NationStates Jolt Archive

Based on what is being reported by the ephemeral media, all economists have lost faith in unbridled capitalism and it won't be long before the US goes the way of Europe.
It's exaggerated, of course, but it's also hard to believe the current economic situation won't leave academic economics untouched. Part of the reason a hands-off approach seemed so attractive in the first place was the perceived failure of Keynesian methods in the 1970s, which were based on teachings that first became popular after an earlier crisis. Before that, there was the Classical-Neoclassical shift, thanks in part to rising wages, and of course the idea of economics as a field of study only emerged after a trend toward industrialization.
So, how will this crisis affect the science(?) of economics? I don't mean just policy, but the way it is studied and taught. Will there be a shift to more government involvement, or is the current situation too small to make a permanent impact?

Watching folks dust off the Keynesian textbooks only suggests to me how limited and unimaginative the debate over the next year will be. Crises ought to be breeding grounds for new thinking, not pendulum swings back to the old. I haven't a clue what that new thinking might be, though.

EDIT: On second thought, I think Stiglitz's ideas about information asymmetries would be a great way to inject economics with a healthy dose of post-modernism. I'm not sure I'd enjoy the result, but it would be fun to watch the fireworks.

The current economic turmoil is a resounding validation and vindication of free market capitalism. It is also plain, overwhelming, and massive evidence for the failure and dangers of government intervention.

Government intervention created this crisis, and government intervention will not solve it.

New Limacon, the myth that the economy was "deregulated" in the 1980s in response to the "perceived failure of Keynesian methods in the 1970s" is just that - a myth. Keynes' theories were not abandoned after the 1970s. Quite the opposite occurred; Keynesian policies were expanded enormously. No deregulation took place; laws and regulations have multiplied, and government spending as a percentage of GDP has increased every year in every presidency- including the so called "conservative" Reagan presidency.

Finally, the least intuitive aspect of the current economic crisis is money supply. The world's money supply is 100% regulated by bureaucrats sitting behind desks in the United States Federal Reserve, European Central Bank, BOE, PBC, BOJ, and other governmental central banks. These bureaucrats, and not the free market, decide how much money should be in circulation. Deregulation absolutely does not exist if our medium of exchange is 100% regulated and manipulated. There has been no such thing as a "hands off" policy in the economy if the money supply is daily manipulated, regulated, and tinkered with by government technocrats who like Soviet economic planners mistakenly believe they know better.

As history has repeatedly proven, central planning and assignment of resources is ALWAYS less efficient and unsustainable than decentralized market forces. The inflationary policies undertaken by the world's central banks in the past several decades are not exempt from that axiom, since money is a commodity just like any other.

And the massive increases in money supply - these fake economic signals sent out by government bureaucrats - directly fueled the dotcom and real estate bubbles and caused systemic malinvestments that burst so spectacularly this past year. Our current economic crisis is a direct result of hamfisted, incompetent government intervention.

New Limacon, the myth that the economy was "deregulated" in the 1980s in response to the "perceived failure of Keynesian methods in the 1970s" is just that - a myth. Keynes' theories were not abandoned after the 1970s. Quite the opposite occurred; Keynesian policies were expanded enormously. No deregulation took place; laws and regulations have multiplied, and government spending as a percentage of GDP has increased every year in every presidency- including the so called "conservative" Reagan presidency.
In some ways that's true; the government has certainly not stopped expanding. However, I'm talking less about policy and more about economic culture, what I guess you could call the economic zeitgeist. Even as he was expanding the federal government, Reagan at least talked about free market ideals.


As history has repeatedly proven, central planning and assignment of resources is ALWAYS less efficient and unsustainable than decentralized market forces. The inflationary policies undertaken by the world's central banks in the past several decades are not exempt from that axiom, since money is a commodity just like any other.
This isn't really the subject of the thread so I don't want to get too off-topic. However, I'm skeptical of the claim the free market is more efficient than central planning only because a) there seems to be a natural inclination to central planning, even if its private and b) I cannot think of a single country or time where the market has been as free as many supporters of laissez-faire think it should be, which makes comparisons difficult.

Based on what is being reported by the ephemeral media, all economists have lost faith in unbridled capitalism and it won't be long before the US goes the way of Europe.

We're getting managed health care and restrained military spending?

Fuck that. We will find a way to combust dirt and invade Canada.

We're getting managed health care and restrained military spending?
Probably not, hence my suspicion it's exaggeration.

In some ways that's true; the government has certainly not stopped expanding. However, I'm talking less about policy and more about economic culture, what I guess you could call the economic zeitgeist. Even as he was expanding the federal government, Reagan at least talked about free market ideals.

Even after the 70s the economic zeitgeist has always been pro-government intervention. Every time the stock market goes down people cry for the Federal Reserve and other governmental central banks to lower interest rates; people almost never demand the rightful abolition of central banks so that the free market can "discover" the natural, sustainable interest rates without the artificial and unsustainable distortions of fiat central banking. It is these artificial interest rate distortions that central banks have engaged in that created the dotcom and real estate bubbles.

Also, the so-called successful Fortune 500 companies are touted as champions of capitalism yet ALL of them subsist on large government contracts for income. Historically, these government contracts have increased yearly. The "zeitgeist" has been consistently shifting toward corporatism and fascism, not toward free market capitalism.


This isn't really the subject of the thread so I don't want to get too off-topic. However, I'm skeptical of the claim the free market is more efficient than central planning only because a) there seems to be a natural inclination to central planning, even if its private and b) I cannot think of a single country or time where the market has been as free as many supporters of laissez-faire think it should be, which makes comparisons difficult.
Monopolistic central planning does not exist in the private sector, because central planning is incapable of gaining feedback from the market. Private economic planning in firms and corporations get feedback for their economic calculations from the decentralized market, i.e. consumers. (This feedback is in the form of the consumer deciding whether or not to spend money on that firm's goods and services) Private planning must rapidly adapt and change in order to defend profitability and avoid losing money. Public, monopolistic central planning does not get consumption feedback from consumers since there is no need to worry about profits or lack thereof; all funding is subsidized by taxation. Therefore public central planning persist in their wasteful, inefficient, and money-losing policies.

Comparisons between less-free and more-free economies are rife throughout history and are always decided in favor of more-free markets, which produce maximal prosperity, efficiency, and abundance. Less-free, centralized economies produce more scarcity and unemployment.

academic economic theory has been premeditatedly isolating itself from virtually all other factors of reality for quite some time. it makes the numbers convenient to do so. of course reality being reality, slightly chaotic and infinitely diverse, has never been under the slightest obligation to make life simple for mathematical theorists.

real humans can generally see this, but always some are not stopped by the opportunities for shuck and jive exploitation of it. thus there is something called leverage, which amounts to using barrowed symbolic value as security against borrowing even more symbolic value, a process i see as completely analogous to kiting checks and other forms of paper hanging. i mean that's looks fine, and some people get very symbolically fat off of it, and it goes along for a while as long as nothing rocks the boat, but like all pyramid schemes it eventually reaches a point of critical mass implosion, at which point its reality check bounces hard. and that of course is precisely what we've seen and are seeing happening.

They consistently fail to realize that it was the mixed economy that produced these problems in the first place. Government intrusion in to the market creates that wonderful combination of socialized risk and private profit as well as establishes colossal vested interests that in turn artificially depress risk and outright encourage risky behavior that would not be anywhere near as widespread in a free market. I feel with total certainty that these banks knew their vested interests in the government and its massively distortive intrusion in to the market would provide considerable or even total cover for their risky investments and so were willing to pursue things few investors would ever consider were they fully exposed to the risk.

Greed and corruption only flourish when there is someone else there to pick up the pieces and to set things right, and in this case our government has been spending our money to reward incompetence. But then again, that is the nature of government...

