduced volatility of output as well.

http://www.federalreserve.gov/Boarddocs/Speeches/2004/20040220/default.htm

I can’t find the quote but either Bill Gross or Paul McCulley have a great article a few years ago that said the reason for the great moderation was Bernanke’s third choice “luck”.

By this he means that “the great moderation” that set up “the great recession” was not advancement of our society at all, nor can we give credit to Clinton, or Reagan or Blame Bush, it was simply what economist call a goldilocks event.

And no I am not rich because I follow and take action from these top economists that were in fact wrong. There was no permanent moderating in the economy based on advancement of our society or the greatness of our monetary policy. If there was it was check mated by our humaness and we simply used that security to buy more rope to hang ourselves.

Now is when economist are all over the map. Pick and idea of what one thinks is going to happen, and it doesn’t take long to find some top economist who will agree.

Christine:

Just to demonstrate how far off the top economist were, here is a quote from Pimco of Bill Gross fame. This is their CEO Mohamed El-Erian:

After the September 2008 crisis, you mentioned in Fortune that you’d asked your wife to withdraw cash from the bank. What was your life like?

I would kiss my wife good morning at 2 o’clock in the morning. I would tell her, “You’ve got to watch TV. This is really important.” I normally get up at three, but I moved it forward to two.

And we worried about things we never thought we’d have to worry about. We worried about, Where’s our cash? There was a day when I called my wife and said, “Please go to the bank and get cash.” And she said, “Why?” I said, “Because I don’t think the banks are going to open tomorrow.” That’s how close it got.

Our very best economists missed it.

I have to agree with Remer’s comments about tempting fate. There is a point that seems lost on all these comments so far. the cyclical nature of economies in the 19th century was a function of technological revolutions remaking the market place and then having to reallocate resources, both labor and raw resources had to be re-staged for the new reality.

A good example would be in the petroleum industry, where the rise of petroleum and the development of refining caused prices for illumination oils to crash, uprooting people dependent on whale oil. That crash in prices made oil competitive with coal for heating fuels and new demand drove prices up so that there was new explorations- etc. There was a see-sawing of a crucial commodity price through much of the century. That really is the norm in markets. In spite of the volatility, however, the economy’s capacity to fill the needs of the people grew, albeit unsteadily.

There is very good evidence that these gyrations are not necessarily bad and that the interventions that are supposed to make us feel better while they happen are not necessarily good. If the economy does not make the reallocations of resources it must make to provide for changes in the marketplace recessions merely drag on. If small and large businesses feel only the shifting sands of changing rules and tax policies beneath their feet they will not committ to solid plans for the future and recessions drag on. Worse yet, if government makes the error of creating make-work jobs that don’t really substantially add value to the economy as it did in the Great Depression it can crow, as it did then, that it has eliminated unemployment, only to have the scourge reemerge as soon as the government jobs go away.

Folks, a year ago, folks like you were saying (as you still say) that the stimulus would be a flop.

Rather than be a flop, the stimulus can be credited with millions of jobs since its inception, millions more to come, and at long last substantial growth that’s taken us out of a recession that started well over a year before.

That growth won’t go away. Folks said that car sales would drop in the wake of the finish of the cash-for-clunkers programs. It didn’t.

What Republicans aren’t factoring in, is that this is not a cyclical downturn. There was nothing natural about it. This recession was the result of a financial panic the likes of which had not been seen for decades. It wasn’t that suddenly America became less capable of productivity, that some critical resource just vanished into thin air.

No, what happened was that people became highly uncertain about the assets and the derivatives based insurance policies that constituted huge parts of the biggest bank’s portfolios, and those banks suddenly became either unable to lend, or very much unwilling.

This meant that businesses, through no fault of their own, found themselves facing financial difficulties that could not have been predicted by any reasonable analyst, causing many otherwise profitable businesses to shut their doors.

And these businesses were not islands unto themselves. In an economy, nearly everybody who’s paying for your goods and services is paid for giving out those goods and services to somebody else. So when businesses went under, the economic hard times of millions made things harder for the people who were still employed, and the businesses that were still running. Sometimes, too hard.

