When Wall Street Is Backing Main Street
A weekend topic around three articles. Bloomberg, “One of the reasons the American economy is performing better than any of the largest in Asia and Europe is that its regulators have repaired the damage of the financial crisis and the worst recession since the Great Depression. Led by the Federal Reserve, they replaced incentives for reckless speculation with catalysts for old-fashioned credit creation backed by levels of capital that are unprecedented in modern times. Banks today are most willing to lend money since at least 1990. Perhaps the best measure of restored confidence in the financial system is the 63 percent of Americans who are within 7 percentage points of the all-time-high valuation of their homes in 2006.”
“Home mortgages now total $9.95 trillion after bottoming in 2014 after the recession. That amount is comparable to the easy-credit days of 2006, before the financial crisis. Today, in contrast, the mortgage market shows no signs of the leveraged lending that precipitated the housing bust and, if anything, is poised to keep growing.”
“The average home price, up 30 percent since 2012, reflects an increasingly robust outlook for housing, according to data compiled by Bloomberg. U.S. homeowner equity now amounts to 93 percent of the 2006 peak, which means Americans from coast to coast and North to South can look forward to recovering value lost from their homes when the market collapsed during the recession, Bloomberg data show.”
“Warren Buffett, whose Berkshire Hathaway has increased its holdings of Wells Fargo, Visa and U.S. Bancorp the past several years, recently told his shareholders that they should ignore much of what they’re hearing from presidential candidates. ‘As a result of this negative drumbeat, many Americans now believe that their children will not live as well as they themselves do,’ Buffett wrote. ‘That view is dead wrong: The babies being born in America today are the luckiest crop in history.’”
“Buffett should know. It can only happen when Wall Street is backing Main Street.”
The Wall Street Journal. “The Federal Reserve has been trying to prevent deflation, writes George Melloan, but the federal government has been ‘engineering its cause, excessive debt.’ And it’s not just our government. Global debt of all types has soared above 300% of GDP, notes Mr. Melloan.”
“Near-zero interest rates not only enabled government spending but also ‘encouraged consumers and business to releverage. Cars are now financed with low or no-interest five-year loans. With the 2008 housing debacle forgotten, easier mortgage terms have made a comeback. Corporations also couldn’t let cheap money go to waste, so they have piled up debts to buy back their own stock. Such ‘investment’ produces no economic growth, but it has to be paid back nonetheless.’”
From Business Insider. “With stocks rallying in recent days, the more bullish voices in the market seem to be gaining confidence. But Nomura’s Bob Janjuah, a strategist and noted perma-bear, thinks that the recent uptick is only a brief bounce along the market’s prolonged descent. While the reasons for the coming downturn are plentiful, in Janjuah’s opinion, central bankers have played a particularly notable role for setting up the decline.”
“‘We are entering an extremely worrying time and we have got here even faster that I had feared – a place where monetary policy and central banks become the problem and not the cure,’ Janjuah wrote. ‘The Fed is in a hole of its own making by using self-serving metrics to fix a debt and asset bubble crisis with a policy that relies on more debt and even bigger asset bubbles.’”
“Perhaps the best measure of restored confidence in the financial system is the 63 percent of Americans who are within 7 percentage points of the all-time-high valuation of their homes in 2006.”
Isn’t the correct term irrational exuberance?
‘The Fed caused 93% of the entire stock market’s move since 2008: Analysis’
read that- kind of simplistic
better question? how much would interest rates go up if the fed sold off 3/4s of the 4 trillion ?
Isn’t the correct term irrational exuberance?
+infinity, PB. It blows my mind that anyone can consider “all-time-high valuations” a good thing, a sign that things are all better now—considering that no one seems to have any reservation about using the term “bubble” to description 2005-2007 nowadays.
Huh??!? The bubble being alive and well is now considered a good thing?
‘no one seems to have any reservation about using the term “bubble” to description 2005-2007 nowadays’
The bubble is in the price. This has been the quiet rewriting of history that I have examined many times. I remember a UHS who thought a bubble was nuts telling someone after, “those prices were an illusion, everyone knew it couldn’t last.” All the manipulation and QE gets traction, prices start up and “prices had gone too low, it’s now moving up to its true value.”