Personally, I would like to see the full privatization of all government-chartered corporations, a comprehensive set of new regulations aimed at full market transparency and the elimination of all asset-guaranteeing programs above and beyond the FDIC's insurance for deposits. Furthermore, I'd like to see all political contributions by companies and lobbyists completely outlawed and transition to a full public financing system for political campaigns that is entirely funded through personal income taxes (not matching funds), giving all taxpayers a real stake in the election and forcing the politicians to use their money wisely rather than rewarding the candidate who can produce the slickest advertising campaign. Obviously, such tall goals are pretty damn unlikely given the current situation in Washington, but even campaign finance reform alone would do a massive amount of good.

If you expose these companies to real market risk and remove the leeches in Washington that feed them, they won't become to big to fail because their entire business will be subject to market forces and to their investors, who will also no longer be protected by the government's socialized risk and will be forced to make decisions accordingly.

academic economic theory has been premeditatedly isolating itself from virtually all other factors of reality for quite some time. it makes the numbers convenient to do so. of course reality being reality, slightly chaotic and infinitely diverse, has never been under the slightest obligation to make life simple for mathematical theorists.

real humans can generally see this, but always some are not stopped by the opportunities for shuck and jive exploitation of it. thus there is something called leverage, which amounts to using barrowed symbolic value as security against borrowing even more symbolic value, a process i see as completely analogous to kiting checks and other forms of paper hanging. i mean that's looks fine, and some people get very symbolically fat off of it, and it goes along for a while as long as nothing rocks the boat, but like all pyramid schemes it eventually reaches a point of critical mass implosion, at which point its reality check bounces hard. and that of course is precisely what we've seen and are seeing happening.

Leverage is simply borrowing. If you borrow a $5 bill from your friend, you are leveraged. There's nothing mystifying about leverage, and although condemnation of leverage makes for a good sound bite on TV, focusing on the mathematics of investment banking does not clarify the perverse "logic" of our economy's boom-bust cycles. The root cause of the current economic crisis is plain and simple: government intervention and distortion of the money and credit supply. These violent boom-bust cycles are not a natural feature of a free market. These booms and busts are manufactured by governmental central banks' hamfisted dysregulation of the money and credit supply. The only way to avert crises in the future is for the governments and central banks to cease tinkering with the free market once and for all.

They consistently fail to realize that it was the mixed economy that produced these problems in the first place. Government intrusion in to the market creates that wonderful combination of socialized risk and private profit as well as establishes colossal vested interests that in turn artificially depress risk and outright encourage risky behavior that would not be anywhere near as widespread in a free market. I feel with total certainty that these banks knew their vested interests in the government and its massively distortive intrusion in to the market would provide considerable or even total cover for their risky investments and so were willing to pursue things few investors would ever consider were they fully exposed to the risk.

Greed and corruption only flourish when there is someone else there to pick up the pieces and to set things right, and in this case our government has been spending our money to reward incompetence. But then again, that is the nature of government...

Personally, I would like to see the full privatization of all government-chartered corporations, a comprehensive set of new regulations aimed at full market transparency and the elimination of all asset-guaranteeing programs above and beyond the FDIC's insurance for deposits. Furthermore, I'd like to see all political contributions by companies and lobbyists completely outlawed and transition to a full public financing system for political campaigns that is entirely funded through personal income taxes (not matching funds), giving all taxpayers a real stake in the election and forcing the politicians to use their money wisely rather than rewarding the candidate who can produce the slickest advertising campaign. Obviously, such tall goals are pretty damn unlikely given the current situation in Washington, but even campaign finance reform alone would do a massive amount of good.

If you expose these companies to real market risk and remove the leeches in Washington that feed them, they won't become to big to fail because their entire business will be subject to market forces and to their investors, who will also no longer be protected by the government's socialized risk and will be forced to make decisions accordingly.

The FDIC is the greatest socializer of risk of them all. Abolish the FDIC, abolish the Federal Reserve, truly free the markets, and sustainable, long-term, enduring economic stability will result.

The FDIC is the greatest socializer of risk of them all. Abolish the FDIC, abolish the Federal Reserve, truly free the markets, and sustainable, long-term, enduring economic stability will be achieved.

Perhaps in the long term; even the things I propose would be very disruptive to a system built on a half-century of socialized risk and government intervention. The sheer compound effects of this system and its decades of hidden damage are massive and will take a long time to deflate properly.

Leverage is simply borrowing. If you borrow a $5 bill from your friend, you are leveraged. There's nothing mystifying about leverage, and although condemnation of leverage makes for a good sound bite on TV, focusing on the mathematics of investment banking does not clarify the perverse "logic" of our economy's boom-bust cycles. The root cause of the current economic crisis is plain and simple: government intervention and distortion of the money and credit supply. These violent boom-bust cycles are not a natural feature of a free market. These booms and busts are manufactured by governmental central banks' hamfisted dysregulation of the money and credit supply. The only way to avert crises in the future is for the governments and central banks to cease tinkering with the free market once and for all.

I don't know, I'd say it's mostly the delusion of the masses, delusion in tulips, delusion in tech stocks, delusion in house prices. The sheep effect of seeing something rise, feeling like a fool for not joining and failing to understand the underlying truths, tulips are worth nothing, tech is a way from full fruition and houses don't rise for ever.

If anything, government's merely to blame for not having the spine to go against public delusion.

Do we vote for servants or leaders?

At the moment I say we get neither.

I don't know, I'd say it's mostly the delusion of the masses, delusion in tulips, delusion in tech stocks, delusion in house prices. The sheep effect of seeing something rise, feeling like a fool for not joining and failing to understand the underlying truths, tulips are worth nothing, tech is a way from full fruition and houses don't rise for ever.

I think, though, that in recent history certainly bubbles have been heavily stoked by the government, either through its unwillingness to act in the face of irrational exuberance, as was the case in the 1990's, or sudden surges in the money supply that flood the market with artificially cheap credit, as happened in Japan back in the 80's as well as the US and other countries during the 2000's. They are also longer lasting than earlier speculative bubbles, quite possibly reflecting the market's pricing in of government effects on risk.

I don't know, I'd say it's mostly the delusion of the masses, delusion in tulips, delusion in tech stocks, delusion in house prices. The sheep effect of seeing something rise, feeling like a fool for not joining and failing to understand the underlying truths, tulips are worth nothing, tech is a way from full fruition and houses don't rise for ever.

If anything, government's merely to blame for not having the spine to go against public delusion.

Do we vote for servants or leaders?

At the moment I say we get neither.

Mass delusion is a secondary effect and never the initial cause of speculative bubbles. After all, speculative bubbles start small, and the delusion is limited. The delusion only spreads when people start seeing the large amounts of inflationary money and credit flowing into the asset class in question.

Speculative bubbles are always caused by inflation of money and credit. In modern day, in the fiat currency regime, the source of monetary and credit expansion is government action, and therefore government action is to blame for creating a bubble where no bubble existed before.

Wishful thinking by itself cannot sustain a bubble if there is no money available to borrow for speculation. The Dutch tulip bubble was sparked by the cheap credit and monetary inflation resulting from the massive import of Aztec gold into the Low Countries' economy during the 16th century. The dotcom bubble of the 1990s was sparked by cheap credit and monetary inflation resulting from Alan Greenspan's crazed money-printing policies. The real estate bubble of the 2000s was fueled by more of Alan Greenspan and some of Ben Bernanke.

The Federal Reserve and other irresponsible governmental central banks, including the ECB, the Chinese central bank, the Bank of Japan, and others, were all complicit in creating the inflation and cheap credit that resulted in the greatest asset bubble in the history of mankind, from Miami Beach to Dubai to Shanghai.

...

...

I feel my brain wrenching from the inherent idea that government is, in the main, good to thinking that the entire system of top-down, information-control government is simply way outdated.

Anyway, thanks for mah edumacation.

I feel my brain wrenching from the inherent idea that government is, in the main, good to thinking that the entire system of top-down, information-control government is simply way outdated.

Anyway, thanks for mah edumacation.