The lost wealth of wall street, and the stagnated cashflow translates to an economy struggling to get people to buy the products and services that former levels of wealth and cashflow could sustain. Yet people are faced with prices set at levels appropriate to the former levels of economic wherewithal. Trouble is, pulling prices down to appropriate levels means that those asking those prices, often the people employing and paying the consumers out there get less.

Therefore, out of control downward price pressures. It could have gotten uglier than it got.

And this is what you Republicans claim is the good thing, the natural thing, rather than understanding it for what it is: one of the collosal ****-ups of economic history, one that could have been even worse had we immediately done what many Republicans and some Democrats were advocating for: Letting the banks collapse, failing to stimulate the economy.

It is said that those who do not know history are doomed to repeat it. That, in my mind, is the explanation for so many so-called cycles. One generation forgets the lessons of those before it, pushes their luck, and finds themselves no more impervious to error than those who screwed up before them.

This mess was entirely preventable, and its repetition is preventable as well. This talk of cycles is just Republicans not wanting to take responsibility for a policy question. They don’t want to have to admit that their economic policies were relevant to what happened. They want to be able to shrug and say **** happens.

But if you look at history, you’ll find it most often happens when somebody does something to monkey around with the economy to make it seem like it’s got more money in it or more stability than it really does.

It doesn’t matter whether it’s a government that does it, individual or corporate financial interests, ultimately it comes down to people finding out that a great part of the supposed prosperity is a damn lie.

Unfortunately, since the economy has a significant subjective component to it, but often objectively set conditions, adjusting back to something resembling reality is difficult and dangerous without idling workforces and killing productivity even more than the downturn

In fact, the last Depression before the Great one, or rather the Great Depression before the Great Depression, was called the Long Depression. It wasn’t merely a cycle, for the longest time, it was the norm.

What did the Republicans do in those times? Well, nothing much. What was the result? Well, the economy was in recession about half the time until around 1900.

The problem with the modern Republican Party is that it’s forever trying to vindicate the judgments of its predecessors in economic hard times before. Unfortunately, many times that means repeating the mistakes that caused those difficulties in the first place, simply to prove folks weren’t mistaken.

The Republican Congress and Clinton were wrong to do away with Glass Steagall and its protections, the way they did. They were wrong to leave derivatives unregulated, to in fact prohibit their regulation. They didn’t aid the free market, they only managed to create a market where valuations were mostly works of fiction, and the folks taking these immense risks weren’t small enough to allow their companies to die without destroying the economy’s strength for decades to come.

The Republicans let the captains of industry become numb to the basic economic realities of the average American, and let them stake so much of the rest of our assets on their game that we couldn’t let them suffer the consequences without slitting our own throats, too.

Lee:

There is very good evidence that these gyrations are not necessarily bad and that the interventions that are supposed to make us feel better while they happen are not necessarily good.

It depends on what one means as bad. Robert Shiller the Harvard economist uses the term “Animal Spirits”. Although I will describe his concept poorly, he basically means that when there is a shock to the system like what we have experienced it can be so severe that we become very risk averse.

The theory goes that stimulus from the fed needs to be so large that our animal spirits are revived and we will take risk and thus allow the eocnomy to grow.

Here is a link to an article by Robert Shiller describing this concept:

http://online.wsj.com/article/SB123302080925418107.html

Back to your point, if the downturn is too severe the pyschological damage is so great that the economy can flounder for years. In that case the downturn would not be a good thing.

The term for what you are describing is called “creative destruction” I think it was first used in the 1940’s but I could be wrong. Alan Greenspan uses it quite a bit.

Lee said: “There is very good evidence that these gyrations are not necessarily bad…”

True enough in general. They just are. However, that is not a defense for avoiding regulatory measures that 1) detect the onset of such downturns, or inflation of bubbles, and 2) moderate the impact of such downturns and bubbles.

This is why Bernanke is going to remain. He gets it. Now that he missed it, and has learned from the experience in a very real life, non-theoretical, non-ideological way, the high price of wearing rose colored glasses tinted by Wall St. performance and leveraging of debt to an unlimited degree.

There is a cataclysmic fight going to take place over the next months and few years, between the federal regulatory agencies and corporations who fully intend to leverage the Supreme Court’s ruling to the maximum extent. This is going to very unsettling for the markets, for the Congress and White House, and for the American people who are going to the target of corporate propaganda campaigns to elect their own puppets into the seats of Congress and the White House.