Prices keep going up really fast. Flippers selling to flippers, a million over asking. New after the fact excuse needed: “we don’t have those bad loans anymore!” So if a bunch of Chinese are paying cash (they aren’t to a large degree, but anyway) there can’t be a bubble?
I asked JM long ago, do you think these fund guys and flippers are going to raise prices to the perfect equilibrium and stop? Note that each time the prices have slowed, in comes Mel Watts and the boys with some fresh gasoline. Because bubbles have to keep going up. New excuse needed; “house prices can’t possibly go too high as long as the lending is restrainted.” Uh, you keep loosening the lending. Isn’t that exactly what happened before?
I had posted about subprime loans in 2004. But I didn’t know how it would break down. Prime loans were the vast majority of defaults anyway. My point is it will break. Junk bonds or the stock market or some combination, it’ll break. Defaults in a system this large cascade, taking out ever greater numbers of companies and FB’s.
I’m glad though, that a person at Bloomberg decided to use this report about high prices to tell us we should give wall street banks a big old hug! It reminds us how we got here.
‘Since the beginning of the post-crisis bull-market run, the biggest buyer of equities hasn’t been retail investors or institutions but companies themselves. Companies have been supporting the stock market through buybacks for years. But according to some analysts, the era of buybacks may be coming to a close.’
‘According to a note from analysts at HSBC, buybacks have been the source of most of the demand for stocks since 2009. The note said that for each of the past two years, companies in the S&P 500 have bought back nearly $500 billion of their own stock and a total of $2.1 trillion since 2010.’
‘This huge amount of buying has been a massive source of upside for the stock market, said Liz Ann Sonders, chief investment strategist at Charles Schwab.’
“There’s no question that by far corporate buyback have been the source of most of the buying in the stock market,” Sonders told Business Insider on Wednesday. “On a cumulative basis there has not been a dollar added to the US stock market since the end of the financial crisis by retail investors and pension funds.”
‘For Glionna, the current problems is that many companies are financing buybacks through debt issuance, and so any tightening of credit conditions — which we’ve seen in the last several months — will lead to an inability for companies to finance and execute buybacks at the rate seen in the last few years. That would end the reign of buybacks as the biggest buyer in the market.’
‘Omar Aguilar, chief investment office for equities at Charles Schwab Investment Management, said this is already coming to pass. “The cycle for buybacks is nearing its end,” Aguilar told Business Insider. “Cheap financing has encouraged buybacks for some time. It’s easier to do when you can simply ask for a loan to finance the buybacks and as the Fed tightens and interest rates increase, this isn’t going to be as available.”
http://finance.yahoo.com/news/biggest-force-powering-stock-market-110000062.html
“Note that each time the prices have slowed, in comes Mel Watts and the boys with some fresh gasoline.”
Melatov cocktails
“Global debt of all types has soared above 300% of GDP, notes Mr. Melloan.”
Isn’t this a recipe for deflationary malaise?
“While the reasons for the coming downturn are plentiful, in Janjuah’s opinion, central bankers have played a particularly notable role for setting up the decline.”
I thought the central bankers were trying to create inflation and economic stimulus in order to avoid a decline. What gives?
“Cars are now financed with low or no-interest five-year loans.”
Back in the recession(s) of the seventies there was No Fugg’n Money… seemed like everyone was dead broke unless you were working for the government. OPEC had us by the nutz, and black-n-blue were their favorite colors. Then the Volcker interest rates… construction was stopped dead in it’s tracks. Ad nauseam…
Then the Volcker interest rates… construction was stopped dead in it’s tracks ??
Including projects already underway…It crushed millions of hard working & prudent American families…That SOB…Every time I saw him on the TV with that friggen cigar in his mouth I wanted to just shove it up his a$$…
That SOB…
So… you would have preferred that he let high inflation continue for a couple more decades, becoming firmly embedded in the economy?
My father lost his shirt during those years due to being overexposed to RE with too much leverage; I still think Volcker did the right thing by breaking the back of that inflation.
My father lost his shirt during those years due to being overexposed to RE with too much leverage ??