It really is outdated. Now, I'm not one to advocate things like a gold standard, since realistically gold is no more inherently valuable than paper (and probably far less so...I think paper is probably more critical to our modern economy). However, I am a strong supporter of a completely fixed growth rate for the money supply, only to be adjusted if it is absolutely and certainly clear that the rate needs to change due to adjustments in the economy such as new technology or unforseen disasters.

leverage ISN'T "just" borrowing. its borrowing using borrowed resources as 'security' against risk of nonpayment, which is of course, no security at all, and thus, by any other name, a pyramid scheme.

leverage on leverage on leverage on leverage on leverage ... ad infinitum, until at some point reality takes over.

letting little green pieces of paper get away with murder does nothing to prevent this.

granted not all management is good management. not all regulation is good or beneficial regulation. that doesn't make all regulation bad, nor the absence of any somehow inherently beneficial.

in a theoretical pure market situation, well i'm not so sure in a pure market situation you'd even have corporations. but like pure democracy or pure anything else, i seriously doubt its ever been attempted or could be, for precisely the practical realities that academic economic theories insist on ignoring.

you know, minor little details like where the air we breathe comes from, survival let alone gratification of actual living awarenessess and organisms, and so on, that sort of thing.

Mass delusion is a secondary effect and never the initial cause of speculative bubbles. After all, speculative bubbles start small, and the delusion is limited. The delusion only spreads when people start seeing the large amounts of inflationary money and credit flowing into the asset class in question.

Speculative bubbles are always caused by inflation of money and credit. In modern day, in the fiat currency regime, the source of monetary and credit expansion is government action, and therefore government action is to blame for creating a bubble where no bubble existed before.

Wishful thinking by itself cannot sustain a bubble if there is no money available to borrow for speculation. The Dutch tulip bubble was sparked by the cheap credit and monetary inflation resulting from the massive import of Aztec gold into the Low Countries' economy during the 16th century. The dotcom bubble of the 1990s was sparked by cheap credit and monetary inflation resulting from Alan Greenspan's crazed money-printing policies. The real estate bubble of the 2000s was fueled by more of Alan Greenspan and some of Ben Bernanke.

The Federal Reserve and other irresponsible governmental central banks, including the ECB, the Chinese central bank, the Bank of Japan, and others, were all complicit in creating the inflation and cheap credit that resulted in the greatest asset bubble in the history of mankind, from Miami Beach to Dubai to Shanghai.

So why do all the crazed idiots running our Governments insist that the solution is to 'spend,spend, spend' and 'borrow, borrow, borrow'? Are they trying to reinflate the bubble?

I think, though, that in recent history certainly bubbles have been heavily stoked by the government, either through its unwillingness to act in the face of irrational exuberance, as was the case in the 1990's, or sudden surges in the money supply that flood the market with artificially cheap credit, as happened in Japan back in the 80's as well as the US and other countries during the 2000's. They are also longer lasting than earlier speculative bubbles, quite possibly reflecting the market's pricing in of government effects on risk.

Contrary to popular belief, the government did not sit idly in the face of irrational exuberance. In fact, Alan Greenspan printed even more dollars and encouraged even more credit unabated throughout the late 90s. The government and Federal Reserve therefore continued to actively inflate the bubble in the middle of the exuberance, and the money supply expanded continuously and exponentially throughout the 90s. Greenspan had every ideological motivation to fan the bubble to ever increasing girths. As a misguided Chicago School monetarist, all Greenspan knew was inflation of the money supply.

Furthermore, the irrational exuberance of the 90s was originally caused by the government's inflation of the money supply throughout the 80s and 90s. Bubbles and the Federal Reserve are two mutually-reinforcing things.

The bubble finally burst in 2001, with deflationary pressure served by credit destruction, which the Federal Reserve thankfully has only indirect, and not direct, ways to "combat." Yet combat it the Fed did, by lowering interest rates to absolutely unsustainable levels which resulted in the late famous real estate bubble.

Could these economic and societal catastrophes have been avoided? Yes, if Alan Greenspan and the Federal Reserve did not embark on its 30-year campaign of relentless money expansion in the first place. So in a way, a government's "unwillingness to act" is a good thing. An effective government should always be unwilling to act on the economy, whether inflating or deflating the money supply. In order to attain economic sustainability, the money supply must be freed and exposed to market forces. The money supply will then expand or contract or stay the same according to free market forces and must not be dictated by counterproductive bureaucratic manipulation.

leverage ISN'T "just" borrowing. its borrowing using borrowed resources as 'security' against risk of nonpayment, which is of course, no security at all, and thus, by any other name, a pyramid scheme.

leverage on leverage on leverage on leverage on leverage ... ad infinitum, until at some point reality takes over.

letting little green pieces of paper get away with murder does nothing to prevent this.

granted not all management is good management. not all regulation is good or beneficial regulation. that doesn't make all regulation bad, nor the absence of any somehow inherently beneficial.

in a theoretical pure market situation, well i'm not so sure in a pure market situation you'd even have corporations. but like pure democracy or pure anything else, i seriously doubt its ever been attempted or could be, for precisely the practical realities that academic economic theories insist on ignoring.

Leverage is just borrowing. A guy paying down his credit card debt can be said to be de-leveraging. Sure the Wall Street investment banks engaged in some incredibly convoluted leveraging (borrowing), but again that is merely the superficial symptom of the deeper disease - the Federal Reserve's reckless fanning of the real estate bubble.

So why do all the crazed idiots running our Governments insist that the solution is to 'spend,spend, spend' and 'borrow, borrow, borrow'? Are they trying to reinflate the bubble?

Bush and Obama are more desperate to find a new bubble to replace the tattered ruins of the busted real estate bubble than a cheap hooker is looking for a $10 bill...

I think, though, that in recent history certainly bubbles have been heavily stoked by the government, either through its unwillingness to act in the face of irrational exuberance, as was the case in the 1990's, or sudden surges in the money supply that flood the market with artificially cheap credit, as happened in Japan back in the 80's as well as the US and other countries during the 2000's. They are also longer lasting than earlier speculative bubbles, quite possibly reflecting the market's pricing in of government effects on risk.

Uhuh.

If the financial system had been forced to take its knocks back in 98 (which would have taken Lehman out of the game at that time) then I don't think that the dot.com boom would have been nearly as bad, and thus the housing bubble would have been moderated.

They still would have happened, of course. Bubbles are driven by cheap credit, which would have been available regardless of any failure in '98 because the boomers were hitting their peak earnings, and interest rates would have fallen in the aftermath anyway, as central banks don't have all that much control over interest rates in practice. They can only really sort of smooth out liquidity spikes and troughs and jawbone about it.

So in 1999 you would have had cheap credit + stuff to invest in that people don't properly understand, which always leads to bubbles.

And to be fair to greenscum, while he could have raised bank reserve requirements and choked the .coms while the telecom bubble was incipient, it is a very difficult thing to explain that you just tanked the entire economy because you were worried about what people 'might' do. In hindsight it seems idiotic that the fed didn't stomp these things from the get go...but try explaining say an 8 or 9% unemployment rate on the basis that you were worried about something that hasn't happened yet.

Still, I agree these things could be moderated by ending the washington wall street consensus.

I would even go so far as to say that there should be a big flushing of the current crop of management, and the handing out of punitive fines and whatnot to impoverish them, so a proper appreciation of risk is returned.

I really think that i-banking is not a suitable industry for the public company model either. It should be private partnerships only. That way the people who run the company are pledging the entirety of their assets to the endeavor, which should promote a healthy skepticism about laying off risk &c.

It really is outdated. Now, I'm not one to advocate things like a gold standard, since realistically gold is no more inherently valuable than paper (and probably far less so...I think paper is probably more critical to our modern economy). However, I am a strong supporter of a completely fixed growth rate for the money supply, only to be adjusted if it is absolutely and certainly clear that the rate needs to change due to adjustments in the economy such as new technology or unforseen disasters.

Ah, but that's the joker in the pack though, isn't it. What the goldbugs never want to admit is that a gold standard doesn't constrain the overall money supply, just the monetary base. (M0, or whatever you crazy kids call it these days).

We have a fractional reserve banking system - because there really is no other sensible alternative - so the vast majority of money creation is private, not done by the fed. A gold backed currency is just as susceptible to credit bubbles as a fiat one, all else being equal.

The one advantage I can see for the gold standard is that it makes devaluation of the currency easier, though still problematic.