The corporation’s odds of winning this fight will double each year for the next 3, leaving them the clear winners if our government and the people it represents fail to check their exercise of their newfound freedom to buy elections in their favor.

Stephen:

This mess was entirely preventable, and its repetition is preventable as well.

I agree with most of what you have said. However I disagree with this statement.

The reason I disagree is human nature.

In football do pads eliminate injuries? No actually the injury rate is high in football because football pads also have the unintended consequence of increasing the violence of football. Why? Because as players feel safer they take greater risks.

The same way is true now. We always need to keep our regulations current. But the safeguards we put in place today, will only lay the foundation for additional risk taking in the future.

It is true that instability produces stability. So we will of course reregulate and put on addition pads. Human nature what it is, over time when the emotional pain from what we have experienced is gone, these new safeguards will lead to additional risk taking and then we will have another crisis.

This pattern will continue until humans stop being human.

David:

True enough in general. They just are. However, that is not a defense for avoiding regulatory measures that 1) detect the onset of such downturns, or inflation of bubbles, and 2) moderate the impact of such downturns and bubbles.

This is why Bernanke is going to remain. He gets it. Now that he missed it, and has learned from the experience in a very real life, non-theoretical, non-ideological way, the high price of wearing rose colored glasses tinted by Wall St. performance and leveraging of debt to an unlimited degree.

Could you comment on how this relates to the Fed’s twin mandates of stable prices and full employment?

I see an indirect correlation because of the high unemployment rate right now. However, I am not sure how clear it is that the Fed’s job is to manage bubbles.

For instance, do you think that this should be added directly to their charge?

Craig, the Fed has oversight responsibility for holding banks, and collects data from them. This data and oversight both permits some bubble formation detection and some regulatory control over their actions which may be contributing to bubble formation, especially where leveraging of investment and debt instruments are concerned passing through those holding banks.

That’s my take from his testimony yesterday, anyway. I am not well versed on the intricacies of the inner workings or even legal power provisions for the Fed Reserve.

David:

One of the debates is whether or not it is best to have the fed regulate bubbles. For instance the tech bubble in the late 1990’s. Greenspan called in “irrational exuburance.” Do we want the fed to do such a thing?

Right now under current law the fed has all the regulations it needs to pop stock market bubbles through margin rules currently at 50%. I am not certain they have the moral authority as I am not sure how clearly asset bubbles fits within the twin purpose of stable prices and full unemployment.

This could be one great debate. In Europe as you know central bankers have one mandate, stable prices. Hmmmm, which currency would you think would be the strongest over time? My money would be on the currency where the central bankers only have one thing to do verses two. If we add a third, there might be negative unintended consequences of a weaker currency.

Craig’s basic rule is that whenever my tax dollars are needed for a bailout, my govenment now has a responsibilty to regulate to make sure we don’t have to do it again. You take bailout money, you welcome our regulators.

A lot of good stuff came out of the thirties. (a lot of bad stuff as well). It will be a great debate!! Hopefully it will lay the ground work for a better future.

David:

FYI:

Federal Reserve Act
Section 2a. Monetary Policy Objectives
The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.

Craig asked: “One of the debates is whether or not it is best to have the fed regulate bubbles. For instance the tech bubble in the late 1990’s. Greenspan called in “irrational exuburance.” Do we want the fed to do such a thing?”

Yes, and No. Yes, we want the Fed to oversee and act as a defense system against potential bubbles occurring in the Banking sector, or bubbles elsewhere that show up through the banking sectors (the Mortgage Industry) for example. Look, Greenspan was a partisan ideologue. He has admitted this himself. That blinded him. That was his mistake. How much influence he had over the rest of the Fed’s board of governors I don’t know, but clearly and on record, Greenspan was working complicitly with GW Bush to create the ownership society which pursues political and Fiscal policy agendas, not monetary. That is where I see Greenspan having left the tracks.

One person’s failure in government is no reason to alter the structure of government anymore than one person’s failure on the battlefield should justify remaking the entire military.

Bernanke has learned from Greenspan’s errors and and his own from what I gather from his testimony; and has for all intents and purposes left the ideological partisan realm which he was only half in, from the beginning, and is now prepared to insure that ideology does not alter or massage the data to say something the data doesn’t.

