The real reason for today's economic problems

[RandBlade]

This post is to expound on a (somewhat flippantly made) point in the 2012 thread, which I think perhaps could form its own thread.

When the recent financial crisis hit, the straw that broke the camels back was that the banks needed bailing out following the sub-prime collapse. But bailing out the banks should not have destroyed entire economies and put us in so much debt. It should have been affordable. Furthermore had the sub-prime collapse and credit crisis not happened, inevitably something else would have. In 2000 it was the Dot Com bubble, the late 90s the Asian stock crisis, early 90s there was a global recession etc, etc, etc - we follow a cycle of boom and bust and eventually something (not typically the same thing that caused the last one) causes a bust.

The problem for our economies today wasn't greedy bankers. The problem wasn't a lack of regulations on the bankers. The problem was that we were totally unprepared for a crisis ultimately happening (as one does approximately every 8-12 years anyway).

We'd just had years of boom and surplus. Ever heard the biblical story of Joseph and the Amazing Technicolour Dreamcoat? How he advised the Egyptian Pharaoh about 7 years of plenty followed by 7 years of famine? So Joseph and the Pharaoh during the years of plenty prepared for the famine and then when the famine struck Egypt was able to survive.

We had our seven years of plenty. Of course there was no forewarning about how and when the famine would strike, but eventually something always does. Instead of preparing for it though, the opposite was done. Imagine if we'd bailed out the banks as we did but instead of starting from a position of already incredible debt and massive budget deficits pre-existing, we did so from a starting position of an accumulated reserves of a "warchest" and a budget surplus? The crisis in confidence would be over already, there would be no sovereign debt crisis.

During times of plenty, you should always be saving a bit for when the "years of famine" come.

[Khendraja'aro]

That would require long-term planning.

Something which the free market is spectacularly bad at.

[agamemnus]

Would be nice to see a graph of country deficits and income distribution curves during other prolonged busts...

Anyway, I don't see government being much better at long-term planning. 5-year plans are awesome in theory, though. I think there's a bug in there somewhere, however. If only they beta-tested communism before releasing.

[wiggin]

RB - in principle, I agree with countercyclical spending, notably including the bit about running surpluses in good years. I think, though, that even if we'd all been in better fiscal straits prior to this whole mess imploding, we'd still have significant problems now. The scale of this bust was unlike any since the Depression, and the magnitude of the needed policy measures increases accordingly. Even planning for a 'normal' bust would not have been adequate. It would have been a whole lot better, though.

I also want to highlight the fact that at least the US (and to an extent the UK and a handful of other countries) have had a decade of unprecedented security spending - both on wars in the Middle East as well as a greatly increased domestic security and intelligence apparatus. These don't come cheap, so part of our 'good times' surplus was eaten up by security spending. There's a valid debate to be had about how much of that spending was unnecessary overreaction, but it's not unreasonable to suggest that one-off bits of spending on those wars that are necessary is not something countercyclical spending can anticipate.

That being said, it's utterly irresponsible to vastly expand Medicare (see: unfunded Medicare Part D) and cut taxes to structural-deficit levels during an economic boom.

ag: It helps if you have automatic stabilizers built in, that doesn't require central planning of an economy to get countercyclical spending. Also, it's not unreasonable for countries to move to multi-year budgets. There's no particular reason why there should be a wrangle over the same budget issues every year when the priorities remain roughly constant for years at a time. Multi-year budgets work decently for some governments, and it allows for much more stable deficit outlooks.

[RandBlade]

That would require long-term planning.

Something which the free market is spectacularly bad at.

Your answer to everything . Glad I can write a long OP and that you put no initial thoughts into it whatsoever: It's a sovereign debt crisis that we're suffering now. The free market are not the sovereigns. The nations suffering due to the sovereign debt crisis had major deficits prior to the crisis in the good times, which was my point. That is a political/state issue and not a free market one. Try again.