Bush and Obama are more desperate to find a new bubble to replace the tattered ruins of the busted real estate bubble than a cheap hooker is looking for a $10 bill...

They already found one: The Green bubble !

Buy stocks today from companies that produce solar cells, wind turbines and stuff.

But don’t be greedy this time, sell them before 2012. Else you will complain once more that the little man is hurt again.

EDIT: On second thought, I think Stiglitz's ideas about information asymmetries would be a great way to inject economics with a healthy dose of post-modernism. I'm not sure I'd enjoy the result, but it would be fun to watch the fireworks.
:rolleyes:

Stiglitz wrote his stuff on information asymmetries decades ago (along with two other guys who also won Nobel Prizes but didn't go the "pop economics" way and are therefore unknown). It is part of modern economics.

How is this thread supposed to be about academic economics if people just assume that what they hear in opinion pieces during dinner time is an actual representation of it?

Anyways, the effect on it is going to be marginal. Economics has all the tools needed to explain what happened here, because what happened here was not new and has been around for longer than capitalism has (sorry, Cameroi). It's human nature, and human nature can (contrary to popular belief) be expressed by economic theory quite well.

How is this thread supposed to be about academic economics if people just assume that what they hear in opinion pieces during dinner time is an actual representation of it?
"Academic" was a poor choice of words. I meant economics as a subject of study, as opposed to government policy. What actually happens in academia is less important for the purposes of this thread than how academics are perceived.

Anyways, the effect on it is going to be marginal. Economics has all the tools needed to explain what happened here, because what happened here was not new and has been around for longer than capitalism has (sorry, Cameroi). It's human nature, and human nature can (contrary to popular belief) be expressed by economic theory quite well.
It's true that this isn't the first recession, or even the worst. But even if the subject has all of the tools necessary to explain what happened, there is still plenty of disagreement on what that is.

Ah, but that's the joker in the pack though, isn't it. What the goldbugs never want to admit is that a gold standard doesn't constrain the overall money supply, just the monetary base. (M0, or whatever you crazy kids call it these days).

We have a fractional reserve banking system - because there really is no other sensible alternative - so the vast majority of money creation is private, not done by the fed. A gold backed currency is just as susceptible to credit bubbles as a fiat one, all else being equal.

The one advantage I can see for the gold standard is that it makes devaluation of the currency easier, though still problematic.

That's absolutely correct. Remember what happened when all that gold from the Americas started flowing in to Europe; it caused a massive surge in the money supply that produced effects similar to any monetary stimulus in the present day, and was also far more drastic in its effects. Also, even more importantly in many ways, gold stays in circulation; almost all of the gold ever mined is still in some form of circulation or in the possession of individuals.

Given how small M1 is, let alone M0 when compared to M3 the concept of a gold standard somehow restoring order to the financial system is ridiculous. It would require colossal and intrusive government regulation and control to force the money supply to conform to such a standard.

Buy stocks today from companies that produce solar cells, wind turbines and stuff.

Truth be told, though, the amount of money going towards those industries is a drop in the bucket compared to the colossal amounts spent on agribusiness and fossil fuels.

I think it says a lot about how broken our system is that the only solution we have for our energy crisis is to subsidize another industry rather than removing the ones already in place, thereby forcing those protected firms to compete on a level playing field. I have a feeling we'd be producing a lot more wind and solar power and consuming fewer fossil fuels if those fossil fuels were priced according to the market rather than subsidized out the ass by our government and others around the world.

Honestly, this entire credit crisis can be blamed first and foremost on the government and the corruption that runs rampant in our Congress.

Ah, but that's the joker in the pack though, isn't it. What the goldbugs never want to admit is that a gold standard doesn't constrain the overall money supply, just the monetary base. (M0, or whatever you crazy kids call it these days).

We have a fractional reserve banking system - because there really is no other sensible alternative - so the vast majority of money creation is private, not done by the fed. A gold backed currency is just as susceptible to credit bubbles as a fiat one, all else being equal.

The one advantage I can see for the gold standard is that it makes devaluation of the currency easier, though still problematic.

Whether gold, paper banknotes, silver, or seashells prevails as the commonly accepted medium of exchange, the free market is the only entity capable of calculating the optimum size of the money and credit supply. The governmental central banks' politically-motivated low capital requirements are inherently unable to account for the risk of bank runs, and such risks and other calculations can only be calculated by participants in a competitive free market. Central banking must be a private, never a state-sponsored, business. A central banking authority lacking government-backed monopoly powers and fully exposed to competition and free market forces would never set reserve requirements in its client banks as dangerously low as seen in the modern governmental, politically-motivated central banking systems.

The US hasn't really been capitalist since the Gilded Age when the government first put its paws on business, even before that it wasn't truly capitalist.

That's absolutely correct. Remember what happened when all that gold from the Americas started flowing in to Europe; it caused a massive surge in the money supply that produced effects similar to any monetary stimulus in the present day, and was also far more drastic in its effects.

Each potential candidate for currency, whether gold or silver or paper, has associated benefits and drawbacks but gold supply today is demonstrably more stable than a paper money supply like the USD. The sharp bout of gold inflation during the 16th century was a once-in-10,000-year phenomenon, and really has no relevance to any hypothetical "gold standard" today. By contrast, explosive inflation of paper money has consistently been a yearly, monthly, and hourly phenomenon.

Also, even more importantly in many ways, gold stays in circulation; almost all of the gold ever mined is still in some form of circulation or in the possession of individuals.

I don't understand this comment; are you arguing that this detracts from gold's ability to act as a stable currency?

Also, all the US dollars ever issued is still in some form of circulation or in the possession of individuals, no different from gold. Additionally the rate of new USD issuance is far greater than the rate of new gold mined.

Given how small M1 is, let alone M0 when compared to M3 the concept of a gold standard somehow restoring order to the financial system is ridiculous. It would require colossal and intrusive government regulation and control to force the money supply to conform to such a standard.

This is very true, and optimally there would be no government-enforced "currency standards" at all, and the free market would naturally and spontaneously designate its favored common medium of exchange from among the candidates to be currency- the different commodities, objects, and papers. Monetary anarchy remains an ideal of free market capitalism, even if today's political expediency calls for less capitalism, more government diktat and fiat, more socialism, and more fascism.

The US hasn't really been capitalist since the Gilded Age when the government first put its paws on business, even before that it wasn't truly capitalist.

There have always been different "degrees" of market freedom in different times and places of history so it's somewhat useless to talk about "true capitalism" here. It only makes sense to describe economies as "more-" or "less-" capitalist etc.

There have always been different "degrees" of market freedom in different times and places of history so it's somewhat useless to talk about "true capitalism" here. It only makes sense to describe economies as "more-" or "less-" capitalist etc.
I'd describe it as more or less capitalistic before the gilded age and more or less socialist afterward.

Whether gold, paper banknotes, silver, or seashells prevails as the commonly accepted medium of exchange, the free market is the only entity capable of calculating the optimum size of the money and credit supply. The governmental central banks' politically-motivated low capital requirements are inherently unable to account for the risk of bank runs, and such risks and other calculations can only be calculated by participants in a competitive free market. Central banking must be a private, never a state-sponsored, business. A central banking authority lacking government-backed monopoly powers and fully exposed to competition and free market forces would never set reserve requirements in its client banks as dangerously low as seen in the modern governmental, politically-motivated central banking systems.

Of course it would. There were huge bubbles and bank runs before government sponsored central banks you know. It's not as if credit bubbles only started to happen after 1913. And there is the whole shadow banking system to consider.

"Academic" was a poor choice of words. I meant economics as a subject of study, as opposed to government policy. What actually happens in academia is less important for the purposes of this thread than how academics are perceived.
Then really you should be asking the editors of the major news channels. 99% of people don't care about economics, they don't want to know anything about it - all they want is sound bites they can use to fit whatever opinion they happen to support. So yeah, if those sound bites are what we are going by, then the idea of the free market is hurting. But that's outside the discipline of economics or even of policy, it's in the realm of PR, marketing and journalistic populism.

