Money. Doing it Right this Time.

Oh, 'tis a great story, with heroes and villains, tales of bravery and disgrace.

Well, maybe not quite.

Start in the 1960s. You have these wonderful large-scale quantitative models used for policy evaluation.

Then Lucas comes along in '73 and digs into those models. He realizes that they have a particular feature: people can be fooled by the government, constantly, consistently, year-in and year-out. If the central bank says "we're gonna increase the money supply 10% this year, just like every other year," people believe it -- even if the historical record is only, say, 5% money growth per year.

So Lucas writes down an alternative: expectations about the future have to be consistent with the model itself. People are "asymptotically correct" -- everyone knows the true model of the economy and bases their forecasts on that model, at least in the very long-run. People base their forecasts on what the government's actually done rather than their proclamations, and the government has to build up credibility for its proclamations to be anything other than cheap talk.

And I do think that market participants are rational, in the long-run, with enough information and time to learn about the economy. Maybe not super-rational in the sense of "knowing the true model" (hell, nobody knows the true model, that's why we still have economists!) but, you know, close enough.

The problem comes when trying to use the long-run rationality of expectations in a short-run context. In the short run everyone (especially in financial markets) is trying to make a buck, and people can be fooled, and you can find a sucker if you look hard enough. Trouble is when the other guy thinks you're the sucker....

One of the research directions I'm going in explores "rational learning", where market participants know *basically* what the economy looks like but learn more about it over time. There you can get bubbles and short-run fluctuations until everyone settles down and learns the long-run equilibrium.
 
If you ban the lending of any money at interest, then people will just find a different, more complicated and expensive, way to do the same thing.
You could make that same argument against making anything illegal.

You cannot stop the loaning of money without putting a stop to the economy as a whole. The economy is absolutely dependent on credit.
The economy is also falling apart. Maybe an economy based on credit is not sustainable.

Usury is not all lending at interest. It is a description of excessive interest.
Originally it meant any interest, "excessive" is open to interpretation.

And the only excessive interest many people pay is on credit cards. The interest on most business, home, student, and car, loans is pretty low, and has been for a long time.
Meh, there's plenty of people with homes who owe more than their homes are worth. Interest is too slippery a slope. Anyway, it allows the non-productive to rule the world.
 
You could make that same argument against making anything illegal.

Sure. And so? There really aren't that many people who want banking to cease to exist. Most people want the banks. They are useful.

The economy is also falling apart. Maybe an economy based on credit is not sustainable.

And one without it is dirt poor. Pick your poison.

Originally it meant any interest, "excessive" is open to interpretation.

And most people don't think that most interest is excessive.

Meh, there's plenty of people with homes who owe more than their homes are worth. Interest is too slippery a slope. Anyway, it allows the non-productive to rule the world.

That's not the fault of the interest rate. That's the fault of borrowing with no equity or having the equity eroded away by falling home prices.
 
Sure. And so? There really aren't that many people who want banking to cease to exist. Most people want the banks. They are useful.
Sure, it's useful to keep score so to speak but the banks/traders/speculators/finance sector in general shouldn't be as powerful as they are. It's like letting the umpires make bets on which team will win. Bad analogy maybe but corruption seems inevitable.

They are semi-useful but ultimately they don't contribute actual value.

And one without it is dirt poor. Pick your poison.
How about more limited lending rules (which seems like it's already starting to happen somewhat) and limited the amount of profit banks could make. Banking as a non-profit industry, I like the sound of that!

And most people don't think that most interest is excessive.
I don't know about that. People are constantly complaining about their student loans, car loans, credit card bills, mortgages.

That's not the fault of the interest rate. That's the fault of borrowing with no equity or having the equity eroded away by falling home prices.
I agree that people who borrowed with no equity were a bit stupid but they banks shouldn't have been allowed to lend to them. I'm sure the lenders had some culpability in driving the housing market to such ridiculous heights. The problem is, to the fat cats, its all just a game, they are playing with people's lives but there is no accountability. They don't care that we're in a recession as long as they're still making money.