The Fed. Res. however, Craig is neither authorized to, nor has the resources to, monitor or regulate bubbles which build outside the banking system, (tech Bubble was a matter for Congressional and White House fiscal regulation, through the SEC for example, not monetary oversight and regulation by the FED. Reserve.)

This doesn’t mean the Fed can’t see problems arising outside of the banking system in the fiscal arena of the private or public sector, but, upon seeing those, it can only advise Congress and the SEC or, other agencies on such data events, and should NOT be granted the authority to intervene in such bubbles. That is the job of the White House and Congress. Not the Fed. Reserve.

Craig said to Stephen D.: “In football do pads eliminate injuries? No actually the injury rate is high in football because football pads also have the unintended consequence of increasing the violence of football. Why? Because as players feel safer they take greater risks.”

To use your own analogy, Craig, the NFL has it within its own province and authority to regulate the violence in football, pads or no. The fact that they choose not to, does not mean they can’t.

Likewise, the government has the authority and responsibility to, as far as possible, detect and respond to economic distortions which threaten the nation’s economy. The fact that they didn’t, only speaks to the competence and/or blindness of those in charge of government at the time the bubble’s seeds were sown, dating back to the GLB act.

Ultimately, the majority of government politicians will serve themselves first, and the public and nation last, if the people do not hold them responsible and accountable at election time, through anti-incumbent voting.

As d.a.n and Roy are fond of saying, we have the government we, as voters, deserve. The fact that our democracy is not functioning very well, doesn’t mean it can’t. It just means the players responsible for its functioning are failing in their responsibilities, and it begins with voters and spreads upward throughout political government.

The truly remarkable thing is how much of our government, given this kind of neglect of responsibility, does still manage to function well and efficiently. From the military to the Food Stamp program to the Department of Interior’s, (or whatever it is called today) management of our national parks and monuments, many aspects of our government accomplish their charge well and efficiently given the resources at their disposal.

Many would object to my including the military here, but, much of what they would cite as evidence of inefficiency or failure, rightfully is the responsibility of private contractors or the political determinations by the administration or Congress.

David

All assessments of the future are extrapolations based on past experience. Discontinuous change invalidates past experience and eventually we hit that kind of wall, but we have no other method of guessing at the future so what can I tell you?

I would give one historical extrapolation that I think fits. You talk about a “jobless recovery” We have had that now in the initial stages of all recoveries since 1982. One reason is the good one that productivity rises as well as the fact that firms are better able to control their costs such as inventory and also employees.

The big shift has been away from manufacturing. The jobs have not gone to China, which is also losing manufacturing jobs. People have been replaced by machines and processes. This is analogous to the employment situation in agriculture. A one time, almost everybody was a farmer. Now it is down to something like 3% in most industrial counties. Even in the U.S., where we have a fantastically productive agriculture, we employ few people.

The bottom line is that manufacturing jobs are NEVER coming back in the kinds of numbers we used to have and any government program that tries to do that is like trying to outlaw farm machinery to increase the numbers of farmers.

I don’t know exactly how we will solve this unemployment problem, but we have seen worse. Unemployment was 10.8 % when I got out of grad-school, but it got better.

IMO – and it is just my opinion – is that the next big thing will be biotech and nanotech. There have been amazing advances in these fields. Experience shows that it takes a couple decades for advances in the laboratories to make it big into the economy, so that will happen soon.

I am just naturally optimistic. It has served me well for 55 years. You are right that it may someday fail, but I don’t think it will be today. I retain reasonable confidence in American institutions, people and even politicians. And as the title of this article and the included chart say, when we have troubles we have to ask, “Compared to what?”

Craig & David

I think one big difference between liberals and conservatives is that liberals have a lot more confidence that people can control things.

The football example is a good one. Sure, they could limit the violence, but then it wouldn’t be football. They could play touch football, I suppose. But they cannot really anticipate all the consequences.

When you tell me, David, that we cannot predict the future, you are right. But that also negates the idea that people can micro manage the economy. W/o a reasonable ability to anticipate the future, you cannot plan and if you cannot plan you cannot control.