It's true that this isn't the first recession, or even the worst. But even if the subject has all of the tools necessary to explain what happened, there is still plenty of disagreement on what that is.
Not really. There is disagreement about the best response to it, but not really about the facts of the matter. The areas where theory failed most spectacularly aren't really economics as such, but financial statistics and risk modelling.

And yes, monetary policy also needs a good look at, because the tools the Fed has at hand, and its knowledge on how to wield them in an extraordinary situation like this, are limited and should perhaps be modified or expanded. Even now people are talking about somehow forcing banks to reduce long-term mortgage rates directly, perhaps by law. A mistake, obviously, but also a matter of huge concern to the conduct of monetary policy and potentially the way yield curves are derived, with massive effects on the way the US deals with debt going forward.

Some of this we already know how to solve, other things need further research. None of it is what will be in the headlines going forward.

The governmental central banks' politically-motivated low capital requirements are inherently unable to account for the risk of bank runs, and such risks and other calculations can only be calculated by participants in a competitive free market.
Actually...

1. Central Banks don't set capital requirements in most countries, though I'm thinking about writing a thesis arguing that they probably should be involved, since it's becoming painfully obvious that risk-taking and the effect capital requirements have on that are part of the transmission mechanism of monetary policy.

2. The actual capital requirements set as part of Basel II took huge account of what the banks' internal risk models said was necessary.

3. Those internal models, developed by private actors in a private market, were wrong.

Basically there is nothing whatsoever correct about what you're saying.

Of course it would. There were huge bubbles and bank runs before government sponsored central banks you know. It's not as if credit bubbles only started to happen after 1913. And there is the whole shadow banking system to consider.


Large, systemic credit bubbles are not features of a natural free market lacking in government intervention and government-enforced regulations. Without exception all the huge pre-1913 credit bubbles were directly caused by government central banking and/or other government actions. The Federal Reserve was not the original government-mandated central bank in this country, nor was it the original agent of government-mandated monetary inflation. All the pre-1913 credit bubbles were caused by top-down governmental inflationary policies, such as deficit spending during wars, or inflation undertaken by the pre-1913 central banks (Bank of the United States, actions by the Bank of England, etc). In a free market without a central government regularly printing paper notes to pay for wars and entitlement programs, or without a government-mandated central bank monopoly, any bubbles that arise would be small, local, and quickly shorted to death by astute entrepreneurs who are not receiving fake economic signals from fiat technocrats. Every single one of the famous 19th century bubbles were caused by one or a combination of the following: 1.) fiat central banking, 2.) inflationary war-related government spending, 3.) other politically irresistable inflation of the money supply by government during peacetime. 19th century economic history provides final and damning evidence for the colossal failure and dangers of all forms of government manipulation of the economy and financial system. As I hopefully made clear in my postings in this thread all the unsustainable distortions of the economy and the socially devastating consequences that result have their root cause in governmental intervention, including fiat central banking and all forms of governmental deficit spending.

Actually...

1. Central Banks don't set capital requirements in most countries, though I'm thinking about writing a thesis arguing that they probably should be involved, since it's becoming painfully obvious that risk-taking and the effect capital requirements have on that are part of the transmission mechanism of monetary policy.

2. The actual capital requirements set as part of Basel II took huge account of what the banks' internal risk models said was necessary.

3. Those internal models, developed by private actors in a private market, were wrong.

Basically there is nothing whatsoever correct about what you're saying.


Neu Leonstein, I mistyped and wrote "capital" requirements rather than "reserve requirements". I did refer to "reserve requirements" later in my post, which is what I meant. And yes, modern state-sponsored central banks do set reserve requirements for its depository affiliates in the great majority of countries. Central banking (but not state-mandated central bank monopolies) might be a naturally occurring phenomenon of the free market and a central bank competing in a free market - that is without its banknotes enjoying monopoly-status enforced at gunpoint - would absolutely set higher reserve requirements of its clients compared to the government-mandated reserve laws today, which are artificial and unrealistic.

Furthermore, in a free market banks would also have much higher capital ratios than the capital ratios seen in today's fiat inflationary environment. Free market competition, lack of government intervention, and lack of government-mandated monetary inflation would together allow the free market to naturally suppress credit explosions, since banks would not be betting on massive monetary inflation to wipe out their debts. The risk models calculated by the banks in the current financial crisis are in fact completely logical in a fiat inflationary environment. The perversity of the modern banks' risk models do not whatsoever indicate any supposed shortcomings of free market calculation, because: 1.) free market calculation is axiomatically and empirically always the optimal and perfective allocator of resources compared to all other alternatives, and 2.) a free market does not currently exist. The immediate perversity of modern private banks' operation models is therefore merely a superficial symptom of the perversity of government distortion of the economy, i.e. the modern fiat inflationary environment and hodgepodge mixed-economy system where true, sustainable incentives and risks are not left to market forces to discover and are all completely obscured by government action and intervention.

Previously I said a free market does not currently exist. I am alluding to the least intuitive yet most insidious form of government distortion of the free market today: top-down manipulation and inflation of the money supply. Read on for an explanation.

Then really you should be asking the editors of the major news channels. 99% of people don't care about economics, they don't want to know anything about it - all they want is sound bites they can use to fit whatever opinion they happen to support. So yeah, if those sound bites are what we are going by, then the idea of the free market is hurting. But that's outside the discipline of economics or even of policy, it's in the realm of PR, marketing and journalistic populism.


It's quite unfortunate that the monetarist clowns of the Chicago School have tricked the public and even many otherwise intelligent economists into believing the fiction that fiat government intervention in the money supply somehow "doesn't count" as harmful government intervention in the free market, when in reality the supply of money - just like the supply of shoes, supply of food, and supply of toys - can only be efficiently and sustainably regulated by the spontaneously self-regulating free market. Just as the Soviet-bolshevik experience demonstrates technocratic central planning of shoe production inevitably leads to massive waste, inefficiencies, and suffering, the Western-monetarist experience demonstrates technocratic central planning of money supply likewise inevitably leads to massive waste, inefficiencies, and suffering. Therefore your following comment does not need to be addressed, since all the useable economic principles and empirical research do exist, and demonstrate that monetarism and government monetary policy, much like the Soviet Five Year Plans, are a tragic dead-end in the history of economics:

There is disagreement about the best response to it, but not really about the facts of the matter. The areas where theory failed most spectacularly aren't really economics as such, but financial statistics and risk modelling.

And yes, monetary policy also needs a good look at, because the tools the Fed has at hand, and its knowledge on how to wield them in an extraordinary situation like this, are limited and should perhaps be modified or expanded. Even now people are talking about somehow forcing banks to reduce long-term mortgage rates directly, perhaps by law. A mistake, obviously, but also a matter of huge concern to the conduct of monetary policy and potentially the way yield curves are derived, with massive effects on the way the US deals with debt going forward.

Some of this we already know how to solve, other things need further research. None of it is what will be in the headlines going forward.

Not much. Although the effect of PPE on in real economics is interesting in itself.

Large, systemic credit bubbles are not features of a natural free market lacking in government intervention and government-enforced regulations. Without exception all the huge pre-1913 credit bubbles were directly caused by government central banking and/or other government actions. The Federal Reserve was not the original government-mandated central bank in this country, nor was it the original agent of government-mandated monetary inflation. All the pre-1913 credit bubbles were caused by top-down governmental inflationary policies, such as deficit spending during wars, or inflation undertaken by the pre-1913 central banks (Bank of the United States, actions by the Bank of England, etc). In a free market without a central government regularly printing paper notes to pay for wars and entitlement programs, or without a government-mandated central bank monopoly, any bubbles that arise would be small, local, and quickly shorted to death by astute entrepreneurs who are not receiving fake economic signals from fiat technocrats. Every single one of the famous 19th century bubbles were caused by one or a combination of the following: 1.) fiat central banking, 2.) inflationary war-related government spending, 3.) other politically irresistable inflation of the money supply by government during peacetime. 19th century economic history provides final and damning evidence for the colossal failure and dangers of all forms of government manipulation of the economy and financial system. As I hopefully made clear in my postings in this thread all the unsustainable distortions of the economy and the socially devastating consequences that result have their root cause in governmental intervention, including fiat central banking and all forms of governmental deficit spending.