You did not need to be over-leveraged to have gotten your a$$ handed to you..Construction loans are tied to the prime rate + 2%…Those are adjusted monthly…Raise the prime rate almost overnight to 18% and that blew-out every interest reserve budget in the country by a factor of 100% or more because it lasted a very long after the project was complete…Massive layoffs…Even if you completed the project there was not a tenant or a buyer in site with interest rates that high unless they could lease or buy @ 50-cents on the dollar
I still think Volcker did the right thing by breaking the back of that inflation ??
Problem is he blind-sided everyone…Nobody saw those massive rate increases coming and it happened real fast…I know many, many prudent business people who lost it all because of that dude and he did not give a rats a$$ about the millions he crushed…Ba$turd…
Happening now too:
The final days and deals of Aubrey McClendon
http://finance.yahoo.com/news/special-report-final-days-deals-aubrey-mcclendon-025820633.html
Debt, or the lack of credit, did him in.
Yeah…I kinda pointing to more of the small guys Ben…Watching some reasonably successful drywall contractor with three employees, a house and a couple of kids lose it all because of what Volker did is more what I am talking about…Stick his Beek in a bottle because he is so depressed. Then marriage goes south because frankly he had no ability to provide for them…Unemployment rate in 1979 was 5.6%…By 1982 it was 9.7%….I saw this happen to many, many people…Can’t imagine how many it happened to Nation wide…
And here we are 30 years later with unemployment rates exceeding 25% because interest rates are “managed” by communist central planning.
And this is a good thing?
‘Unemployment rate in 1979 was 5.6%…By 1982 it was 9.7%’
Some of the best years in Texas. The price of gasoline was part of what hurt the economy. The two Arab oil embargoes, all that stuff. When the S&L’s were offering CD’s at 20% or more, I thought, they must be doing well to be able to pay that much. Truth was, they were about to fail and scrambling for cash. that was a different economic age. Inflation was high in the US and I can remember it was scary, on the news every night.
No where near as much money had been created prior to those inflationary years as the past 7 or 8. This deflationary force we’re in has inhaled tens of trillions of dollars and spit out empty cities and useless ore mines. And incomes fell in the US. I read a headline the other day, “we need to take our economy back from the central bankers” or something like that. Look at how people long for inflation. Do they not have memories? I also remember after the inflation went down, price stability was what everybody said was needed. Boy, they forgot all about that. Bernanke made a big mistake. This funk proves that, IMO. No way out except a bunch of creative destruction. It didn’t have to be this way.
The article above shows he got what he wanted; high stock and house prices and saved the banks. Now what Bernanke? Renters paying so much they can’t save any money. Housing relying on frequent standard lowering and easier money. Global stocks swoon when the Fed raises rates one quarter of a percent! I can’t see a way out that doesn’t involved breaking some eggs.
Problem is he blind-sided everyone…Nobody saw those massive rate increases coming and it happened real fast…
Sounds to me like you are blaming the wrong Fed chairman, then—the chair previous to Volcker _should_ have raised rates more to deal with the inflation, and did so insufficiently. Inflation had been high for like a decade before Volcker was appointed, and he took immediate action; where is the surprise factor?? Anyone with a brain should know that high inflation may lead to higher fed funds rates.
Going forward, the only way out is higher lending rates and dramatically lower prices. The only way out. If you didn’t like what happened during Volkers tenure, you’re really going to dislike the next round.
Are you prepared?
Going forward, the only way out is higher lending rates and dramatically lower prices. The only way out.
Japan has been maintaining ZIRP for what, almost a couple of decades now? Who is to say that we won’t do the same?
We’re not Japan. There is no Uncle Sam for the US lean on in accommodating ZIRP. There would be no Japan-ZIRP if there were no US.
Say…. Did you JT extension malfunction?
‘Who is to say that we won’t do the same’
Anything can happen. But I can think of reasons what’s happening could break down. Banks can’t make money with ultra low rates. Pensions and life insurance companies need some kind of return for their existence. And what about the 1.7 trillion bucks or so that savers have lost in the US? That’s not pocket change. But I’d say the biggest problem is the borrowing this has encouraged. The Japanese doing ZIRP versus the EU, US and Japan doing ZIRP and QE (China QE too) all at the same time are two different things.
But I’d say the biggest problem is the borrowing this has encouraged.
I agree, Ben—the borrowing this has encouraged is the biggest problem, as it has translated into borrowing for reckless risk-taking.
The Japanese doing ZIRP versus the EU, US and Japan doing ZIRP and QE (China QE too) all at the same time are two different things.
