JerichoHill
Bedrock of Knowledge
I think EconomistBR hit this pretty well, but in addition I think the rate cut was a panic prevention move as well
Ask an Economist (Post #1005 and counting)
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Fifty
!!!!!!!!!!!!!!!!!!!!!!!!!
Do you think that experimental economics will replace the abstracted proof-theoretic economic theory of today? If so, do you think that that is a good or bad thing? If not, do you think it should?
Let me answer for JH.
"I'm busy and I don't have time to watch a video, how about you reiterate the main points?"
They're meeting next week. Bernanke decided to cut it by himself and now we'll see what happens when all the people meet.
I bet they'll lower the interest rates more though. It's like giving candy to a crying baby. It's probably not the best thing to do, but it'll please the people. I mean, the Dow dropped like bloody 3% and Bush has some crazy tax rebate system that will screw over the next president. People could use some good news, or something.
countrygrl
King
jericho hill, i have a question for you.
how come when the price of oil goes up, the price is immediately factored into the price at the gas station? but when the price of oil goes down, you don't see it immediately? i think oil has dropped quite a bit since it went up to $100, so why hasn't it dropped? you can gaurantee that if it shot up tomorrow, that the price would go up tomorrow though!
how come when the price of oil goes up, the price is immediately factored into the price at the gas station? but when the price of oil goes down, you don't see it immediately? i think oil has dropped quite a bit since it went up to $100, so why hasn't it dropped? you can gaurantee that if it shot up tomorrow, that the price would go up tomorrow though!
JerichoHill
Bedrock of Knowledge
This probably has to do with the futures market, the figures you're seeing. Those are not current day prices. What you're seeing is likely something called "selection bias." We tend to remember that which is most important to us (higher prices) and forget to notice when they go down.
But I drive a scooter, so I don't even know what the price of gas is anyways. It's a nice life.
JerichoHill
Bedrock of Knowledge
I'm not in the business of making day to day predictions on the stock market. The stock market's journey is a random walk along a general pattern (ie up, nowhere, or down).
Since we didn't see a crash today, I doubt we'd see them tomorrow. Plus, its a freaking youtube video. I give those about as much credibility as 9/11 truthers...wait, scratch that, I give those about as much credibility as those who believe Bush is a member of an alien lizard species that secret rules the earth.
Homie
Anti-Lefty
The video was not about predicting the stock market. It was about Ron Paul's ideas of fiscal policy, including dismemberment of the Central Bank, gold/silver backed currency to replace or compete with the current fiat currency, cutting government spending (in particular on wars).
JerichoHill
Bedrock of Knowledge
Remind me tomorrow and Ill give you an indepth answer.
JerichoHill
Bedrock of Knowledge
Good, glad I didnt waste watching a youtube video portending to be predicting a crash when it was just a fanboy vid.
Points though:
The existence of a Federal Reserve is one major reason why the business cycle has been smoothed. Unregulated banking (or state-regulated) didn't work very well in the US previously (look at the late 1800s economic cycles)
We aren't going on a gold standard again. Gold? What good does gold do? What does it do? I quote pre-eminent investor and philanthropist Warren Buffett "It gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head."
Homie
Anti-Lefty
Ceteris Paribus? Are we for certain that those economic cycles have been smoothed because of a central bank, and not because of other factors?JH said:
If so, why is the lack of a central bank causing greater swings in the business cycles?
Whether gold has utility or not is besides the point. It is scarce and thus valuable to people, and it is a raw material so its value can easily be compared across continents based on purity and weight, hence it is very tangible. Also, that its utility is limited (like you mentioned) speaks to its benefit as a currency backing commodity, i.e. if we used something with a high utility as backing that would put alot of that "stuff" out of use, as it is just "sitting in hole" and not being used. After all, paper money came into being as receipts for gold held by blacksmiths and later, banks.JH said:
But I don't think Ron Paul cares what we back it with as long as it is backed. At least he said so in an interview once, that he wanted it to be backed by something tangible, whether that be gold, silver or something else.
So the question is, should currency be backed by something? Intuitively I think that it should, because money should be a representation of actual wealth, or else why would we seek to aquire it. At the same time most economists seem to agree that fiat money is the way to go, so I am taking the advice of proverbs (in The Bible) and listening to the old and wise.
Homie--why would you say greater swings in the business cycle? There have been two recessions in the last two decades. From the late 1960's through the early 80's the US endured four of them including two of the deepest in decades.
In fact, I would say that if we were on the gold standard in 1995 when the yen catapulted versus the dollar we would've had to increase rates (from already monsterous increase in rates from 1994) to keep parity and we undoubtedly would've gone into recession.
Why is it that no one remembers that the countries that came off the gold standard were the first to recover from the Great Depression?
There's also some fundamental supply and demand issues with gold. IE environmentally and cultures that demand it.
I knew I read this somewhere...
