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These government bailouts are a very disturbing trend

Discussion in 'Blazers OT Forum' started by AgentDrazenPetrovic, Sep 16, 2008.

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Denny Crane It's not even loaded! Staff Member Administrator

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The directors/shareholders lost everything in these bailouts. The CEOs that left with a golden parachute got 10s of $millions tho.

Denny Crane, Sep 18, 2008

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AgentDrazenPetrovic Anyone But the Lakers

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Well, they should be patriotic and pay all their money back in huge taxes then!

AgentDrazenPetrovic, Sep 18, 2008

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Denny Crane It's not even loaded! Staff Member Administrator

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e_blazer said: ↑

I'm not really wanting to get into a big discussion of capitalism vs socialism except to say that I believe that the biggest advantage in capitalism is that it provides the opportunity for those who innovate and take risks to be rewarded for such risk and innovation. I'd also be more likely to support socialism when you can show me a model where politics and individual greed don't get involved in these government owned endeavors.
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I have a hypothetical question I like to ask people who favor socialism or communism. It goes something like this:

"They build a 2 story apartment building across the street from the beach. The lower floors' views are blocked by trees, but the upper floor apartments have awesome ocean views. Who decides who gets the lower floor apartments and the upper ones?"

The concept of rationing goods and services means these things are limited and someone is going to get the 1st floor. If the 2nd floor are rewards, then you have cronyism, corruption, and whatever you call it, it's no longer socialism or communism. It simply doesn't work.

Denny Crane, Sep 18, 2008

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MikeDC Member

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chingy0007 said: ↑

I'm an advocate of equality, and I don't think anyone can argue that capitalism is the best method for providing equality.
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Indeed, living conditions for peasants and kings in pre-capitalist societies were, and are, much more equal than under capitalism. Of course, they're more equal because they're uniformly worse.

Ideally, many industries would be centrally owned, and countries ought to be more self-sufficient. For example, one of the main reasons that Britain is suffering now is because America is suffering, and we are so reliant on America (as are most countries) that we are suffering as a result. I understand that there will be problems due to lack of competition within markets but currently there is problem in the other way, with companies striving to reduce costs so much that products/working conditions suffer as a result. And that is unacceptable.
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Why? It's certainly true that working conditions are pretty good in monopolized, uncompetitive industries but most people wouldn't work in such industries. So raising prices simply means the average person can't afford as much, and less competition means the expensive product they buy is unlikely to be of good quality.

We're better off having much lower costs, because that tends to make things more affordable for more people.

MikeDC, Sep 18, 2008

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MikeDC Member

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On the bailouts, a libertarian (and I consider myself one) should note two things:
* People talking about this as a "market failure" are missing the very obvious point that we weren't talking about free market companies when we talk about the GSEs, and to a large extent the regulatory schemes that created the housing bubble in general.

* Being a libertarian != being an anarchist. Most of us think there are legitimate roles for government, and acting as the lender of last resort to head off an epic financial disaster is a legitimate role for government notwithstanding the fact that government actions might have been a significant cause of said disaster. The remaining question is what happens after the crises.

MikeDC, Sep 18, 2008

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bbwchingy0007 BBW Member

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It all depends on your view of human nature. I would say I have a utopian view of society, so my ideals would be unlikely due to problems in society. The problem with society is that we are all trying to get one over each other. As Gracchus Babeuf said “Society must be made to operate in such a way that it eradicates once and for all the desire of a man to become richer, or wiser, or more powerful than others.” If that were the case, and the entire world/country worked together as a community, we wouldn't have the problems of poor quality goods or people driving up prices because everyone would want everyone else to be well off. Unfortunately, in the present society this is not the case, and people instead want to be better off than everyone else, for which I largely blame the media for their part in the idolisation of "celebrities" who do very little but go to parties and wear expensive clothes. Since people idolise them, they want to be like them and have all the expensive clothes etc. This isn't the case for everyone (idolisation of celebrities) but it has such a large impact on our society (why do you/your kids want those expensive clothes?) that it cannot be ignored.

bbwchingy0007, Sep 18, 2008

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e_blazer Rip City Fan

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chingy0007 said: ↑

As Gracchus Babeuf said “Society must be made to operate in such a way that it eradicates once and for all the desire of a man to become richer, or wiser, or more powerful than others.”
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In other words, change basic human nature. Good luck with that.