Agreed; this time is different. It’s just not clear to me yet how that will affect how its end-game plays out.
like 1921 , after the medicine is delivered then the economy grows
beats turning Japanese
And that’s what you get for speculating on depreciating assets at a grossly inflated price. They lost their ass and deservedly so.
The upside is prices subsequently fell to dramatically lower and more affordable levels and millions of people benefited and the economy accelerated for the first time in decades.
‘The Fed is in a hole of its own making by using self-serving metrics to fix a debt and asset bubble crisis with a policy that relies on more debt and even bigger asset bubbles.’
AKA the Hair of the Dog Hangover Cure
The economy
A hair of the dog
A bit more debt keeps the recovery on track
Feb 4th 2012 | WASHINGTON, DC | From the print edition
Timekeeper
AFTER three years of stagnant loan growth, The Peoples Bank in Coldwater, Ohio, has noticed a change. Clients who two years ago would not have qualified for a loan now find that they can. One customer who was working for only 35 hours a week two years ago is now working 45 to 50 hours. “That was his reason for coming in: he had steadier income,” says Jack Hartings, president of the seven-branch bank. Since the bank’s main alternative to lending money is buying Treasury bonds that yield only 1%-2%, Mr Hartings is eager to make new loans.
Across the country, bank lending, which shrank almost steadily from early 2009, is growing again (see chart), thanks to modest employment growth, stabilising home prices in many regions, and the Federal Reserve’s Herculean efforts to hold down interest rates.
This is helping. In the fourth quarter, America’s economy grew by 2.8% at an annual rate, the fastest in an otherwise dreary year. Much of that was from inventory restocking which will not be repeated. Still, consumer spending rose at a 2% annual rate and house building expanded by 11%, the most since 2004.
Both of these sectors were helped by easier credit. Moderate job growth, skimpy pay rises and higher petrol prices held growth in income after taxes and inflation to just 0.9% last year. Consumption grew faster because households borrowed more and saved less. Saving, which had topped 5% as a share of disposable income in the wake of the recession, had fallen to 3.5% in November.
…
More like the “Shakes the Clown” hangover cure.
From the leading article …
“Bouncing Back”
“All but ignored in the presidential debates this year is the record $1.06 trillion of loans to commercial and industrial firms by the largest U.S. banks, an amount that has increased for 21 consecutive quarters. That’s a streak unequaled since 1985, when Ronald Reagan occupied the White House (and Bloomberg began compiling such data).”
The RECORD $1.06 trillion of loans to commercial and industrial firms by the largest U.S. banks, an amount that has INCREASED for 21 consecutive quarters is considered to be … the GOOD news.
IMO the good news, the “Bouncing Back”, would be the PAYING OFF of $1.06 trillion of loans by commercial and industrial firms, not the other way around.
But, hey, I’m old school.
‘Near-zero interest rates not only enabled government spending but also ‘encouraged consumers and business to releverage. Cars are now financed with low or no-interest five-year loans. With the 2008 housing debacle forgotten, easier mortgage terms have made a comeback. Corporations also couldn’t let cheap money go to waste, so they have piled up debts to buy back their own stock. Such ‘investment’ produces no economic growth, but it has to be paid back nonetheless.’
This isn’t taking into account the dry cleaner effect of having more productive capacity than needed, resulting in price wars.
‘There will be bedlam: The global energy crisis is only just beginning’
‘Understandably enough, the stunning increase in North American oil production in the past few years simply wasn’t on their radar. According to the Energy Information Administration (EIA) of the Department of Energy, U.S. crude output rose from 5.5 million barrels per day in 2010 to 9.2 million barrels as 2016 began, an increase of 3.7 million barrels per day in what can only be considered the relative blink of an eye. Similarly unexpected was the success of Canadian producers in extracting oil (in the form of bitumen, a semi-solid petroleum substance) from the tar sands of Alberta.’
‘The reality of the matter has turned out to be significantly more straightforward: U.S. and Canadian producers were adding millions of barrels a day in new production to world markets at a time when global demand was incapable of absorbing so much extra crude oil. An unexpected surge in Iraqi production added additional crude to the growing glut. Meanwhile, economic malaise in China and Europe kept global oil consumption from climbing at the heady pace of earlier years and so the market became oversaturated with crude. It was, in other words, a classic case of too much supply, too little demand, and falling prices.’