The problem with the economy is that it's about money, not about human welfare. Decisions are made in government and business mostly with money as the chief goal with PR coming in second (mainly to make sure the money keeps coming) and human well being almost as an afterthought. Some people believe in elaborate conspiracy theories about how the powers that be are dominating & controlling us. Personally, such theories are unnecessary, it's not that "they" are out to get us, they simply don't give a crap about us (beyond the fact that they need the masses to keep the machine that's making them rich running).
 
I get actual value out of all the services I use banks for. :confused:
Hmm, the main value I get from banks is that they make it so I don't have to buy a safe to keep track of my money.

Using credit/debit is questionable as "value" as it mostly appeals to human laziness. It's proven that generally people spend more when using credit than cash so credit cards are less a service than a way for banks & credit card companies to take advantage of human irrationality/weaknesses.
 
I agree that people who borrowed with no equity were a bit stupid but they banks shouldn't have been allowed to lend to them. I'm sure the lenders had some culpability in driving the housing market to such ridiculous heights. The problem is, to the fat cats, its all just a game, they are playing with people's lives but there is no accountability. They don't care that we're in a recession as long as they're still making money.
What does this have to do with money supply or interest rates? Regulating to requre X% downpayment on homes does not involve interest or money supply. Further, the way to remedy this within interest rates would be to increase them, making ownership unviable for poorer people.

Hmm, the main value I get from banks is that they make it so I don't have to buy a safe to keep track of my money.
They keep my money safe. They keep me safe because I don't carry around a pile of money. They pay me interest on investments that I don't have sufficient funds to do on my own. They provide people with loans they need to get an education or to purchase an asset. They provide businesses loans to make capital investments and for more cyclical businesses crredit to help in slow cash flow periods.
Banks add a tonne of value. Are many overstepping where they should be? Sure. But that means they should be regulated, bot that the entire industr should be destroyed and set the economy back a hundred years or so (at least).
 
Sure, it's useful to keep score so to speak but the banks/traders/speculators/finance sector in general shouldn't be as powerful as they are. It's like letting the umpires make bets on which team will win. Bad analogy maybe but corruption seems inevitable.

They are semi-useful but ultimately they don't contribute actual value.


How about more limited lending rules (which seems like it's already starting to happen somewhat) and limited the amount of profit banks could make. Banking as a non-profit industry, I like the sound of that!


I don't know about that. People are constantly complaining about their student loans, car loans, credit card bills, mortgages.


I agree that people who borrowed with no equity were a bit stupid but they banks shouldn't have been allowed to lend to them. I'm sure the lenders had some culpability in driving the housing market to such ridiculous heights. The problem is, to the fat cats, its all just a game, they are playing with people's lives but there is no accountability. They don't care that we're in a recession as long as they're still making money.

The problem with the economy is that it's about money, not about human welfare. Decisions are made in government and business mostly with money as the chief goal with PR coming in second (mainly to make sure the money keeps coming) and human well being almost as an afterthought. Some people believe in elaborate conspiracy theories about how the powers that be are dominating & controlling us. Personally, such theories are unnecessary, it's not that "they" are out to get us, they simply don't give a crap about us (beyond the fact that they need the masses to keep the machine that's making them rich running).


Essentially, you are off the topic of money itself, and on the topic of how should banks and finance be regulated. And you should recognize where those topics diverge. In this thread I'm trying to give an overview of money. Not a critique of capitalism or regulation.
 
Cutlass said:
Over the past 30 years income and wealth have become more concentrated in the US. What that accomplishes is that consumers have less wealth to spend. And that results in less business opportunities for those people and firms that want to relieve consumers of their money.

This isn’t at all accurate as it would presume that those who’ve accumulated the concentration of wealth are letting it sit idle and aren‘t consumers themselves. You’ve already explained this isn’t happening, so why say this. Those who rightfully earn that wealth by providing a return on the investment to those that hire them or purchase their products put their money back to work. Either by investing in their own businesses, investing in the businesses of others, purchasing bonds, commodities, or by spending it as consumers. If you simply redistribute wealth from where it is concentrated now, to who you wish to have it, there will be no net increase in the amount of business opportunities available. You will simply reshuffle the deck of who has discretion over how the money is spent or invested, while simultaneously removing the motivation for genuine wealth creators to substantively invest in the greater economy. Not a good economic recipe.