e_blazer, Sep 18, 2008

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MikeDC Member

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I posted this over in the Religion/Politics board, but I'd be happy if everyone read it.

http://freakonomics.blogs.nytimes.c...nd-kashyap-on-the-recent-financial-upheavals/

I'm just gonna post the whole thing because it's a really good article to get a handle on why these bailouts are happening:

As an economist, I am supposed to have something intelligent to say about the current financial crisis. To be honest, however, I haven’t got the foggiest idea what this all means. So I did what I always do when something related to banking arises: I knocked on the doors of my colleagues Doug Diamond and Anil Kashyap, and asked them for the answers. What they told me was so interesting and insightful that I begged them to write their explanations down for a broader audience. They were kind enough to take the time to do so. In what follows, they discuss what has happened in the financial sector in the last few days, why it happened, and what it means for everyday people.

The F.A.Q.’s of Lehman and A.I.G.
By Douglas W. Diamond and Anil K. Kashyap
A Guest Post

For most of the last 20 years we have been studying banks, monetary policy, and financial crises. So for us the events of the last year have been especially fascinating.

The last 10 days have been the most remarkable period of government intervention into the financial system since the Great Depression. In talking with reporters and our noneconomist friends, we have been besieged with questions about several aspects of these events. Here are a few of the most frequently asked questions with our best answers.

1) What has happened that is so remarkable?

This episode started when the Treasury nationalized Fannie Mae and Freddie Mac on September 8. Their combined assets are over $5 trillion. These firms help guarantee most of the mortgages in the United States. The Treasury only got authority from Congress to take this action in July, and in seeking the authority had insisted that no intervention would be needed.

The Treasury has replaced the management of both companies and will presumably oversee their operation. This decision marked an acknowledgment by the government that the mortgage market and the institutions to make it operate in the U.S. are broken.

On Monday, the largest bankruptcy filing in U.S. history was made by Lehman Brothers. Lehman had over $600 billion in assets and 25,000 employees. (The largest previous filing was WorldCom, whose assets just prior to bankruptcy were just over $100 billion.)

On Tuesday, the Federal Reserve made a bridge loan to A.I.G., the largest insurance company in the world; perhaps best known to most of the world as the shirt sponsor of Manchester United soccer club, A.I.G. has assets of over $1 trillion and over 100,000 employees worldwide. The Fed has the option to purchase up to 80 percent of the shares of A.I.G., is replacing A.I.G.’s management, and is nearly wiping out A.I.G.’s existing shareholders. A.I.G. is to be wound down by selling its assets over the next two years. (Don’t worry, Man U will be fine.) The Fed has never asserted its authority to intervene on this scale, in this form, or in a firm so far removed from its own supervisory authority.

2) Why did these things happen?

The common denominator in all three cases was the ability of the firms to secure financing. The reasons, though, differed in each case.

The Fannie and Freddie situation was a result of their unique roles in the economy. They had been set up to support the housing market. They helped guarantee mortgages (provided they met certain standards), and were able to fund these guarantees by issuing their own debt, which was in turn tacitly backed by the government. The government guarantees allowed Fannie and Freddie to take on far more debt than a normal company. In principle, they were also supposed to use the government guarantee to reduce the mortgage cost to the homeowners, but the Fed and others have argued that this hardly occurred. Instead, they appear to have used the funding advantage to rack up huge profits and squeeze the private sector out of the “conforming” mortgage market. Regardless, many firms and foreign governments considered the debt of Fannie and Freddie as a substitute for U.S. Treasury securities and snapped it up eagerly.

Fannie and Freddie were weakly supervised and strayed from the core mission. They began using their subsidized financing to buy mortgage-backed securities which were backed by pools of mortgages that did not meet their usual standards. Over the last year, it became clear that their thin capital was not enough to cover the losses on these subprime mortgages. The massive amount of diffusely held debt would have caused collapses everywhere if it was defaulted upon; so the Treasury announced that it would explicitly guarantee the debt.

But once the debt was guaranteed to be secure (and the government would wipe out shareholders if it carried through with the guarantee), no self-interested investor was willing to supply more equity to help buffer the losses. Hence, the Treasury ended up taking them over.

Lehman’s demise came when it could not even keep borrowing. Lehman was rolling over at least $100 billion a month to finance its investments in real estate, bonds, stocks, and financial assets. When it is hard for lenders to monitor their investments and borrowers can rapidly change the risk on their balance sheets, lenders opt for short-term lending. Compared to legal or other channels, their threat to refuse to roll over funding is the most effective option to keep the borrower in line.