I take a reasonable approach. We can make some reasonable assumptions and some reasonable plans, but we can never wring out all the uncertainty and the plain wildness.

Craig,

This pattern will continue until humans stop being human.

On this we completely agree.

Christine,

Sorry to be completely contrarian to your last post, but us humans will continue to be human.:)

Gergle

I don’t know what you mean by being contrarian. I agree that people are humans and that makes them eventually unpredictable. That means that we cannot micro-mange the economy and that, IMO, argues against in depth economic planning.

Craig Holmes-
Football may be a more kinetic sport with pads on, as I can attest as a former defensive lineman in high school, but thanks to those pads and that helmet, I never broke my skull, broke my neck, lost a tooth, suffered a concussion, broke a collarbone, or broke a leg.

If I had been playing the football of a century before, that likely wouldn’t be the case. Football was a pretty violent game at its beginning, with actual fatalities at some games. President Theodore Roosevelt, hardly a bleeding heart liberal himself, threatened to suppress the game if they didn’t shape up the rules.

So, both rules and protections are important.

Training’s important, too, the way you’re taught to tackle with your head up, to grab the other player’s pads a certain way.

So, if I were to sum things up, It’s the general way you play the game that’s important. Sometimes protections perversely encourage risk-taking, but as American Football’s history demonstrates, a lack of rules and safety equipment can also make things more dangerous.

But I would also say this: the crucial factor is often the perception of risk. What certain studies about traffic have shown is that people drive more responsibly and safely when the roads are constructed in a way that demands their attention. You don’t want to do too much, of course, but just a little bit of rise in perceived risk can lead to people being more attentive, and less accident prone.

The trick is, if you read the stories about what actually happened in the financial sector, you would find that people were disarming and rendering toothless many of the price signals and disclosure requirements, allowing incredible levels of leverage without raising red-flags, and leaving the volatile derivatives market largely unwatched.

The term “false sense of security” comes to mind. It was like they were playing football at pads-required speed without the pads. But since these people often were trading other people’s money, and were rewarded year after year no matter what when wrong or right, they would never feel the pain until it was too late.

So, to sum things up, my attitude is, unless you can impose consequences only people like that, or prevent that behavior altogether, we will get hurt again, because many times these people do not have losses of their own to consider. Left to themselves, they will once again do the same things. If Enron didn’t teach the lesson and 2008’s crash didn’t teach it either, other means will have to be used to educate these people.

Stephen:

So, to sum things up, my attitude is, unless you can impose consequences only people like that, or prevent that behavior altogether, we will get hurt again, because many times these people do not have losses of their own to consider. Left to themselves, they will once again do the same things. If Enron didn’t teach the lesson and 2008’s crash didn’t teach it either, other means will have to be used to educate these people.

Pretty good response.

We are not far from each other on this one. Reform is part science and part art form as you attest.

The next time we have a crisis it likely will be from another crisis. I remember talking to the older generation of 20 or 30 years ago. (Those who were adults during the Great Depression). Do you know what their big fear was? Well the banks of course. They simply didn’t trust the banks FDIC insurance or not because of their life experience.

That is why we need to be regulating and deregulating at the same time in order to keep a balance that you are describing. It is not one or the other. Both Democrats and Republicans have deregulated industry.

Obviously there are parts of our economy that need new regulation. As I said above, anytime my tax dollars are used to bail out an industry, I expect my elected leaders to make sure it doesn’t need to happen a second time.

C&J
A thing to mention re. the graph is that the recession in the US was from the real estae collaspe. For the rest of the world,with the exception of the UK, its was an export collaspe.
I also cannot let the oft made statement that WW2 ended the depression stand alone. What ended the Depression,in economic terms, was the huge economic stimulus package necessitated by WW2. What the war did was shut up the detractors and allowed the only ,but radical, economic solution to occur, truly massive government intervention.

C&J
We get CNN international here in the RP. A piece cought my eye today about a McCain issued attack on the stimulus involving the Napa Wine Train supposedly recieving 53 million dollars. Fiegned outrage.Seems the train runs over a creek crossing that is being rebuilt as part of multi-year, large flood control project to keep the City of Napa from flooding every couple of years. THAT is what the 53 million dollars is for.I personally worked on the first phases 10 years ago. Its a big needed project that will reap long term benefits and is employing about 200 hard hit construction workers in California. The Wine Train is not getting a nickel out of it. The stimulus is doing what it is supposed to do. I just wish it were bigger.Maybe we could get together as Americans and hope it works instead of the constant carping.After all,we have two wars going.