It started with natural gas and metals, it spread to most commodities.
Just like with housing, the price was too high. Politicians and bankers like high prices, but they cause wreck and ruin.
‘LIES, BOOZE, AND BILLIONS: How one of the fastest-growing startups in Silicon Valley history raised $580 million then spiraled out of control’
I’m so impressed.
http://www.businessinsider.com/the-inside-story-of-zenefits-2016-3
That’s quite a read; the comments too! Hehe.
‘Berkshire Hathaway has increased its holdings of Wells Fargo, Visa and U.S. Bancorp the past several years, recently told his shareholders that they should ignore much of what they’re hearing from presidential candidates. ‘As a result of this negative drumbeat, many Americans now believe that their children will not live as well as they themselves do,’ Buffett wrote. ‘That view is dead wrong: The babies being born in America today are the luckiest crop in history.’
They have the luck of making interest payments to Berkshire Hathaway.
Plus Berkshire will get a guaranteed skim off every transaction in our “cashless” society.
The economic punditry looks at debt-fueled booms and says, “That’s how we want society to be all the time. People are working and consuming at optimal rates. And they’re doing it with debt and currency. Debt is just a promise to pay and currency is just slips of paper. It’s all just a result of human expectations. So we should do everything we can to bring those circumstances back. We can control debt and currency.”
That kind of thinking results in borrowing and printing to deal with economic slowdowns.
However, this is the core mistake the pundits make: Currency is not only a representation of some abstract concept, it is a measure of something very real.
That something is human effort, human labor, human pain.
It’s not just a slip of paper representing some abstraction, it is a measure of human effort, as surely a a ruler measures length.
Government-guaranteed debt is a form of money printing - it injects a lot of money into economy. But debt is also the thing that retains the ability of the currency to act as a measurement tool. Canceling debt would undermine the currency’s use as a measurement tool. But then what is debt? Consumption drawn forward. Which means future consumption is reduced.
Government guaranteeing debt and lenders being able to shed repayment risk means there are strong incentives to maximize the generation of debt. Which puts brakes on future consumption.
And despite what Keynes implied, tomorrow eventually does get here.
Humans have accepted currency for thousands of years. Humans have accepted it as a very effective measuring tool. An economic policy based on trying to obfuscate what it measures is an exercise in futility. There can be brief disruptions, but water eventually finds its level.
tomorrow eventually does get here.
Yes, tomorrow eventually gets here—but that is not the same thing as suggesting that the debt-induced reduction of consumption does eventually arrive.
The key, in the minds of the debt-pushers, is that debt-generation never be reduced; if new debt continues to be generated at an increasing pace forever, well then, in that manner, the debt-chickens never do need to come home to roost.
Why do you think the Federal Reserve was so terrified to see the amount of lending diminish in the post-GFC years, and why they are so relieved to see total indebtedness going up again now?
Yes, tomorrow eventually gets here—but that is not the same thing as suggesting that the debt-induced reduction of consumption does eventually arrive.
Debt fueled bubbles and businesses follow similar patterns:
1) Rapid initial growth
2) Supply of high quality debtors run out
3) Debt is granted to lower quality debtors resulting in a race to the bottom
4) The model fails
I posted a link with some evidence about this model recently. But the points about 2 and 3 suggested that there is peak debt - debt saturation. Where top-tier debtors run out.
I think the deflationary pressures are driven by this model, by the reduction in consumption.
An thought-provoking link:
“But SoFi faces three obstacles if it is to keep growing fast enough to justify a recent investment that valued it at around $4 billion (it is not listed). The first is growing without lowering its lending standards. Of the $6 billion it has lent in total, more than $4 billion went out the door in 2015. Such rapid growth usually comes with more than a few dud loans. ”
– http://www.economist.com/news/finance-and-economics/21688439-fintech-darling-offers-new-modelone-not-without-risks-so-far-so-good
“I think the deflationary pressures are driven by this model…”
In a bubble we see that prices go up insanely. That is what causes the deflation when the bubble pops.
‘the debt-chickens never do need to come home to roost’
And Reagan proved deficits don’t matter.