This was especially relevant for Lehman, because as an investment bank, it could transform its risk characteristics very easily by using derivatives and by churning its trading portfolio. So for Lehman (and all investment banks), the short-term financing is not an accident; it is inevitable.

Why did the financing dry up? For months, short-sellers were convinced that Lehman’s real-estate losses were bigger than it had acknowledged. As more bad news about the real estate market emerged, including the losses at Freddie Mac and Fannie Mae, this view spread.

Lehman’s costs of borrowing rose and its share price fell. With an impending downgrade to its credit rating looming, legal restrictions were going to prevent certain firms from continuing to lend to Lehman. Other counterparties that might have been able to lend, even if Lehman’s credit rating was impaired, simply decided that the chance of default in the near future was too high, partly because they feared that future credit conditions would get even tighter and force Lehman and others to default at that time.

A.I.G. had to raise money because it had written $57 billion of insurance contracts whose payouts depended on the losses incurred on subprime real-estate related investments. While its core insurance businesses and other subsidiaries (such as its large aircraft-leasing operation) were doing fine, these contracts, called credit default swaps (C.D.S.’s), were hemorrhaging.

Furthermore, the possibility of further losses loomed if the housing market continued to deteriorate. The credit-rating agencies looking at the potential losses downgraded A.I.G.’s debt on Monday. With its lower credit ratings, A.I.G.’s insurance contracts required A.I.G. to demonstrate that it had collateral to service the contracts; estimates suggested that it needed roughly $15 billion in immediate collateral.

A second problem A.I.G. faced is that if it failed to post the collateral, it would be considered to have defaulted on the C.D.S.’s. Were A.I.G. to default on C.D.S.’s, some other A.I.G. contracts (tied to losses on other financial securities) contain clauses saying that its other contractual partners could insist on prepayment of their claims. These cross-default clauses are present so that resources from one part of the business do not get diverted to plug a hole in another part. A.I.G. had another $380 billion of these other insurance contracts outstanding. No private investors were willing to step into this situation and loan A.I.G. the money it needed to post the collateral.

In the scramble to make good on the C.D.S.’s, A.I.G.’s ability to service its own debt would come into question. A.I.G. had $160 billion in bonds that were held all over the world: nowhere near as widely as the Fannie and Freddie bonds, but still dispersed widely.

In addition, other large financial firms — including Pacific Investment Management Company (Pimco), the largest bond-investment fund in the world — had guaranteed A.I.G.’s bonds by writing C.D.S. contracts.

Given the huge size of the contracts and the number of parties intertwined, the Federal Reserve decided that a default by A.I.G. would wreak havoc on the financial system and cause contagious failures. There was an immediate need to get A.I.G. the collateral to honor its contracts, so the Fed loaned A.I.G. $85 billion.

3) Why did the Treasury and Fed let Lehman fail but rescue Bear Stearns, Fannie Mae, Freddie Mac, and A.I.G.?

We have already explained why Fannie, Freddie, and A.I.G. were supported. In March, Bear Stearns lost its access to credit in almost the same fashion as Lehman; yet Bear was rescued and Lehman was not.

Bear Stearns was bailed out for two reasons. One was that the Fed had very imperfect information about what was going on at Bear. The Fed was not Bear’s regulator, the amount of publicly available information was limited, and its staff was not versed in all of the ways in which Bear might have been connected to other parts of the financial system.

The second problem was that Bear’s counterparties in many transactions were not prepared for the sudden demise of Bear. A Bear bankruptcy might have triggered a wave of forced selling of collateral that Bear would have given its counterparties. Given the potential chaos that would have resulted from Bear Stearns filing for bankruptcy, the Fed had little choice but to engineer a rescue. In doing so, the Fed argued that the rescue was a rare, perhaps once-in-a-generation, event.

When Bear was rescued, the Fed created a new lending facility to help provide bridge financing to other investment banks. The new lending arrangement was proposed precisely because there were concerns that Lehman and other banks were at risk for a Bear-like run. Since March, the Fed had also studied what to do if this were to happen again; it concluded that if it modified its lending facility slightly, it could withstand a bankruptcy; it made these changes to the lending facility on Sunday night.

Once the Fed had made these changes and determined that it and the others in the market had an understanding of the indirect or “collateral damage” effects of a bankruptcy, it could rely on the protections of the bankruptcy code to stop the run on Lehman, and to sell its operating assets separately from its toxic mortgage-backed assets.