Christine:

I don’t know what you mean by being contrarian. I agree that people are humans and that makes them eventually unpredictable. That means that we cannot micro-mange the economy and that, IMO, argues against in depth economic planning.

You are almost there. It IS predictable that humans will fail, and succumb to over enthusiasm and over reactive fears, which is exactly why you need things like Glass Steagal to prevent stupidity like Gramm Leach.

I have no idea where you come up with micro management being an issue or why you want to forswear economic planning. Perhaps it’s the revisionist economic histories you’re reading.

bills

WWII didn’t really end the depression in most of Europe. It just destroyed so much that they had to rebuild. Germany did not reattain its prewar levels of development until probably around 1955. Of course E. Germany didn’t make it until the fall of communism.

The U.S. was in a unique position of producing half of the world’s GDP. Good times for us. So it was a strange kind of stimulus that nobody in peacetime can reproduce.

If you carefully read the history, you also see that lots of the New Deal emphasis on more equal outcomes was relaxed in the need to actually produce for the war. If there had been no war, FDR would have been viewed as a monumental failure.

Christine
Fantastic. Its more of that revisionist history you’ve been reading. Way before the US assumed “half the worlds GDP” every American was working with all the overtime they could stomach.I understand that this is part of the total denial conservatives maintain about the post war period when labor unions controlled the workforce, marginal tax rates were ar 90% for the top brackets,banks were strictly regulated,and the standard of living DOUBLED in one generation. When confronted with this, you all remind me of the Robinsons robot.”That does not compute! That does not compute!”

That “monumental failure” was elected to four terms by a grateful people.I do not believe that the “Greatest Generation” would award that much confidence to a failure.

Christine
You might put this on your reading list.

http://www.krugmanonline.com/books/the-return-of-depression-economics-and-the-crisis-of-2008.php

Christine:

I take a reasonable approach. We can make some reasonable assumptions and some reasonable plans, but we can never wring out all the uncertainty and the plain wildness.

To do so we would not just be able to predict the future but also be prophetic in that we would be able to see what financial instruments have not even been invested yet.

Credit Default Swaps for instance were not even invented unitil the mid 1990’s. How in the world would government know how to regulate something that new? They really did not take off out of the launch pad until about 2000.

Let’s say those of us here were in charge of regulations, and by some miracle we were able to get the perfect blend that still came the game of football exciting, but kept the players as safe as practical. It would only be a few years before those “perfect” decisions would start to look stale because of some new products that became available that we could of had no comprehension of what they might be.

Even if we could see the new products it is not unitil they take off and become a huge issue in the market that regulation needs to be strong.

Of course then there is a crash and we all wonder how it all happened.

“Mr. Bloomberg, however, ruled out any tax increases, even if Albany approves draconian cuts. City residents, particularly the wealthy, had been taxed too much, and too often, he said.”
http://www.nytimes.com/2010/01/29/nyregion/29budget.html?th&emc=th

NYC is a financial basket case at this time. They have overspent for years and have increased taxes on their citizens to the point that many have left. When tax revenue on tobacco failed to produce increasing revenue they did what liberals always do…increased the tax even more chasing the ever illusive goal of taxing enough to pay for all the ever increasing spending.

The nation of Greece is the primary basket case of the EU followed closely by Italy and a few others. What do they have in common with NYC…over spending. Greece, with a national debt of 113% of GDP simply can’t continue to make the payments on that debt. They, along with NYC and many others, have finally had to face reality. A city, or nation, can not live way beyond their means for long.

Our national credit card has been maxed out and now we have dems making the irrational decision that the solution is not to live within our means but to increase our credit line by $1.9 trillion.

$12 trillion of debt simply was not enough to keep America going so the conventional wisdom of the dems is to spend $2 trillion more. Does anyone doubt that if that trend continues we will see the need for raising the limit on debt ever more often and in ever larger amounts?