CutlassYet that money does not want to sit idle. What does it go to when it can't find those sound business investments?[/quote said:
Any of the things above? If there are no sound business investments to be had than most people will simply spend their money (which will create a business opportunity), as it’s wiser to simply spend in an inflationary economy than allow dollars to sit idle. I know you think that all rich people merely speculate, but this is nothing but a tawdry mischaracterization. The vast majority of wealthy people take a conservative approach to investing, and also are the most knowledgeable investors.

Cutlass said:
If investors invested rationally and with good information, you would have a point. Can you say that they do?

How do you determine what is and what isn’t a rational investment decision? What are you getting at here?

Cutlass said:
The reason Goldman Sachs still exists is that they were the first major firm to get the hell out of Dodge when it looked like housing was going to go belly up. The reason Freddie Mac and Fannie Mae caught all the bad debt and are still catching the bad debt is because they were the last ones to get into the housing bubble.

No, the reason F&F caught all the bad debt is because the government rigged the system for them to absorb as much of the bad assets as possible. This why such an incredible stream of derivatives were funneled into F & F even after the crisis hit. F&F essentially became government entities to socialize and reduce the risk posed by the implosion of the housing bubble to the private sector. It was a means of protecting and shielding private institutions from all the bad mortgages by allowing F&F to guarantee them, or bundle them off as derivatives . This was shifty accounting meant as a last ditch effort preserve as much liquidity in the private system as possible, and make it easier to paper over the real endemic asset losses within that existed in the market.

Cutlass said:
You cannot stop the loaning of money without putting a stop to the economy as a whole. The economy is absolutely dependent on credit.

But surely you must admit that there is a natural limit to debt accumulation, and that things like the housing market accentuate the endemic risk associated with loose monetary policy and the encouragement of debt accumulation. Debt accumulation should really only be done as a method of last resort. If individuals, or even whole nations, cannot provide a return on the investment of the debt or cannot pay it off then you’re looking at a perfect recipe for economic disaster. That is what western civilization is facing right now. The people are not able to equitably produce the “stuff” that they expect to have. We have five nations now: Iceland, Greece, Italy, Spain, and Portugal, that tried to finance economic prosperity on debt. I leave out Ireland as they were a one trick pony that sought to use foreign investment as a means of propping up their economy. The problem was that their societies either did not have the skills to produce enough wealth to make the investment pay off, and thus, pay off the debts, or they were unwilling to produce the wealth required to pay it off. Sadly, instead of addressing this structural problem, they merely accumulated more debt, and then more debt, which they really had no more ability to pay off the first day they started to accumulate the debt, and this has driven/will drive their nations into ruin. They spent two to three decades functioning on this precept, and they’re facing the crushing realities of the economic destruction that completely irresponsible debt spending can bring. And sadly, the rest of us are caught up in it and held hostage to their irresponsibility and the actions of financial institutions. There are natural limits to debt and it is foolish for us to pretend they don’t exist and continue to dig these holes deeper and deeper while never addressing the structural issues that lead to them in the first place.

The same is true within the private sector with private individuals. It’s only wise to absorb debt if you have the ability to pay it off and you are willing to forego your future production for today’s needs or desires. And all people have a natural limit to the amount of debt they can take on and actually pay off to keep the economy accelerating.

The root of modern consumer debt, and modern societies transition from “savers to debtors,” is born from the specific fact that we don’t have the skills to fulfill what we demand. Instead of addressing the structural problem to increase economic growth, we fueled economic growth purely on debt spending, creating artificial demand, establishing inflationary economies, and making debt cheap. But this didn’t alter the fact that real ceilings to debt accumulation exist at some point and that there must be someone willing to lend to the debtor. When the ceiling gets hit, you end up starving the economy. People will only have what they can produce, debt or no debt. So it is a fool’s errand to think that our debt spiral can be saved by simply utilizing economic liquidity tools.

An economies foundation is not what it demands, but what it has the capacity, knowledge, and skills to produce. If societies debts exceed the ability to produce, then you are doomed from the start, as at some point the debt load reaches a ceiling to where it is no longer sustainable - production and demand stalls out as an individuals ability to pay off debt is exhausted - wealth is diverted from substantive consumption to rent seekers - and a downward spiral ensues.