In fact, I would say that if we were on the gold standard in 1995 when the yen catapulted versus the dollar we would've had to increase rates (from already monsterous increase in rates from 1994) to keep parity and we undoubtedly would've gone into recession.
Why is it that no one remembers that the countries that came off the gold standard were the first to recover from the Great Depression?
There's also some fundamental supply and demand issues with gold. IE environmentally and cultures that demand it.
I knew I read this somewhere...
http://www.dallasfed.org/research/eclett/2007/el0709.html
EconomistBR
King
Homie
Anti-Lefty
I'm sorry, I should have worded it in the past tense. This is what I said:Whomp said:
This is what I should have said:
If so, why was the lack of a central bank causing greater swings in the business cycles?
JerichoHill
Bedrock of Knowledge
Homie,
This was because each state was pursuing its own monetary policy. And it was still dominant thinking that out-printing your money would make your richer.
That's one part. The other part was that there wasn't a consistent, fractional reserve system in place with government backed-insurance. Just read about how banks could be chartered back then, it was a mess.
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An economy-wide problem in the financial sector and the banking industry that triggers an economy-wide business-cycle contraction or even depression. Bank panics were common throughout the 1800s and early 1900s, during which time they where the primary cause of business-cycle downturns. Bank panics usually involved bank runs that spread from bank to bank throughout the economy.
Bank panics, as the name suggests, were crises in the banking industry in the 1800s and early 1900s usually created when the general public had serious questions about the solvency of banks and the safety of their deposits. Bank panics were often sparked by bank runs in which an usually large number of depositors sought to withdraw funds at the same time from their banks. The run on a single bank, and its subsequent failure, often created the uncertainty and distrust of the banking system that led to an economy-wide bank panic.
While all too common a century ago, bank panics have largely vanished from the modern economic landscape thanks to government deposit insurance (Federal Deposit Insurance Corporation). Because such insurance guarantees bank deposits, customers are less concerned about losing their deposits and thus likely to panic if problems emerge.
In the 1800s and early 1900s business-cycle contractions were, more often that not, caused by economy-wide bank panics. For this reason economic downturns were more commonly termed bank panics than recessions or contractions.
Bank panics triggered economic downturns by reducing the amount of money in circulation. Before the advent of deposit insurance, the run on a bank was likely to deplete the bank's available reserves, causing it to fail and making any remaining deposits worthless. When such bank runs spread throughout the economy as bank panics, a significant amount of the economy's bank deposits literally vanished.
These lost deposits reduced the economy's stockpile of financial wealth and, more importantly, the supply of available money. With less money in circulation, less output was purchased, meaning production, employment, and income all declined. This was, and continues to be, one sure recipe for a business-cycle contraction.
Some Notable Panics
Bank panics were a common occurrence in the U.S. economy throughout the 1800s and into the early 1900s. The first notable bank panic took place in 1819 after the war of 1812 in large part due to tight lending policies by the Second Bank of the United States. The last of note was in 1932, during the depths of the Great Depression, which then prompted the formation of the Federal Deposit Insurance Corporation. Other major panics that marked the U.S. economic landscape occurred in 1837, 1857, 1869, 1873, 1893, and 1907.
The bank panic of 1857 was the result of European speculation in the construction of the U.S. railroad system. When the speculation investment bubble burst, the panic began. The 1869 bank panic was triggered by the first of several stock market collapses known as "Black Friday." The panics in 1873, 1893, and 1907 were caused by ongoing financial conflicts between farmers and bankers that, among other things, also gave rise to the Populist political movement. The bank panic of 1907 was noteworthy for inducing Congress to create the Federal Reserve System, which was officially established 1913.
Bank panics appear to be relegated to the history books. The Federal Reserve System, Federal Deposit Insurance Corporation, and a better understanding of how economy works, has effectively prevented bank panics since the Great Depression. A potential bank panic that could have occurred with a major decline in the stock market in 1987 was avoided. And even though hundreds of banks failed during the 1980s due to bad management and a bad economy, no economy-wide bank panics emerged
JerichoHill
Bedrock of Knowledge
This needs to be repeated.
JerichoHill
Bedrock of Knowledge
Firstly, gold standard is just fiat currency with something tangible to back it up. That, and it was a disaster because we had a bi-metallic system.
A gold standard is something in our past. It's not healthy for an economy today. It's better to let our currency float against others and let the market sort it out.
The gold standard, in theory, limits the power of governments to inflate prices through excessive issuance of paper currency. It is also supposed to create certainty in international trade by providing a fixed pattern of exchange rates. Under the classical international gold standard, disturbances in the price level in one country would be wholly or partly offset by an automatic balance-of-payment adjustment mechanism called the "price specie flow mechanism." At the time of the Bretton Woods agreement, it was believed that markets were always internally clear; Say's Law. However, in practice, wages, not capital, depreciate in price first.