There was no central bank or war in 1857 or 1873. As long as you have freedom of contract there will be credit or it's equivalent. And as long as there is access to credit there will be, from time to time, bubbles.

(You can talk about shorting by astute entrepreneurs all you want, but markets don't work that way. Many have gone bankrupt by being right).

The idea that the substantial 19th century bubbles were naturally occurring events, and not manufactured by government, is a myth, and one used by the monetarists to justify their disastrous power grab. Among many things 1857 and 1873 washed out the lingering monetary excesses of the Mexican-American War and Civil War, respectively.

Good point about the word "shorting". Shorting was not the best word to use perhaps. "Sidestep" is a much better word, and my intended meaning.

Neu Leonstein, I mistyped and wrote "capital" requirements rather than "reserve requirements". I did refer to "reserve requirements" later in my post, which is what I meant. And yes, modern state-sponsored central banks do set reserve requirements for its depository affiliates in the great majority of countries.
The book you're taking these arguments from must be more than 30 years old. Nobody but the Chinese uses reserve requirements anymore.

Central banks change the aggregate money supply by buying and selling government bonds and thus changing the amount of cash in the pool of funds the banks are maintaining and can lend out from. The prices of these bonds (and therefore the yields and their attractiveness to the banks) are determined freely in an auction. No one is compelled to buy or sell if they don't want to.

Central banking (but not state-mandated central bank monopolies) might be a naturally occurring phenomenon of the free market and a central bank competing in a free market - that is without its banknotes enjoying monopoly-status enforced at gunpoint - would absolutely set higher reserve requirements of its clients compared to the government-mandated reserve laws today, which are artificial and unrealistic.
The central bank doesn't issue its own notes or bonds (except in weird cases, I believe the Indian central bank once did). They're normal treasuries, and as I said, no one is forced to buy them. It's just that the nature of these instruments and the yields (or other benefits, as you see right now) these auctions are capable of offering are for all intents and purposes irresistible.

If you're annoyed with the amount of money banks have to keep, then you can talk about the BiS, Basel II and the various institutions enforcing it - which are not the central banks.

Furthermore, in a free market banks would also have much higher capital ratios than the capital ratios seen in today's fiat inflationary environment. Free market competition, lack of government intervention, and lack of government-mandated monetary inflation would together allow the free market to naturally suppress credit explosions, since banks would not be betting on massive monetary inflation to wipe out their debts.
So are you just making the "Greenspan cut rates too much" argument? There is obviously merit to that, though the "short dollar-long pretty much anything" trade wasn't about debts being wiped out, just them being smaller compared to anything you could do with that money.

The risk models calculated by the banks in the current financial crisis are in fact completely logical in a fiat inflationary environment.
Are you sure you want to go there, given that I'm actually sitting literally two desks from the people who do these models at a major investment bank at the moment?

The perversity of the modern banks' risk models do not whatsoever indicate any supposed shortcomings of free market calculation, because: 1.) free market calculation is axiomatically and empirically always the optimal and perfective allocator of resources compared to all other alternatives...
Which does not mean that it actually is optimal in absolute terms. Just that it is better than the alternative.

And even that doesn't take into account the last 30 years or so of economic theory.

...and 2.) a free market does not currently exist. The immediate perversity of modern private banks' operation models is therefore merely a superficial symptom of the perversity of government distortion of the economy, i.e. the modern fiat inflationary environment and hodgepodge mixed-economy system where true, sustainable incentives and risks are not left to market forces to discover and are all completely obscured by government action and intervention.
I didn't say a free market existed, I don't think it does. But that doesn't affect the reasoning behind risk modelling - there simply is no reference in these models to bail-outs or aggressive rate cuts. Banks don't count on them when doing these calculations. Traders might when they design strategies, researchers when they write papers - but the people at risk management, to my knowledge, don't.

It's quite unfortunate that the monetarist clowns of the Chicago School have tricked the public and even many otherwise intelligent economists into believing the fiction that fiat government intervention in the money supply somehow "doesn't count" as harmful government intervention in the free market, when in reality the supply of money - just like the supply of shoes, supply of food, and supply of toys - can only be efficiently and sustainably regulated by the spontaneously self-regulating free market.
Find one. And not one from the pre-news, pre-macroeconomics era, but one from today, from the world when the Great Depression happened, where deflation is not normal, but a self-reinforcing vicious cycle.

Therefore your following comment does not need to be addressed, since all the useable economic principles and empirical research do exist, and demonstrate that monetarism and government monetary policy, much like the Soviet Five Year Plans, are a tragic dead-end in the history of economics:
I really think you haven't spent enough time reading up on this stuff, on monetarism, on monetary economics (amazingly, not the same thing) and on the crisis itself.

I would like to see this empirical research though that says monetary policy has been a failure.

Are you sure you want to go there, given that I'm actually sitting literally two desks from the people who do these models at a major investment bank at the moment?

Oh please go there.

Neu Leonstein, there has been no such thing as a "self-reinforcing vicious cycle" of deflation, and the episodes of deflation being discussed accurately reflect the magnitude of the malinvestments made during the preceding period of inflation. During events such as the Great Depression, the only abnormal deflations were the situations when government actively interfered with the free market, such as when Hoover steeply raised taxes, thereby directly annihilating productive capital to make even more malinvestments.

Economic crises from the so called "pre-macroeconomics era" and the those from the 21st century are fundamentally the same, and are governed by precisely the same timeless laws of economics, even as the monetarists, Keynesians, and Marxians are completely confounded by their own wrongheaded theories, models, and "research". One lesson learned from all economic crises discussed here is that money is not some sort of mystifying, sacred entity separate from and somehow exempt from the laws of economics. The regulation of money and credit supply, just like shoes and food, must be left to the spontaneously self-regulating free market alone, or systemic economic imbalances will result- this is the fundamental truth discovered by capitalist economists. In the past 20 years there has been a massive deflation in the typewriter supply due to free market forces. Why is it that self-proclaimed free marketers from the monetarist group complain loudly when there is massive deflation of money and credit, but do not complain when there is massive deflation in typewriters? Instead, the monetarists absurdly argue that money has special magical properties and therefore must be under government control.

In conclusion:

1.) money does not have mystical properties and is governed by the exact same economic laws that govern all commodities, goods, and services
2.) the spontaneous, self-regulating free market is the only system capable of rationally calculating and distributing money, credit, shoes, toys, and everything else
3.) Government technocrats' tinkering with the money supply have led to disastrous systemic economic imbalances in the West just as government technocrats' tinkering with the supplies of leather shoes and wheat flour led to disastrous systemic economic imbalances in the USSR

Neu Leonstein, the current famous global economic crisis provides no less than towering and overwhelming empirical evidence that monetary policy of the past decades have failed miserably, and, more generally: governmental monetary policies are inherently and inevitably disastrous. Furthermore, all previous economic crises provided the exact same evidence- but people simply did not have the sophistication or political willpower to learn, probably the latter.

Compare your quant colleagues with farmers in a Soviet collective farm. The quants produced their insane risk models in a rampantly inflationist monetarist economic regime, just as the Ukrainian farmers underproduced grains in a collectivist economic regime. The quants' insane risk models are totally to be expected in an monetarist economy, just like grain underproduction is totally to be expected in a agriculture-collectivist economy. That is what I meant when I called their insane risk models "logical" - they are precisely the logical, expected outcomes of individual economic actors acting in an perpetually inflationary monetarist environment controlled by the monetarist central planners. The quants counted on perpetually, unnaturally increasing money and credit provided by governmental "monetary policy"- such explosive growth in money and credit would be impossible in the self-regulating free market. Likewise, underproduction of grain on the Soviet collective farm of the 1970s was just as disastrous as the 21st century SIVs, yet underproduction of grain was precisely the logical, expected outcome of economic actors acting in an environment where private capital accumulation is outlawed and all capital is seized by bolshevik central planners. Hopefully you see the meaning of the analogy now, and note the roles that central planners have in causing crisis. Yet people in the popular media and even some otherwise intelligent economists claim that "greed" was the cause of the housing bubble. That is as absurd as the Soviet political commissars claiming that "greed" causes the farmers to underproduce grain! In both 21st century Wall Street and 20th century USSR, it is not "greed" that produces disasters like the housing bubble or chronic Soviet grain shortages; rather it is government intervention, government distortion of the free market, and government distortion of the natural incentives and risks found in the free market. In the USSR government intervention in the economy was crude and unsophisticated- rounding up a bunch of Ukrainian peasants and confiscating their grain at gunpoint, for example. In the modern world, government intervention in the economy is far more subtle and sophisticated, and consists of manipulation (inflation) of the money supply, yet this is just as unsustainable and fallacious as the Soviets' methods. As we saw that grain shortages were the result of the Five Year Plans, we now see that our catastrophic asset bubbles are the result of the central bankers' manipulation of the money supply.