In the end the person who doesn’t divert future production to interest will always have more stuff at the end of their working life than the person who chooses to live on debt. Businesses that do not carry interest will almost always be in a better position that those who pay their month to month bills on a line of credit. There are times where debt spending is prudent and a sound investment, but western is so far removed from this concept that I really find it to be astonishing.



Lastly, isn’t it crazy to think that an asset like a house can actually appreciate in value in the first place? The only reasonable way a house should appreciate in real value is if there is a constriction in supply or an increase in buyers.
 
Lastly, isn’t it crazy to think that an asset like a house can actually appreciate in value in the first place? The only reasonable way a house should appreciate in real value is if there is a constriction in supply or an increase in buyers.

It is. Discounting the appreciation of the land it sits on, a house is a material good that gets worse with age, and should be a pretty significant money sink once you factor in maintenance, insurance and taxes.
 
Iceland, Greece, Italy, Spain, and Portugal, that tried to finance economic prosperity on debt. I leave out Ireland as they were a one trick pony that sought to use foreign investment as a means of propping up their economy.
Iceland doesn't really belong into that category either, then.
 
This isn’t at all accurate as it would presume that those who’ve accumulated the concentration of wealth are letting it sit idle and aren‘t consumers themselves. You’ve already explained this isn’t happening, so why say this. Those who rightfully earn that wealth by providing a return on the investment to those that hire them or purchase their products put their money back to work. Either by investing in their own businesses, investing in the businesses of others, purchasing bonds, commodities, or by spending it as consumers. If you simply redistribute wealth from where it is concentrated now, to who you wish to have it, there will be no net increase in the amount of business opportunities available. You will simply reshuffle the deck of who has discretion over how the money is spent or invested, while simultaneously removing the motivation for genuine wealth creators to substantively invest in the greater economy. Not a good economic recipe.


Not really true at all. But we're talking about money here. Not The rest of it.

But my point was that when income becomes much more complicated, more investable wealth is chasing fewer business opportunities. Because the marginal propensity to consume goes down as income goes up, having a much greater share of income at the top has to restrict consumer spending. And restricting consumer spending has to restrict business opportunities.

Oh, there's a surge in conspicuous consumption. But that doesn't create many jobs. And so has no real benefit.



Any of the things above? If there are no sound business investments to be had than most people will simply spend their money (which will create a business opportunity), as it’s wiser to simply spend in an inflationary economy than allow dollars to sit idle. I know you think that all rich people merely speculate, but this is nothing but a tawdry mischaracterization. The vast majority of wealthy people take a conservative approach to investing, and also are the most knowledgeable investors.


No. When there are no sound business investments to be had, people will speculate and bid up the price of existing assets. They aren't going to just go out and spend it on consumer goods.



How do you determine what is and what isn’t a rational investment decision? What are you getting at here?



No, the reason F&F caught all the bad debt is because the government rigged the system for them to absorb as much of the bad assets as possible. This why such an incredible stream of derivatives were funneled into F & F even after the crisis hit. F&F essentially became government entities to socialize and reduce the risk posed by the implosion of the housing bubble to the private sector. It was a means of protecting and shielding private institutions from all the bad mortgages by allowing F&F to guarantee them, or bundle them off as derivatives . This was shifty accounting meant as a last ditch effort preserve as much liquidity in the private system as possible, and make it easier to paper over the real endemic asset losses within that existed in the market.


Actually, that's not true. The bosses at Fannie and Freddie got bent out of shape by the fact that Subprime, Alt A, and creative financing had left them with declining market share. So they lobbied Congress and regulators very aggressively to be allowed into markets that the law and their own business practices had kept them out of as the housing bubble built up steam. By the time that the bubble had peaked, F&F were rushing into it pellmell
just as a number of others were realizing that it was time to get out. So when the wheels really did come off, F&F were essentially all that was left holding the market up at all. And without a government takeover the entire housing market would have been destroyed right there.