Against this backdrop, if the government had rescued Lehman, it would have repudiated the claim that the Bear rescue was extraordinary; it would have also conceded that in the six months since Bear failed, neither the new facility that it set up nor the other steps to make markets more robust were reliable. Essentially, the Fed and the Treasury would have been admitting that they had lied or were incompetent in stabilizing the financial system — or both.

It was not surprising that they drew the line at helping Lehman. Based on all the publicly available information, this was clearly the right thing to do.

4) I do not work at Lehman or A.I.G. and do not own much stock; why should I care?

The concern for the man on Main Street is not the bankruptcy of Lehman, per se. Rather, it is the collective inability of major financial institutions to find funding.

As their own funding dries up, the remaining financial firms will be much more cautious in extending credit to normal firms and individuals. So even for people whose own circumstances have not much changed, the cost of the credit is going to rise. For an individual or business that falls behind on payments or needs an increase in short-term credit because of the slowing economy, credit will be much harder to obtain than in recent years.

This is going to slow growth. We have not seen this much stress in the financial system since the Great Depression, so we do not have any recent history to rely upon in quantifying the magnitude of the slowdown. A recent educated guess by Jan Hatzius of Goldman Sachs suggests that G.D.P. growth will be just about 2 percentage points lower in 2008 and 2009. But as he explains, extrapolations of this sort are highly uncertain.

5) What does it mean for the Fed and Treasury going ahead?

A reasonable reading of the recent bailouts suggests a simple rule: if a firm is on the verge of collapse and its ties to the financial system will lead to a cascade of chaos, the firm will be saved. A bankruptcy will be permitted only if the failure can be contained.

Assuming the level of chaos is sufficiently high, this dichotomy is probably consistent with the mandate of the Federal Reserve. The rescue of A.I.G., however, raises some major challenges.

One is where to draw the line. A.I.G. was an insurance company, not a bank or a broker dealer, so the Fed had no special relationship with A.I.G. Presumably, if a very large airline or automaker had been involved in the C.D.S. market, the same reasoning that led to the rescue would apply.

A second challenge comes with defining the acceptable level of chaos. We will never be able to find out what would have happened if A.I.G. had been allowed to fail. Furthermore, there are some reasons to believe that even if A.I.G. continues to operate, the fundamental stress in the financial system will remain. If the rescue does not mark a turning point, the bailout may be viewed quite differently down the road.

Should the government intervene if it merely postpones an inevitable adjustment? Creditor runs can make adjustment too fast; blanket bailouts can make adjustment too slow. Has the Fed found the speed that is just right?

Third, now that A.I.G. has been lent to, how will regulation have to be adjusted? Surely the Fed cannot be called upon to provide backstop financing whenever a large member of the financial system runs into trouble. How does it prevent a replay of this scenario, and can it be done without stifling innovation?

6) What does this mean for the markets going ahead?

Letting Lehman go means that the remaining large financial services firms now must understand that they need to manage their own risks more carefully. This includes both securing adequate funding and being prudent about which counterparties to rely upon. Both of these developments are welcome.

If the remaining investment banks, Goldman Sachs and Morgan Stanley, do not get more secure funding in place, they may be acquired or subject to a run too. In the current environment, relying almost exclusively on short-term debt is hazardous, even if a firm or bank has nothing wrong with it.

7) When will the turmoil end?

The inability to secure short-term funding fundamentally comes from having insufficient capital. There are many indicators that the largest financial institutions are collectively short of capital.

One signal is that there were apparently only two bidders for Lehman, when the ongoing value from operating most of the bank was surely far above the $3.60 share price from Friday. Another is the elevated cost of borrowing that banks are charging each other. A third indicator is the reluctance to take on certain types of risk, such as jumbo mortgages, so that the cost of this type of borrowing is unusually high.