Unfortunately, the monetarist economic journals systematically suppress these insights gained from an understanding of the laws of economics, and monetarists, just like the Marxians before them, believe that technocratic central planning will somehow create a prosperous, sustainable economy. And just like the Soviet economic planners before them, the monetarist central bankers blame "greed," "shortsightedness", and "selfishness" for the economic disasters they themselves wrought. And indeed, even a few weeks ago the arch-technocrat Alan Greenspan went before Congress like Pontius Pilate and attempted to absolve himself of his historic crimes, and launched into an incoherent tirade against the free market. He heavily reminds me of Krushchev presiding over the technocratic disaster that was the Soviet Union, and then blaming Russia's woes on capitalism. You will not hear about free market capitalism and liberation of the money supply from government bureaucrats in the pages of the monetarists' economic journals any more than you heard about free market capitalism and liberation of the grain supply from government bureaucrats in the pages of Pravda.

Neu Leonstein, there has been no such thing as a "self-reinforcing vicious cycle" of deflation, and the episodes of deflation being discussed accurately reflect the magnitude of the malinvestments made during the preceding period of inflation.
Do you have anything to support that? Fact of the matter is that the mechanism through which deflation takes hold is necessarily self-reinforcing (much like expectation-based demand-pull inflation is), and the results of it are obviously quite bad. So why is my wording not correct?

Economic crises from the so called "pre-macroeconomics era" and the those from the 21st century are fundamentally the same, and are governed by precisely the same timeless laws of economics, even as the monetarists, Keynesians, and Marxians are completely confounded by their own wrongheaded theories, models, and "research".
You talk about things being empirically proven, but you dismiss the notion of economic research?

Anyways, Austrians too (or rather: especially) would agree with the idea that macroeconomics is based on the microeconomic behaviour of individual agents, which then has some effect in aggregate. So given the completely different nature of the information available, the speed at which transactions are conducted and in turn affect what others do, the new forms of saving and investment - how can you claim that there is no chance that some new string of behaviours can occur now that can lead to or prolong an economic crisis and which didn't exist in the 17th-19th centuries when deflation was quite benign?

In the past 20 years there has been a massive deflation in the typewriter supply due to free market forces. Why is it that self-proclaimed free marketers from the monetarist group complain loudly when there is massive deflation of money and credit, but do not complain when there is massive deflation in typewriters?
Because we don't pay, save or measure value in typewriters?

2.) the spontaneous, self-regulating free market is the only system capable of rationally calculating and distributing money, credit, shoes, toys, and everything else
Were you going to get around to providing some (presumably non-"research" based) evidence for this?

Compare your quant colleagues with farmers in a Soviet collective farm. The quants produced their insane risk models in a rampantly inflationist monetarist economic regime, just as the Ukrainian farmers underproduced grains in a collectivist economic regime.
The risk models don't refer all that much to inflation. That sort of ends your argument right here, at the start.

If government intervention screws with the risk modeling investment banks do, then it does so primarily through the way it affects the volatility and cross-correlation of various asset classes. To make banks more aggressive than they should have been, that presumes that the government can actually reduce these and create a more benign financial environment. Hence, for your argument to work you must first acknowledge that the government actually reduces volatility and increases stability.

The quants counted on perpetually, unnaturally increasing money and credit provided by governmental "monetary policy"- such explosive growth in money and credit would be impossible in the self-regulating free market.
You do realise of course that a main factor causing the acceleration of money and credit was increasing technological sophistication and particularly the increase in the velocity of money that it brought, right? Banks and people simply became more adept at using the money base available, and as such, I would contend that the growth would likely have been even greater in a world without central banks or regulatory agencies.

Unfortunately, the monetarist economic journals systematically suppress these insights gained from an understanding of the laws of economics, and monetarists, just like the Marxians before them, believe that technocratic central planning will somehow create a prosperous, sustainable economy.
Then don't quote those journals, quote an Austrian one. I don't care where it's from, I'm concerned with the quality of the argument and the evidence.

Let me suggest to you that you keep the rants and analogies to a minimum. They're not very good, and your audience is evidently not swayed by comparisons to the USSR. So the more you can stick to the actual argument you're trying to make, the easier on both of us. :)

Anyways, Austrians too (or rather: especially) would agree with the idea that macroeconomics is based on the microeconomic behaviour of individual agents, which then has some effect in aggregate. So given the completely different nature of the information available, the speed at which transactions are conducted and in turn affect what others do, the new forms of saving and investment - how can you claim that there is no chance that some new string of behaviours can occur now that can lead to or prolong an economic crisis and which didn't exist in the 17th-19th centuries when deflation was quite benign?


Neu Leonstein, there have been no new strings of behaviors. There have only been new episodes of governments causing malinvestment.

Do you have anything to support that? Fact of the matter is that the mechanism through which deflation takes hold is necessarily self-reinforcing (much like expectation-based demand-pull inflation is), and the results of it are obviously quite bad. So why is my wording not correct?

Deflation is only huge in the "modern" time because the preceding malinvestments have increased in size and scope, due to ever-increasing government intervention in economies, including the money supply. Top-down, information-control government intervention in the economy, not limited to collectivization of the grain supply and including monetary policy (and even including enforcing currency standards!) ALWAYS lead to systemic, disastrous malinvestments. No central planners, no monetarist managers, no supercomputer has the ability to adjust to the vast amount of ever-changing information, so anything the government interveners do, no matter how small and/or subtle and/or seemingly insignificant, invariably leads to systemic malinvestments. Only the real-time decentralized actions of the individuals voluntarily acting in economic self interest - i.e., only the free market - is able to be the information feedback system efficient enough to avoid systemic malinvestment.

Because we don't pay, save or measure value in typewriters?

I don't want to resort to analogy since you don't like them, but it gets the point across. Your argument is fundamentally no different from some people in Michigan arguing that the US government must bail out the Detroit auto industry because the Detroit auto industry is somehow "different" from other economic commodities; after all supporting Detroit is the duty of every American patriot.

Just because dollars are used to price other commodities does not make it a "different" commodity that demands government intervention. Cars and money are both economic commodities governed by the laws of economics, and the laws of economics teach us that compulsory intervention by governments distorts the economy and causes terrible consequences. Just as the government must not stop the deflation in the number of factories operated by General Motors, the government must not stop the deflation in the number of dollars in the system.

Whenever people start arguing that some commodity or the other is "special", they try to use this "special" status to justify government intervention, leading to incalculable disaster.

You talk about things being empirically proven, but you dismiss the notion of economic research?

Economic research does not equal monetarist research. Monetarist "research" is quackery. It's no different from the Soviet doctors dissecting Lenin's brain to investigate the causes of his endless genius. Not to belittle you personally, but your deeply held beliefs that I'm sure you academically labored for many years over are simply flat out wrong!

2.) the spontaneous, self-regulating free market is the only system capable of rationally calculating and distributing money, credit, shoes, toys, and everything else
Were you going to get around to providing some (presumably non-"research" based) evidence for this?

All the empirical experience in history points to this timeless law. No monetarist research and fake pseudoscientific mathematical models were required years ago to abolish the guild system and abolish other medieval governmental regulations, resulting in economic benefits. No monetarist "research" and fake mathematical models are required today to abolish monetary policy. Economic benefits will result once that step is taken.