‘The aide said that guys like me were “in what we call the reality-based community,” which he defined as people who “believe that solutions emerge from your judicious study of discernible reality.” I nodded and murmured something about enlightenment principles and empiricism. He cut me off. “That’s not the way the world really works anymore.” He continued “We’re an empire now, and when we act, we create our own reality. And while you’re studying that reality—judiciously, as you will—we’ll act again, creating other new realities, which you can study too, and that’s how things will sort out. We’re history’s actors … and you, all of you, will be left to just study what we do.”
Suskind, Ron (2004-10-17). Faith, Certainty and the Presidency of George W. Bush. The New York Times Magazine.
https://en.wikiquote.org/wiki/Karl_Rove
‘ A spelling mistake in an online bank transfer instruction helped prevent a nearly $1 billion heist last month involving the Bangladesh central bank and the New York Federal Reserve, banking officials said.’
‘Unknown hackers still managed to get away with about $80 million, one of the largest known bank thefts in history.’
‘The hackers breached Bangladesh Bank’s systems and stole its credentials for payment transfers, two senior officials at the bank said. They then bombarded the Federal Reserve Bank of New York with nearly three dozen requests to move money from the Bangladesh Bank’s account there to entities in the Philippines and Sri Lanka, the officials said.’
http://www.nbcnews.com/tech/tech-news/how-hacker-s-typo-helped-stop-billion-dollar-bank-heist-n536526
Apparently this digital money is real. If it is real, there must be some limit to it. I find it very interesting that inflation exists under past definitions in some countries and doesn’t in others. China has it, India, Brazil. On this endless debt; notice the hub-bub about raising minimum wages. Why not mandate that everyone gets a 15% increase in pay? Make it 50%. Surely we could all then afford a $20 burger or a $400,000 house. Could it be there are limits involved that the PTB are afraid of testing? These central bankers are flying a bit more blind than they let on.
“Regulators give repaired”
Written by a goverrnmentarian
WSJ interviews “Martin Lee” Beijing business manager: What is the role of the housing market in China’s economy, in your opinion?
It isn’t my business. It’s a means for the privileged and interest groups to make a profit. 1,000 years ago, the ancient poet Du Fu said, “Where can I get a big broad shelter a thousand, ten thousand spans wide, a huge roof that all the world’s poor people can share with smiling faces?” (安得广厦千万间，大庇天下寒士俱欢颜) Now, nothing has changed. The housing market is part of the bubble economy. In 5 years or so, after a war has broken out, then the middle class will be able to afford a home.
Last year I read a decent translation of this Du Fu poem, can’t find it at the moment. Mr. Lee is engaged in a little blood-curdling satire and implies the post-war affordable middle class Chinese home will be a pile of rubble, or maybe just a grave.
Future Economists Will Probably Call This Decade the ‘Longest Depression’
Brad DeLong
Professor of economics, U.C. Berkeley
‘Economist Joe Stiglitz warned back in 2010 that the world risked sliding into a “Great Malaise.” This week, he followed up on that grim prediction, saying, “We didn’t do what was needed, and we have ended up precisely where I feared we would.”
‘The problems we face now, Stiglitz points out, include “a deficiency of aggregate demand, brought on by a combination of growing inequality and a mindless wave of fiscal austerity.” He says the only cure is an increase in aggregate demand, far-reaching redistribution of income and deep reform of our financial system. The obstacles to this cure, he writes, “are not rooted in economics, but in politics and ideology.” Indeed. Joe Stiglitz is right.’
‘In the aftermath of 2008, Stiglitz was indeed one of those warning that I and economists like me were wrong. Without extraordinary, sustained and aggressive policies to rebalance the economy, he said, we would never get back to what before 2008 we had thought was normal. I was wrong. He was right.’
‘Despite the positive jobs report today, we have climbed back less than halfway to where we were in 2007 and less than a third of the way back to where we were in the full-employment year of 2000. The Federal Reserve thinks that it does not dare try to keep interest rates low enough and asset holdings high enough to attempt to close any more of the gap because of its fear of triggering an unwelcome inflationary spiral.’
‘But that is what the Federal Reserve has decided. So that is where we are. And look outside the United States: Western Europe and Japan are in even worse shape than the U.S. is. And today, the main engine of what world economic growth we have seen over the past seven years — China — is more than sputtering. The Chinese stock market this week is telling us that China’s economy is possibly stalling-out entirely as far as growth is concerned.’