Incidentally, did you not read the stories about eg Apple sitting on more cash than the US Federal Government? Etc - many major corporations in the "free market" are sitting on (relatively) huge reserves saved up, and running profits not losses in the good times.

[wiggin]

Is it actually a good thing for the government to sit on a big stack of cash? I think they should have as little cash as possible to keep things running, yes? Cash is utterly useless for a government, especially since they have much readier access to credit markets for short-term paper - in fact, even Apple has come under criticism for having a too-large cash cushion and not putting it to work by investing, paying a dividend, whatever.

I think it's obvious that surpluses shouldn't be directed towards cash but towards debt reduction; that's a far more flexible 'reserve' with a much better return.

[CitizenCain]

During times of plenty, you should always be saving a bit for when the "years of famine" come.

Why?

I'm quite serious, and I think this speaks to both your point and the cause you ascribe to this latest "bust," but why should I, or "we" save up during the good years? Disaster strikes, and the bad years come, I'll just vote in a socialist to give me free money to get me through the lean season, and all those morons who planned ahead and saved up will end up carrying me anyway.

That would require long-term planning.

Something which the free market is spectacularly bad at.

Which is precisely why balanced stock market holdings outperform every other investment type over the long term, right? Oh, wait, that's completely contrary to your assertion. Maybe this is just another example of you asserting something completely baseless as if it's an undisputed fact. Carry on, I suppose.

[Lebanese Dragon]

Wealth does not get re-distributed the way you describe. It is still far better to be wealthy in this country than poor or middle class. So saving will still be good to do. The U.S. populace is very consumer based, but they aren't reason for meltdowns like these. I think the banks knew for a long time that they were in trouble they either were stupid and kept doing it, or the one' s making these decisions knew even if the company collapsed for them there would be no accountability.

[GGT]

Rand, we had huge structural problems that can't be attributed to business cycles or simple bubbles. I disagree when you say the sub-prime collapse was the breaking point for the banks. The sub-prime loans were a small percent of defaults and 'should' have been contained risk (as Greenspan and Bernanke wrongly assumed), but they were tied to MBSs and other collateral debts, structured investment vehicles. The banking-lending-investing arms got tangled with pensions-mutual funds-insurance legs. None were well capitalized and all were overly leveraged. See AIG, Lehman, Bear Stearn, Citi, BofA, Goldman, Iceland....on and on. Our financial industries grew quite large monetizing credit and debts, bundling and securitizing debts, putting crap through the meat grinder and selling it as sirloin. See credit rating agencies, S & P, Moody and Fitch, stamping that sirloin as AAA grade....they'd rate a cow if it came across their desk. Add in commercial paper markets freezing, money market funds "breaking the buck", Treasurys and central bankers freaking out. Quite a tangled mess.

(We had charts once showing the % of GDP growth in financial markets, while manufacturing and labor were tanking.)

I think Khen is right. We're not good at long term planning, especially during Good Times. We're really good at slapping on band-aids or treating symptoms, instead of delving into the heart of problems.

[Loki]

Wealth does not get re-distributed the way you describe. It is still far better to be wealthy in this country than poor or middle class.

What a profound statement. Can you tell me when or where it's not better to be wealthy than poor or middle class? Other than in a country undergoing a communist revolution I suppose.

[Lebanese Dragon]

People paint the picture that the wealthy have it so bad, and that no one wants to put in the effort to be successful, and the fact of the matter is that's simply not true.

[Loki]

No, they say the higher you tax people, the less money and incentive they have to invest.

[GGT]

...The U.S. populace is very consumer based, but they aren't reason for meltdowns like these. I think the banks knew for a long time that they were in trouble they either were stupid and kept doing it, or the one' s making these decisions knew even if the company collapsed for them there would be no accountability.

Agreed. They also knew the incredible political power they held. At the height of the crisis who did Bernanke and Paulson consult with first? The Big Banks and financial titans, then congress. Not only did they get their bail-outs but no one was held accountable. When trying to re-structure things, the lobbyists pulled rank and nothing has changed. Banks are still TBTF, still over leveraged and under capitalized, and TSITF (too systemically important to fail). yay

[agamemnus]

No, they say the higher you tax people, the less money and incentive they have to invest.