The fear of being the next Lehman ought to convince many of the large institutions that, despite however much they already raised, more is needed. It may be expensive to attract more equity financing, but the choice may be bankruptcy or sale. The decision by the Federal Reserve to not cut interest rates suggests the Fed also recognizes that the short-term interest rate is a very inefficient way to address this problem.
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MikeDC, Sep 18, 2008

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Finally, for those wanting to talk blame, Megan McArdle has an equal opportunity smackdown of various political takes on the financial crisis:

Then there are things that I think would have helped, but cannot see where the political will would have come from:

* Keep Fannie Mae and Freddie Mac out of risky mortgages, and give OFHEO some teeth. Bush and several Republicans tried, and failed, to do this. My preferred solution, an explicit strip of the government guarantee and a supervised breakup, wouldn't even have gotten on the radar. Fannie and Freddie were politically powerful, as were voters who wanted to buy houses.
* Regulate mortgage brokers at the federal level. Given the way mortgage funds now flow across state lines, this made sense. But the state governors would have screamed bloody murder. Moreover, no one knew about the fraud when it would have helped--i.e., before most of it happened.
* Mandate 20% down payments. Political suicide. Affluent people would continue to borrow downpayments in private family loans, while the poor were shut out of the housing market. Poor neighborhoods would have been devastated by the credit cutoff. House prices would have dropped sharply everywhere.
* Change regulatory standards to take more account of small-probability, devastating systemic risk. Nassim Taleb has been talking about this for the last few years. But I didn't hear more than academic interest in this until mid-2007. Most people on the Street really believed that they had gotten better at assessing credit risk.
* Unify the bank regulators, including the SEC, into one agency. At least some of this crisis might be traced to the fact that the regional banks who originated many of the bad loans were often regulated by a different body from the investment banks who bought them. It might have been done, I suppose. But each of those agencies has powerful constituencies among their employees, and the firms they regulate. Moreover, the transition process would have involved some ugly internicene warfare that probably would have eroded regulatory effectiveness in the short run.
* Mandate contingency plans for the dissolution of large firms, and other unlikely but devastating scenarios. If people had some certainty about the likely outcome of an insolvency, the panic selling wouldn't be so rampant, and people would be more willing to loan money, albeit at a discount. But again, I didn't hear anyone talking about this in, say, 2006. I certainly didn't think of it. Is it reasonable to say that this should have been utmost on the mind of Bush or his advisors, while other big priorities, like trade deals, loomed large?
* Make subprime loans illegal. As long as most subprime borrowers are still making their payments, I can't endorse cutting them off to protect the fools. Moreover, this would simply not have been possible, no matter who controlled congress or the presidency. Cutting off subprime loans would have prevented more people from buying homes. The politics of it are terrible.
* Make option ARMs or negative amortization loans illegal. Option ARMs are debateable-they're actually useful for people who have uneven income flows, like, er, a lot of journalists. But clearly they were abused, and negative amortization loans are nuts. However, these exotic instruments are only a fraction of the toxic subprime loans. They appeared mostly late in the process, when lenders were scraping the bottom of the barrel to keep the boom going.
* Change the way that these securities were accounted for. Most risk models for ABS and MBS were focused on prepayment risk, not default risk, which was assumed to be fairly well known. This assumes a rather stunning level of prescience on the part of regulators or legislators.
* Force banks to keep some amount, say 10% of the loans they originated. Spain does this, and its housing market is even more bubbleicious than ours was, believe it or not. It might have made the banks more secure. But there are good reasons to want banks, especially small banks, to have the flexibility to match the durations of their asset portfolios to those of their liabilities. When interest rates skyrocketed in the early eighties, banks were stuck with long-term mortgages at low rates, but forced to offer high interest rates on savings accounts in order to keep business. The result was, ultimately, the S&L crisis. And again, while there may have been someone proposing this somewhere, I didn't see a lot of people talking about it in 2003, when it really might have helped.

Then there are the things that people think would have helped, but which wouldn't have done anything I can see:

* Repealing Gramm-Leach-Bliley, or at least the provisions that repealed Glass-Steagall's ban on commercial banks entering other lines of financial business. If this were part of the problem, it would be the commercial banks, not the investment banks, that were in trouble.
* Lowering CEO pay. Whaaaaaa? If Dick Fuld had been paid a dollar a year, we'd be in exactly the same mess. Probably worse, because what kind of CEO do you get for a dollar a year?
* Raising the Fed Funds rate The MBS money was long money, not overnight funds. And when a bubble is truly going, raising rates may just attract more long money, without deterring speculators who are expecting double-digit annual returns.
* Requiring better disclosure of loan terms Disclosure of loan terms is already quite exhaustive, including a term sheet right on top that provides a congressionally mandated summary. You can't make people read things, and the extra disclosure you mandate goes into the "fine print" that people claim they can't read. Moreover, the fundamental problem for most borrowers are things that aren't hard for buyers to understand, like "I have an adjustable rate mortgage"; "Interest rates can go up"; and "My housing payment should not be two-thirds of my gross income".
* Changed the neo-liberal "culture" The president and congress are not the parents of Wall Street, and believe me, bankers do not look towards Washington for moral guidance. The "Miasma Theory" of political influence is the last refuge of partisans who know they are full of it.