You cannot separate what F&F did from the fact that they fought tooth and nail to be allowed to do it. They called in every marker, they used every dirty trick, they twisted every arm.


But surely you must admit that there is a natural limit to debt accumulation, and that things like the housing market accentuate the endemic risk associated with loose monetary policy and the encouragement of debt accumulation. Debt accumulation should really only be done as a method of last resort. </snipped for being too long to quote>


People had an expectation of rising incomes. That ended. But the expectation persisted. And so long as they could get the money to do so, they lived and consumed as if they had that rising income.

It is the failure of the income to rise which was the core foundation of the problem.

Now the rising apparent housing values and the easy credit availability made that consumer debt possible. What fueled both the availability of credit and the bubble in housing prices? Vast amounts of capital out there with no productive bushiness to invest in. Loose monetary policy was only a small part of that problem.


Lastly, isn’t it crazy to think that an asset like a house can actually appreciate in value in the first place? The only reasonable way a house should appreciate in real value is if there is a constriction in supply or an increase in buyers.

Any asset is "worth" what someone will pay for it. But real estate is particularly prone to bubbles. So supply and demand tells you what the value of a property is. People, including and led by, a lot of people who should have been experts in the field, convinced many people that housing prices would rise forever. So millions of people were fooled.

But you cannot separate the housing bubble from the fraud and mismanagement of the mortgage industry.

Never forget this one thing about banking: The job of the banker is to say no. The job of the banker is to reject any loan application that is not entirely sound.

And one of the biggest distinguishing traits of the housing bubble was that the mortgage originators flat out did not care whether any of the loans ever got repaid. And so committed any fraud they could to make any loan they could.



******

Now this thread is and about money. So don't go too far off topic rehashing old arguments.
 
Those who rightfully earn that wealth by providing a return on the investment to those that hire them or purchase their products put their money back to work. Either by investing in their own businesses, investing in the businesses of others, purchasing bonds, commodities, or by spending it as consumers. If you simply redistribute wealth from where it is concentrated now, to who you wish to have it, there will be no net increase in the amount of business opportunities available. You will simply reshuffle the deck of who has discretion over how the money is spent or invested, while simultaneously removing the motivation for genuine wealth creators to substantively invest in the greater economy. Not a good economic recipe.
You're conflating the capital goods and consumer goods markets, here. While it's debatable if it's better to stimulate one or the other- it's really dependent on circumstances- it's a nonsense to say that the economic outcome is the same.
 
Now this thread is and about money. So don't go too far off topic rehashing old arguments.

Moderator Action: Yes, please stay on topic. You may start other threads to discuss other topics.
 
You're conflating the capital goods and consumer goods markets, here. While it's debatable if it's better to stimulate one or the other- it's really dependent on circumstances- it's a nonsense to say that the economic outcome is the same.

There's no point in differentiating between the two since they are ultimately tied to one another at the hip. Because they're tied at the hip there is no reason to stimulate either one of them. And since they are directly tied to one another the economic outcome will likely be exactly the same. The wealth produced by the society is still the same. You've simply redistributed it. What makes you think you'll end up with an additional basket of goods in either scenario?

That gives society the benefit of the doubt too. Because when you start redistributing wealth you take away the incentive of everyone to produce. The rich are less likely to produce because they feel they won't be earning what they are putting in, and the middle class and the poor will be less likely to seek greater wealth because a comfortable lifestyle is being provided to them by other people. And ultimately perception of lifestyle will trump what is possible to attain. If you perceive that you're doing okay, you'll be less driven to produce.
 
So you think we should make everyone less happy, to create an incentive for them to produce?

Of course not. I'm not an economic progressive looking to tax the rich more under the pretext that they'll work that much harder to earn money due to the new duress they are under. ;)

I don't really believe in generating incentives in any direction. I believe in people obtaining the skills they want, seeking the jobs they want, working the jobs they feel comfortable with, and living within the means of the money they earn. I would also like to see more responsible form of politics that doesn't promote jealousy and this "expectation" of certain things that Cutlass describes above.

There's nothing wrong with one person choosing to live a simple life, with a simple job, and other people looking to build a corporate empire and working 80-100 hours a week. The obsession of how other people live is another part of our problem.
 
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