So you're saying some rich guy is waffling between buying himself several new $300,000 cars or a new bakery, and his decision rests on the tax rate? Hmm, not against that thought, but PROVE IT. (and doesn't this mean we just need a luxury goods tax? [a flat consumption tax WILL get manipulated by the akkountants])

[Loki]

If you have two objects that give you the same utility and one of them becomes more expensive, are you or are you not more likely to get the one that's cheaper? The argument isn't that every single rich person will magically decide to stop investing if the tax rate goes up. The argument is that at the margin, where decisions are made, a person will become increasingly less likely to invest as the expected income from those investments go down. Of course you can ignore everything we know about economics and just listen to GGT instead.

[GGT]

Oh, FFS Loki. Your default reply to dig at me is old and stale. Aggie and others make good points about the type of investments people make and how they spend money. Whether that translates into "new jobs" or just personal profits in the stock market. (To buy a luxury car or a bakery.)

[Veldan Rath]

Actually he made an point with Aggie AND took a jab at you.

[Loki]

Oh, FFS Loki. Your default reply to dig at me is old and stale. Aggie and others make good points about the type of investments people make and how they spend money. Whether that translates into "new jobs" or just personal profits in the stock market. (To buy a luxury car or a bakery.)

I stopped reading there, sorry.

[CitizenCain]

So you're saying some rich guy is waffling between buying himself several new $300,000 cars or a new bakery, and his decision rests on the tax rate?

So you're saying bakeries employ workers, and car manufacturing facilities do not? Good to know, thanks.

I stopped reading there, sorry.

Don't be sorry; it makes your point. After all, you demonstrated that this principle of decisions being made in the margins applies to neurons as well as dollars. Perhaps it's some sort of more universal behavior, like a scientific "law" or "theory." We need more studies to be sure, though.

See, after GeeGee says something mind-blowing insane, such as supporting aggie's assertion that making cars doesn't involve employing workers, the reader loses neurons. They overload and die off trying to make sense of the sheer insanity of it all. They're "taxed," if you will. Now, at this point, Loki, who is definitely one of the evil, scheming, j00ish members of the "wealthy" class [in neurons, at least] has a marginal decision to make - acquire more information, while having to pay the neuron-death-by-incomprehensible-insanity tax, or hoard his j00 gold neurons and wait for more advantageous conditions in which to invest his vast, but limited supply of neurons, where the expected payoff per neuron invested is not negatively impacted by prohibitively high taxation.

And, as Loki stopped reading at the first sign of the neuron-death-by-incomprehensible-insanity tax (wish I had too, poor brain), we can see that Loki has proven his own point. Taxation scared Loki off from investing more neurons in a marginal market.

So clearly, the proper solution to gain access to Loki's investment stockpile [of neurons] is to raise the insanity level, tear out half of Loki's brain, force Loki to read GeeGee's posts and then in a few years, blame the other guy for the fact that Loki isn't reading any more. Which, will inevitably devolve in short order into making election promises about stealing other people's brain matter to shove back into Loki's skull to remedy his reading deficit which was probably due to bad luck, laziness, deregulation or the "free market" and definitely had nothing to do with the government ripping out half of his brain.

[GGT]

Tag team again, huh.

Aggie's post was aimed at exactly what everyone in business and politics (and forums) are talking about: the relationship b/w taxes, investments, and jobs; whether it's proven that higher taxes stifle growth and investing in new jobs; whether luxury spending by the top 10-20% can carry an economy when the other 80-90% are struggling, and need more/better paying jobs.

We were talking about that over $2 trillion in private and corporate money sitting in idle cash, waiting for fill-in-the-blank. Consumer confidence, better employment numbers, congressional gridlock to end, Bernanke and the "Twist', european stability, promises of lower taxes, certainty in uncertain times....whatever they want before they'll "invest" in ways that jump start America and make jobs.