Contrary to Bill Clinton’s famous claim of “I feel your pain” the current flock of dems are saying, we will ensure that you fee no pain. At least as long as we can keep borrowing. Liberals operate in a world that has no limits on spending to achieve the illusive goal of prosperity for all.

Washington reminds me of a garden watering can. We fill the can with water to nourish the plants. Not satisfied with the rate of water coming from the spout, liberals drill more holes in the can to let the water flow more freely. Trouble is, there comes a point when the water flowing out exceeds the amount of water it is possible to put in. The water can doesn’t empty immediately, but as more holes are punched into the can the lower the level in the can drops.

Prosperity for an individual, city, or nation could be described as having more resources than debt. The parent who continues to give his/her children bigger and bigger allowances while seeing his/her resources sink lower and lower could rightly be called foolish and irresponsible.

And yet, we see nearly every bill produced by this, and previous congresses laden with ever more pork. Health care is a dead issue for now and so the congress is going to concentrate on other ways to further place this nation in debt.

The answer is always to spend more money in the blind hope that this time we will spend just the right amount to fix things. If that’s not insanity, please give me your definition.

Insane and out of control spending is not the exclusive failure of either party. It has become business as usual. The inability of congress and president’s to control their appetite for more taxes to fund ever more spending is simply a failure of leadership and capitulation to growing public demand for even more.

We have deliberately created a growing population of citizens who expect ever more from government. What we see in Washington is hardly the small and limited government envisioned by our founders.

The elections in November I believe will be a fight between those wishing to punch more holes in the watering can as opposed to those who wish to plug a few holes. I don’t believe it’s possible to increase the rate of water (taxes) going into the can as NYC and Greece have discovered.

bills:

I’m not Christine, but I think I might take you up on reading Krugman’s book. He is definitely a liberal as per the the endorsements from the Daily Kos, New York Times, and San francisco Chronicle.

He also wrote “The Conscience of a Liberal”

Bills

All that I am saying is that the post WWII era was unique. It is like coming to place recently destroyed by a fire and marveling at the reconstruction. It is true that it is impressive, but it is not sustainable. Activity slows down after everything is rebuilt.

The other unique aspect was the imbalance of human capital and physical capital. In places like Germany, you had well-trained,educated workforces with extremely good work habits but w/o the physical capital to employ them. If you give such people the means, they can create their own wealth. When people talk about Marshal plans for Africa, Haiti or even parts of the U.S., they are missing this important variable.

Of course, they also worked cheaply. So you had great workforces at discount prices. America could sell almost anything it had to sell and there was a shortage of dollars. I was kid back then, but I can still remember when it was possible to go to Europe and live pretty well on a couple dollars a day and you could bring back stuff that was worth a lot more than the dollars you paid.

What you had going was a kind of international guild system, with the U.S. in the predominant role. It was a sweet deal for us until the others caught up.

I would also point out the relative versus the absolute levels of prosperity.

Re Roosevelt – he stepped up and I honor his service as president during WWII and in the run up. But his economic plans didn’t work out. Had the war come and had he had the usual two terms, he would have stood on the record of a still failed economy. I am not referring only to the actual U.S. participation. The U.S. economy started to pick up in 1939 as demand for war materials heated up.

Craig

We agree on the uncertainty inherent in any decision process. It is often easy to see what we should have done but we cannot make provisions for things that we did not foresee because they were not yet invented.

Craig Holmes-
What you said about regulating so that we don’t have to repeat a bailout? Amen to that.

What I believe is not that there is a perfect way to regulate the economy, but rather that there are behaviors and industry practices that are either too risky or too reprehensible to allow to continue unabated, things that are predictably bad. We didn’t learn for the first time that letting the banks get too big, or too entangled and conflicted in their industry with other financial sectors was a mistake last year. It’s a lesson we learned before. There are some temptations people just don’t resist well, either by themselves, or in the hypercompetitive “anything not forbidden is compulsory” environment of Wall Street.

I’m not one for learning lessons time and time again, especially when the costs are so great. I don’t like bailing out a bank. I don’t like having our auto industry on government life-support. I don’t think we should have another energy crisis before we make a commitment to high gas-mileage vehicles. I don’t think we should have to be confronted with more Climate-related disasters before we get off our moribund keisters and do something about carbon emissions.