‘What we need now is 1) debt relief to unwind the overhang and 2) much tighter financial regulation to prevent the growth of new fragilities. And if those prove inconsistent with full recovery, then we need massive government spending on infrastructure and other investments financed by money printing until full employment is reattained.’
‘The second task will be one of political organization. For until politicians, finance ministry technocrats and central bankers feel under pressure to respond to and in fact internalize the diagnoses of Stiglitz, Eichengreen, Wolf and others, our problems will remain, as Stiglitz puts it, “not rooted in economics, but in politics and ideology.”
‘And it is only after those ideological and political blockages have been removed that the tasks of economic policy — and then of shifting policy to deal with the new problems that arise as consequences of fixing our current economic policies — can be seriously begun.’
I was on a radio show in 2005 with Mr DeLong, and he said there wasn’t a bubble but if there was we would “find out how good our central bankers are.” Looks like they let you down.
Let’s at least consider some alternatives to this piece: ‘I was wrong. He was right.’ Could it be possible that you are both wrong? I know, Keynesian’s can never, ever do that, but I’m not looking for your capitulation. It isn’t necessary for you to throw in the towel in order to see it’s a complete failure.
‘What we need now is 1) debt relief to unwind the overhang’
Ho ho ho! Austrian economists were wayyy ahead of ya. Weren’t foreclosures the legal method for liquidating debt? Liquidate bankrupt corporations too! Ah, that’s the catch isn’t it. The great and mighty government didn’t allow that to happen. To this day if I turn on a radio I’ll hear ads for HAMP loans etc. And we all know that AIG and pals didn’t get liquidated, nor the GSE’s.
Oh, and foaming the runway for the banks, don’t forget that!
‘He says the only cure is an increase in aggregate demand, far-reaching redistribution of income and deep reform of our financial system.’
Income isn’t going to cut it, you would need (presuming it would work) redistribution of wealth. Good luck running that through DC’s bought and paid for machine along with the billionaires club known as the Federal Reserve. Deep reform? See the previous.
Then there’s this problem:
‘Western Europe and Japan are in even worse shape than the U.S. is. And today, the main engine of what world economic growth we have seen over the past seven years — China — is more than sputtering’
Now, I suggest you ain’t ever going to get these countries to internalize the diagnoses of Stiglitz, Eichengreen, Wolf and others. As a matter of fact, I’d bet they will never know who these people are. In short; the global economy is screwed. It’s not going to get fixed; we are way past the time to pull that off even if we had agreed on a solution in 2007.
But screwed is a temporary thing. FB’s get over it. Bankrupt CEO’s get over it. Mexico went broke twice and they got over it, other countries too. Bad debt will be liquidated, it’s a question of how much denial will be employed so as to pull the bandage off slowly. Plus you never know, something better might emerge.
“redistribution of wealth”
That happens automatically when bad debt gets liquidated.
“redistribution of wealth”
“That happens automatically when bad debt gets liquidated.”
Which means: Whomever is on the wrong end of the bad debt that gets liquidated gets to see his wealth “redistributed”.
Not all debt is bad debt hence not all debt gets liquidated hence not all wealth gets redistributed, so the job of the investor is to determine which debt will end up redistributing his wealth and which debt won’t and then focus his attention on investing in the later while avoiding the former.
Which might be easy to do for an individual investor who does his own thinking but will be tough to do for a person who makes his living by investing other people’s money (OPM) while at the same time extracting a hefty cut from this pile of OPM he manages BECAUSE (and this is important so PAY ATTENTION!) the manager of the pile of OPM not only has to generate enough of a return to keep his clients happy (clients = the owners of the pile of OPM he manages) he ALSO has to generate a hefty enough of a return so that after extracting his hefty fee there will be enough of a return left to keep his clients happy (a reminder: happy clients do not walk away, unhappy clients do).
Which means (and to sum it all up): The manager of OPM has to earn two returns on the money he manages:
1. He has to earn a return hefty enough to extract the hefty fee that he extracts from the pile of OPM he manages, plus …
2. He has to earn a return hefty enough to keep his clients happy so that they do not walk away and take their pile of OPM with them.