The risk models don't refer all that much to inflation. That sort of ends your argument right here, at the start.
The risk models were the logical results of an inflationary asset-bubble environment caused by government intervention. An explanation below.

If government intervention screws with the risk modeling investment banks do, then it does so primarily through the way it affects the volatility and cross-correlation of various asset classes. To make banks more aggressive than they should have been, that presumes that the government can actually reduce these and create a more benign financial environment. Hence, for your argument to work you must first acknowledge that the government actually reduces volatility and increases stability.

Neu Leonstein, that's not how bubble psychology works. Bubbles never result from actual reduction in volatility; bubbles always result from perceived reduction in volatility. In all bubbles the participants in the bubbles are overcome by wishful thinking and believe wrongly that volatility is decreased. Volatility isn't actually reduced in the bubble, but the victims of the bubble believe volatility has decreased. So yes, the quants did believe volatility decreased- the decrease in volatility was commonly attributed to things like globalization, improved risk models, or "sound monetary policy". When in fact volatility was not reduced. Obviously this was complacency about volatility.

Complacency about volatility is the hallmark of an asset bubble. The quants sincerely believed real estate prices would never fall. More importantly, complacency about volatility is also the result of the asset bubble, since complacency is the result of bedazzlement. Finally complacency about volatility is not the original cause of the asset bubble. The cause of the asset bubble is monetary policy.

I've talked to someone in risk management before too, sure I didn't talk to two of them like you did but my quant (from BK) and these quants on Wall Street only had screwed up risk models because their risk calculus never considered the possibility that real estate prices would fall. Why did they assume real estate prices would never fall? Because they were dazzled and blinded by the bubble's upward trajectory, just like bubble-participants in all the bubbles in all of history were overcome with wishful thinking. Why were they blinded by the bubble? Because the bubble existed in the first place. Why did the bubble exist in the first place? Because of hamfisted government intervention - the Federal Reserve's manipulation of interest rates in the early 2000s and rapid currency inflation throughout the whole period. If money supply had not exploded through government action, and if interest rates were allowed to attain a natural level undistorted by government manipulation, market participants would not have been incentivized to overborrow and overloan. Bubbles simply would not have come into existence.

You do realise of course that a main factor causing the acceleration of money and credit was increasing technological sophistication and particularly the increase in the velocity of money that it brought, right? Banks and people simply became more adept at using the money base available, and as such, I would contend that the growth would likely have been even greater in a world without central banks or regulatory agencies.


There is no deflationary vicious cycle; the only vicious self-reinforcing cycle is government's role in creating and expanding asset bubbles, and the quants' bedazzlement by the upward trajectory of the bubble. These two factors fed on each other to result in complacency about volatility, thereby growing the real estate bubble. Yet had the Federal Reserve NOT manufactured the real estate bubble out of thin air with monetarist policy, no asset bubble would've arisen in the first place, no one would be blinded by any upward trajectories because no such trajectories would've existed, and there would be no complacency about volatility, and no "increasing technological sophistication". That is to say, without government manipulation there ultimately never would've existed the "technologically advanced" risk models that did not actually model risk but only modeled the quants' befuddled bedazzlement at the bubble that government made.

Neu Leonstein, there have been no new strings of behaviors. There have only been new episodes of governments causing malinvestment.
That's not saying anything. If you actually want to make that argument, you are going to have to show us how much investment would have been correct, and how the government caused this amount to be exceeded. Then finally, you'd have to show how things like the deflation in Great Depression or in 1990s Japan brought things back to this correct level.

Correct or not, economics follows certain rules of logic and knowledge that require you to back up arguments with some chain of thought that makes sense and can be verified in some way.

Deflation is only huge in the "modern" time because the preceding malinvestments have increased in size and scope, due to ever-increasing government intervention in economies, including the money supply. Top-down, information-control government intervention in the economy, not limited to collectivization of the grain supply and including monetary policy (and even including enforcing currency standards!) ALWAYS lead to systemic, disastrous malinvestments.
I have stopped counting the times you are repeating this. But are you actually intending to let us know any additional information that will flesh out this argument?

Your argument is fundamentally no different from some people in Michigan arguing that the US government must bail out the Detroit auto industry because the Detroit auto industry is somehow "different" from other economic commodities; after all supporting Detroit is the duty of every American patriot.
That's not true. The fact that money is used as the primary store, measure and means of transfer for wealth makes it different. The nationality of a car manufacturer on the other hand is irrelevant.

Money exhibits different reasons for wanting to hold it than shoes do, and it has different consequences associated with the decision to do so. When there is an oversupply of money, this doesn't just trigger a readjustment of supply, but an adjustment of demand as well. But this then in turn works through the entire system because money is not a good, it is the good on which every form of economic behaviour is based. And that's why deflation and the associated increase in the demand for cash also triggers a drop in consumption spending now that modern people have the information and wherewithall to make these discretionary choices and which in turn leads to economic contractions which in turn trigger further price falls. If you allow for even a little bit of rational, forward-looking behaviour by economic agents, you can easily imagine scenarios in which the market does not correct itself in the way we might have thought in the first decades of the century and in which some exogenous shock is required to stop these motions.

Economic research does not equal monetarist research. Monetarist "research" is quackery. It's no different from the Soviet doctors dissecting Lenin's brain to investigate the causes of his endless genius. Not to belittle you personally, but your deeply held beliefs that I'm sure you academically labored for many years over are simply flat out wrong!
I'm not taking anything personal until there is any evidence to support what you're saying. You are hardly the first person to tell me my science is hogwash (though usually it comes from the Left), but so far no one has followed that accusation up with anything at all.

All the empirical experience in history points to this timeless law. No monetarist research and fake pseudoscientific mathematical models were required years ago to abolish the guild system and abolish other medieval governmental regulations, resulting in economic benefits. No monetarist "research" and fake mathematical models are required today to abolish monetary policy. Economic benefits will result once that step is taken.
So you can't offer any logic, empirics or other support, except "some things in the past were abandoned and then in a period following this things were better", without defining what "better" means?

Neu Leonstein, that's not how bubble psychology works. Bubbles never result from actual reduction in volatility; bubbles always result from perceived reduction in volatility.
I don't know how bubble psychology works, but I do know how a bloomberg terminal works. And we have a beautiful little link between those things and our risk models, and they spit out volatility figures, calculated not with perceived, but actual prices as you would face were you to buy or sell in the market right now.

So do we need to send our computers to a shrink? Because whatever idiotic things people did with these figures afterwards, the figures themselves are not man-made and not subject to anyone's bubbly fantasies.

I've talked to someone in risk management before too, sure I didn't talk to two of them like you did but my quant (from BK) and these quants on Wall Street only had screwed up risk models because their risk calculus never considered the possibility that real estate prices would fall. Why did they assume real estate prices would never fall? Because they were dazzled and blinded by the bubble's upward trajectory, just like bubble-participants in all the bubbles in all of history were overcome with wishful thinking.
And I don't necessary disagree with you here, but the fact of the matter is that models simply don't work like this. It's not the quants who make strategic decisions, they don't make projections. The ones in risk are there to do statistical analysis based on historical, actual information and use it to set parameters, themselves fully aware of the limits of these, and quite willing to talk to anyone who would listen to them.

It's just that many people didn't want to hear it, and they weren't strong enough to make themselves heard. None of which is really relevant to the heart of the matter, which is that if you think monetary policy can make these models spit out more benign figures than they should, it must first be able to change historical data in a good way for a prolonged period of time.

That is to say, without government manipulation there ultimately never would've existed the "technologically advanced" risk models that did not actually model risk but only modeled the quants' befuddled bedazzlement at the bubble that government made.
Where you going to respond the possibility that the increase in velocity rather than the increase in money base played a big part in the ongoing increase in broad money supply seen over the past decades, including the 2000s?

I think you know my response to that point, which is monetary policy created the conditions for increase in velocity. Distorted interest rates among many many other factors of government interventions incentivized all participants to overborrow and overlend.