I’m sick of lessons being “learned”, only to have people drop right into old habits once again. Something’s got to stick.

Christine-
FDR was hardly a failure. Hoover was a failure. The difference between FDR and Hoover is not that everything FDR did worked. It’s that FDR was always trying things. Hoover was content to stick with what he thought worked best, even when it became clear that the results were not following the logic of the political claims.

FDR’s problem wasn’t that his programs didn’t work. Any good graph of the growth over that time shows the decline under hoover, and the rise under FDR. FDR’s problem was that he was dealing with a Deflationary downturn. His measures where helping, much much better than the Republican’s “sit back and wait for the markets to recover” approach, but to really crawl out of the deep deflationary hole of the 1929 crash and the subsequent period of economic collapse, it was necessary to just blow the doors open on the government intervention.

Otherwise, the government remained the sole institution able to inject capital into the markets. Only once people had money to spend, more than products to spend it on, could the deflationary pressure cease.

Stephen:

I hear you on not wanting to learn the same lessons over and over again.

Let me just give you an example of why some lessons might need to be learned over and over again.

Credit default swaps. They were invented basically in the 1990’s. But really they were so small that it wasn’t something that would get on the radar of regulators as and issue.

Credit Default Swaps are a very useful tool. Basically when someone issues a bond, you as the holder of the bond can get a Credit Default Swap that insures the debt in case of default. A form of insurance.

This good thing grew way out of proportion so that to use a cheesy analogy, the focus was on the tail instead of the dog. People were trading in CDS without any financial interest in the companies.

This new invention, grew into somewhat of a monster. Here is where I want to take the other side a bit on some of what you are saying. If we are too strong on regulation, we stife invention of new products. Credit Default Swaps CORRECTLY USED, are great tools. We want them in our system we just need to know how to regulate them.

10 or 20 years from now there will be another invention that will grow too large, and we will have another crisis. Crisis or inevitable in a dynamic economy. It is a natural part of invention that some inventions cause unexpected issues.

What I agree with you on is that we need to not repeat. For instance now we should fix the Credit Default Swap issued and never have another huge crisis over them again. That is learning.

The next crisis needs to be about something else. Also since (I would predict) that we will have another crisis over something as yet not created, we can make provision for that crisis in the form of reserves to deal with the future crisis so that the system is not threatened.

Stephen

Bottom line is that the New Deal programs did not end or even significantly mitigate the Great Depression. As I said, they had some other salutatory side benefits, but the lesson is that the economic growth did not follow.

BTW - Hoover also expanded government. Roosevelt campaigned on the platform that Hoover was spending too much. The whole period is more complicated than the stuff we learned (at least the stuff I learned) in HS.

Craig & Stephen

I don’t want to speak for Craig, but if I can rephrase what I think you are saying - we cannot “learn” some lessons because the the situations are dynamic. We solve yesterday’s problems very well. It is tomorrow’s that we have trouble with.

The problem with regulations is that they must be based on past experience. What we have is a dynamic system where people respond to changes by doing things in new and not anticipated ways.

A fundamental difference between liberal and conservative analysis is that liberals tend to view our systems as static. They miss the dynamism and change. They don’t understand that people will adapt to regulatory changes.

That doesn’t mean that you should not regulate. We NEED regulations and rule of law. But it has to be flexible and done with the understanding that no matter how smart government is, somebody else will be smarter about some of the details.

Stephen/Christine:

Some crisis are simply the fruit of innovation. Every new invention creates issues. You know what? 30 years ago there was no traffic deaths because of texting while driving. Now because of the wide spread use of cell phones we have a pretty big problem and regulation is trying to figure out how to catch up. As a society we will flounder with over regulation of texting, and not enough until somewhere in the country some state will get it right.

Cellphones have created a crisis, but I am not giving up mine!!

Credit Default Swaps are good things, just like cellphones are good things. We simply need to learn how to regulate them so they don’t bring down the whole system with their misuse.

In the same way going forward, we can’t possibly know what will be created next. But what we can predict is that the new tools of the future will need to be regulated, and this process will be trial and error as we learn what these new tools can do. Of course we will probably act only when a crisis occurs and we have the public will to do so.

This is exactly why finacial planners teach diversification.