In the Good Ol’ Days of eight-percent-plus returns numbers 1 and 2 were easy for a money manager to do with low to moderate risks but in today’s NIRP world this is impossible for him to do without taking ENORMOUS risks and this, IMHO, is what we are now seeing, we are seeing enormous risks being taken by money managers who are putting their client’s money into junk bonds or junk stocks or soon-to-be junk bonds and junk stocks. They are doing this because they feel they have little choice in the matter.
‘“redistribution of wealth”
That happens automatically when bad debt gets liquidated.”
But of course the Keynesians don’t want this kind of redistribution of wealth. They want to take it from those of us of sound mind and fiscally-conservative bent, who haven’t participated in the bubbles.
QE helps nicely with Keynesian-style redistribution, as the resulting low interest rates screw savers, redistributing what would have been their returns on savings/investment to people and corporations taking on debt at interest rates far lower than what the risk of lending to these folks merits.
The extra interest that they DON’T pay is savers’ redistributed wealth.
I just read this yesterday Ben….
“not rooted in economics, but in politics and ideology.” ??
There you have it…
https://www.youtube.com/watch?v=Nt_zVk8j4wY
How Long (Will Interest Rates Stay Low)?
by Merle Hazard
(c) 2016
Chorus 1
How long (how long) will interest rates stay low?
That’s the question, the whole world wants to know
How long (how long) will interest rates stay low?
It seems like if they’re going up, they’re going pretty slow
Verse 1
Our country’s central bank is really scared, that’s plain to see
When everything is leveraged, raising rates is misery
But keeping rates too low, too long, would cause us pain and sorrow
There is no easy option in a land of constant borrow
Chorus 2
How long (how long) will interest rates stay low?
That’s the question, the whole world wants to know
How long (how long) will borrowing be free?
How long will we be subsidized by savers and retirees?
Verse 2
Central banks around the world, not only in the States
Are each at work on lengthy slumps, their countries’ tragic fates
Legislatures will not spend to give sufficient boost
Lower interest rates are all that’s left to get their countries juiced
Chorus 3
How long (how long) will interest rates stay low?
If you could predict it, you could make a lot of dough
How long (how long) will interest rates stay depressed?
The answer…is anybody’s guess
Verse 3
Some say low rates are symptomatic, rather than the cure
I have a hunch they’re right. I can’t say I am sure.
But recovery has been long and slow, the crisis wounds are deep
So until we see inflation, money’s likely to be cheap
Chorus 4
Instrumental solos
Verse 4
Capital’s abundant, money’s not in short supply
China holds our Treas’ry bonds, although I wonder why
Start-ups happen in the cloud, few people are employed
If something could push rates back up, I’d be overjoyed
Chorus 5
How long (how long) will interest rates stay low?
That’s the question, the whole world wants to know
How long (how long) ‘til we really start to grow?
Interest rates are goin’ up, but they’re go-in’…pret-ty…slow….
How Long (Will Interest Rates Stay Low) ??
When the major developed world economies get off zero bound then we can expect our rates start the way back to some form of normalcy IMO…
According to the Energy Information Administration (EIA) of the Department of Energy,
anyone at the many departments of energy lost their job?
oil patch worldwide is down about 200,000 workers
….. and billions people around the globe benefit from falling crude and fuel prices to dramatically lower and more affordable levels.
It’s how the world works.
“Realtor Nabbed in Palm Beach For Car Theft”
https://www.google.com/search?q=realtor+arrested&oq=realtor+arrested&aqs=chrome..69i57.3258j0j7&sourceid=chrome&ie=UTF-8#q=realtor+arrested&tbm=nws&tbs=qdr:m
Typical realtor.
Led by the Federal Reserve, they replaced incentives for reckless speculation with catalysts for old-fashioned credit creation backed by levels of capital that are unprecedented in modern times.
That’s some of the best comedy, and some of the best propaganda, that I’ve read in a long time.
Yes, liquidity level are “unprecedented”; but they have done nothing but promote, and where possible _enforce_ reckless speculation.
“That view is dead wrong: The babies being born in America today are the luckiest crop in history.”
Perhaps, because Generation Greed will be mostly gone by the time they are 25. And perhaps much of the damage will be repaired, and sacrifices made, by the time they are 50.