According to modern neo-classical synthesis economics, the Mundell-Fleming Model describes the behavior of currencies under a gold standard. Since the value of the currencies is fixed by the par value of each currency to gold, the remaining freedom of action is distributed between free movement of capital, and effective monetary and fiscal policy. One reason that most modern macro-economists do not support a return to gold is the fear that this remaining amount of freedom would be insufficient to combat large downturns or deflation
JerichoHill
Bedrock of Knowledge
I think experimental will fill a niche of economists, probably becoming a major subfield, but economics doesn't work in a lab vacuum, so, I don't see it over-ridden regular ole economic thoughts. Those experimental programs are only as creative as the human mind, after all.
Homie
Anti-Lefty
Thanks for thorough answers.
This is what I gathered from what you wrote:
Business cycles were harsher and long lasting because of bank runs, or bank panics. Then the Federal Deposit Insurance Corporation came along and fixed that problem (the bank runs). So where does the need for the federal reserve come in? It would seem that this FDIC would solve the problem.
You said that another part of what was causing the greater business cycles were that state's thought that printing more money would make you richer, which actually supports a backed currency and not a central bank, but I'm sure you realize that. Another reason you mentioned was that each state was pursuing its own monetary policy. So why exactly would this cause more and longer lasting business cycles?
As for your points on the gold standard, I don't really understand them. What exactly is the problem with a backed currency?
This is what I gathered from what you wrote:
Business cycles were harsher and long lasting because of bank runs, or bank panics. Then the Federal Deposit Insurance Corporation came along and fixed that problem (the bank runs). So where does the need for the federal reserve come in? It would seem that this FDIC would solve the problem.
You said that another part of what was causing the greater business cycles were that state's thought that printing more money would make you richer, which actually supports a backed currency and not a central bank, but I'm sure you realize that. Another reason you mentioned was that each state was pursuing its own monetary policy. So why exactly would this cause more and longer lasting business cycles?
As for your points on the gold standard, I don't really understand them. What exactly is the problem with a backed currency?
JerichoHill
Bedrock of Knowledge
Homie,
The Federal Reserve was created after the FDIC to supervise nationally chartered banks. State-charted banks had the option to join. Thus, the Federal reserve also helped regulate the banking industry.
So why exactly would this cause more and longer lasting business cycles?
States would try and inflate themselves out of a recession. Other states would retailiate by inflating. Or spread rumors of a bank panic. Nasty stuff.
As for your points on the gold standard, I don't really understand them. What exactly is the problem with a backed currency
You have to manually adjust the foreign exchange rates from time to time, which creates imbalances in those times that you don't, and also causes BIG changes in a shor time frame (right after the adjustment). Plus, you're assuming that a few central planners can get the foreign exchange ratios exactly right, which is a fool's errand, as it is highly unlike such a group will know all the information that is to know and will most likely incorrectly set the rates, which will lead to further imbalances.
There is something called the Mundell-Fleming model, which is held in high regard amongst economists today
The Mundell-Fleming model portrays the relationship between the nominal exchange rate and the economy output in the short run. The Mundell-Fleming model has been used to argue that an economy cannot simultaneously maintain a fixed exchange rate, free capital movement, and an independent monetary policy. This principle is frequently called "the Unholy Trinity," the "Irreconcilable Trinity," the "Inconsistent trinity" or the Mundell-Fleming "trilemma."
If you have a fixed exchange rate (gold standard) and free capital movement, then you cannot have monetary policy.
http://en.wikipedia.org/wiki/Mundell-Fleming_Model
The Federal Reserve was created after the FDIC to supervise nationally chartered banks. State-charted banks had the option to join. Thus, the Federal reserve also helped regulate the banking industry.
So why exactly would this cause more and longer lasting business cycles?
States would try and inflate themselves out of a recession. Other states would retailiate by inflating. Or spread rumors of a bank panic. Nasty stuff.
As for your points on the gold standard, I don't really understand them. What exactly is the problem with a backed currency
You have to manually adjust the foreign exchange rates from time to time, which creates imbalances in those times that you don't, and also causes BIG changes in a shor time frame (right after the adjustment). Plus, you're assuming that a few central planners can get the foreign exchange ratios exactly right, which is a fool's errand, as it is highly unlike such a group will know all the information that is to know and will most likely incorrectly set the rates, which will lead to further imbalances.
There is something called the Mundell-Fleming model, which is held in high regard amongst economists today
The Mundell-Fleming model portrays the relationship between the nominal exchange rate and the economy output in the short run. The Mundell-Fleming model has been used to argue that an economy cannot simultaneously maintain a fixed exchange rate, free capital movement, and an independent monetary policy. This principle is frequently called "the Unholy Trinity," the "Irreconcilable Trinity," the "Inconsistent trinity" or the Mundell-Fleming "trilemma."
If you have a fixed exchange rate (gold standard) and free capital movement, then you cannot have monetary policy.
http://en.wikipedia.org/wiki/Mundell-Fleming_Model
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