There are more, but considering all this nonsense is frankly exhausting.

The point is, given what they could reasonably have known then, did regulators act unreasonably? Did legislators ignore politically feasible policy options? I don't see it.

But if you are looking to place regulatory blame, whatever changes you'd care to point to happened on Clinton's watch, not Bush's. You cannot have it both ways--hailing the Clinton genius at economic management (and implying that Obama will bring back those halcyon days), and then claiming that Bush should have trailed around undoing all his work. You most certainly cannot explicitly claim, as Obama did in his speech, that this crisis is the result of the Bush administration's deregulation of the financial markets:

The challenges facing our financial system today are more evidence that too many folks in Washington and on Wall Street weren't minding the store. Eight years of policies that have shredded consumer protections, loosened oversight and regulation, and encouraged outsized bonuses to CEOs while ignoring middle-class Americans have brought us to the most serious financial crisis since the Great Depression.

This is flat out untrue. And I know that Barack Obama is smart, and well-informed, enough to know it.

Update: I should note another thing regulators could have done, which is required more reserves. It's hard to do this when banks are in trouble, since if they had a lot of cash, they wouldn't be in trouble. But while it's now clear that we should do so going forward, I'm hard pressed to say that I could have predicted it then. One reason debt-to-equity ratios are so high now is that toxic securities have caused balance sheets to collapse. Moreover, while this would have let the Fed off the hook, somewhat, it's hard to see how lower debt-to-equity ratios could actually have prevented most of this. As far as I can tell, the scale of the collapse is so epic that unless regulators were willing to really make the banks radically delever (remembering that the resulting credit contraction would have had negative economic effects--the ones we're seeing now), it still would have taken down a lot of firms.
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MikeDC, Sep 18, 2008

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bodyman5001 Genius

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I don't know what to think really but I had an idea today.

I was thinking of sending AIG a bill for consulting work for hmmm, let us go with one million dollars.

Maybe the feds would just pay me?

bodyman5001, Sep 18, 2008

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maxiep RIP Dr. Jack

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MikeDC said: ↑

I posted this over in the Religion/Politics board, but I'd be happy if everyone read it.

http://freakonomics.blogs.nytimes.c...nd-kashyap-on-the-recent-financial-upheavals/

I'm just gonna post the whole thing because it's a really good article to get a handle on why these bailouts are happening:
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LOL, Doug and Anil are two former profs of mine. They're both depressingly smart--by that I mean they unintentionally make you feel like a knuckle-dragger. Doug Diamond may know more about bankruptcy than any other living economist, especially when it comes to financial institutions. Diamond/Dybvig was written almost a quarter century ago, but has stood the test of time and circumstance.

Kashyap badly wants to be on The Fed, and I've never met anyone who hates inflation more. I'm convinced that he would happily suffer a deep recession/small depression to wring out every last bit of inflation in the economy. He's one of those folks that is so smart, his solutions aren't all that realistic.

Thanks for the link.

maxiep, Sep 19, 2008

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maxiep said: ↑

LOL, Doug and Anil are two former profs of mine. They're both depressingly smart--by that I mean they unintentionally make you feel like a knuckle-dragger. Doug Diamond may know more about bankruptcy than any other living economist, especially when it comes to financial institutions. Diamond/Dybvig was written almost a quarter century ago, but has stood the test of time and circumstance.

Kashyap badly wants to be on The Fed, and I've never met anyone who hates inflation more. I'm convinced that he would happily suffer a deep recession/small depression to wring out every last bit of inflation in the economy. He's one of those folks that is so smart, his solutions aren't all that realistic.

Thanks for the link.
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De nada. That's interesting. Did Kashyap ever give a good explanation for why inflation is bad? One of my profs pointed out once that he doesn't think anyone has a really legitimate explanation for why it's bad (at low levels... obviously nobody wants Zimbabwe), and I've come to the conclusion he's probably right.

MikeDC, Sep 19, 2008

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bbwchingy0007 BBW Member

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e_blazer said: ↑

In other words, change basic human nature. Good luck with that.
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I don't think it is to change basic human nature, I believe that we need to change the way society operates. Too many things point us towards making our own life better at the expense of others, which is not the way society should be.

bbwchingy0007, Sep 19, 2008

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Denny Crane It's not even loaded! Staff Member Administrator

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MikeDC said: ↑

De nada. That's interesting. Did Kashyap ever give a good explanation for why inflation is bad? One of my profs pointed out once that he doesn't think anyone has a really legitimate explanation for why it's bad (at low levels... obviously nobody wants Zimbabwe), and I've come to the conclusion he's probably right.
Click to expand...

Depends on the tax code, right?

People need a COLA to their paychecks keep up with inflation (don't lose buying power). If those pay raises bump people into the next higher tax bracket, they can end up with even less take home pay.

Otherwise, I've never seen a good argument against low levels of inflation.

Denny Crane, Sep 19, 2008

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maxiep RIP Dr. Jack

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MikeDC said: ↑

De nada. That's interesting. Did Kashyap ever give a good explanation for why inflation is bad? One of my profs pointed out once that he doesn't think anyone has a really legitimate explanation for why it's bad (at low levels... obviously nobody wants Zimbabwe), and I've come to the conclusion he's probably right.
Click to expand...

His basic thesis is that economies run on predictability of input costs. There are plenty of greeks to add up to calculate your risk; having a currency or inflation risk should be unecessary. Bottom line. inflation is corrosive.

maxiep, Sep 19, 2008

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maxiep said: ↑

His basic thesis is that economies run on predictability of input costs. There are plenty of greeks to add up to calculate your risk; having a currency or inflation risk should be unecessary. Bottom line. inflation is corrosive.
Click to expand...

So they don't teach much Knightian uncertainty there anymore? Heh, I wouldn't presume to be as sharp as Kashyap but it seems to me that inflation generally reflects unpredictable changes in the costs of inputs rather than vice versa. Of course I have little evidence to base that on

MikeDC, Sep 19, 2008

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Denny Crane said: ↑

Depends on the tax code, right?

People need a COLA to their paychecks keep up with inflation (don't lose buying power). If those pay raises bump people into the next higher tax bracket, they can end up with even less take home pay.

Otherwise, I've never seen a good argument against low levels of inflation.
Click to expand...

But a COLA to everyone's paycheck is inflation. If no one received a COLA, the argument goes, you wouldn't need a raise to keep up with inflation because there'd be no inflation to keep up with.

MikeDC, Sep 19, 2008

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AgentDrazenPetrovic Anyone But the Lakers

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so what now, they want a trillion dollar bailout? holy hell.

AgentDrazenPetrovic, Sep 19, 2008

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MikeDC said: ↑

So they don't teach much Knightian uncertainty there anymore? Heh, I wouldn't presume to be as sharp as Kashyap but it seems to me that inflation generally reflects unpredictable changes in the costs of inputs rather than vice versa. Of course I have little evidence to base that on
Click to expand...

I'm not explaining myself well. When he speaks about inflation, his POV is monetary policy and money supply, not exogenous variables.

maxiep, Sep 19, 2008

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maxiep said: ↑

I'm not explaining myself well. When he speaks about inflation, his POV is monetary policy and money supply, not exogenous variables.
Click to expand...

OK, this was two years ago, but it popped into my mind today as I've been mulling over a debate I've been having with a couple of my grad school friends. I'm still trying to understand the "Grim Death" fight against inflation view. In fact, I'm really trying to understand it because I increasingly see the guys who actually have meaningful stuff to say on the Fed putting forth the Kashyap via of things.

From a big picture view, I get the idea. That is, a price index is composed of a basket of goods, and the prices reflect our relative average valuation of the stuff in the basket. In theory, it shouldn't matter if the basket were always valued at 100.

But any price stability is an aggregate phenomenon. The basket of goods is continuously changing over time. And even if one is moderately skeptical of price stickiness, change is costly, the time value of money changes (especially as written in contracts) and the relative valuations of goods are going to shift a lot. Moderate price inflation, I'd argue, provides a certain amount of grease for these shifts in a growing economy. Without them the dislocations and various mistakes folks make are that much harder to overcome.

In a nutshell, if you were to think of economic growth in terms of Schumpeter's "creative destruction" idea, mild inflation somewhat soften the destructive blows, thus allowing the creation to move forward. Without it, folks just get hammered.

MikeDC, Sep 18, 2010

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