Really now, you two brainiacs can stop with the name calling and derogatory digs.

[CitizenCain]

Really now, you two brainiacs can stop with the name calling and derogatory digs.

Stop begging for it.

"Making cars doesn't employ people!"
"Good point!"

....

Seriously, what the hell response is there to that which isn't derogatory????

[GGT]

Seriously, you don't see the difference in type of investments, and how they impact the US? Look, it was a pretty simple example, don't blow it all out of proportion.

Buying a $300,000 car, made in Italy or Germany? Using one importer and one distributor, maybe commissions to a handful of people? That's not the same investment as buying a bakery. That doesn't lead to the same jobs as a bakery. Not in who's employed, numbers hired, or local vendors used. Not in the types or numbers of customers, that can lead to a 2nd or 3rd bakery, hiring more people, making more jobs Let alone how often someone buys a $300,000 car vs bread or bagels.



And no, I don't think people who are choosing b/w a luxury car or a bakery, make that decision based on tax rates.

[Loki]

One can make the exact same argument about all imports. The solution is to clearly ban all imports. Or would you be satisfied with an additional tax on imports? How about another 20%?

[GGT]

People paint the picture that the wealthy have it so bad, and that no one wants to put in the effort to be successful, and the fact of the matter is that's simply not true.

No, they say the higher you tax people, the less money and incentive they have to invest.

One can make the exact same argument about all imports. The solution is to clearly ban all imports. Or would you be satisfied with an additional tax on imports? How about another 20%?

Why don't you address the topic, instead of making up new tangents as you go along?

You're a history buff, so you know our Gilded Age had incredibly high taxes on the upper classes, and there was still profit and incentives to invest. It's also known that even Reagan raised taxes, and the Clinton era had some higher rates, too.

Are you and Cain are trying to make the same argument about taxes as the GOP? That they're always bad, evil, punitive, etc. That all we have to do to spur growth in the US economy and create new jobs is.....cut taxes and cut public spending! To quote aggie---prove it.

[Aimless]

You know, in some countries it's not "far" better to be wealthy than to be middle class. Re. the OP didn't Joseph instruct the Pharaoh to tax the hell out of the populace in order to build up a reserve for the seven bad years??

[GGT]

It doesn't have to be a biblical tale to be relevant in modern times. When I was young, the moral was taught by the Little Red Hen. Later, it was the grasshopper vs the ant.

[wiggin]

You know, in some countries it's not "far" better to be wealthy than to be middle class. Re. the OP didn't Joseph instruct the Pharaoh to tax the hell out of the populace in order to build up a reserve for the seven bad years??

Actually, it's not entirely clear from the text. It's possible that during the seven years of plenty they bought excess food for their storehouses given that the market prices was dirt cheap - kinda like the SPR. The suggestion is just to 'gather' a fifth of the harvest; there's not language of taxation. Certainly afterwards they sold the food to the populace, turning a tidy profit in the meantime.

</language pedant>

[Aimless]

Actually, it's not entirely clear from the text. It's possible that during the seven years of plenty they bought excess food for their storehouses given that the market prices was dirt cheap - kinda like the SPR. The suggestion is just to 'gather' a fifth of the harvest; there's not language of taxation. Certainly afterwards they sold the food to the populace, turning a tidy profit in the meantime.

The seven year famine became so severe that toward the later period, even Egypt was being strangled. Because the Egyptians had used up all of their money to buy grain in the previous years, there was no more money left. All they had was their livestock and even that dwindled down to nothing. As a last resort, all of the inhabitants of Egypt, less the Egyptian priestly class, sold all of their properties to Joseph for seed. These properties now became the property of the Pharaoh, or in another words, government property. Joseph also set a mandate that because they will be harvesting seed on government property, a fifth of the produce shall go to the Pharaoh. A fifth to the Pharaoh has continued down to at least the days of Moses. (Genesis 47:20-31)

I only have wiki to go on, but it seems I blended the prologue and the epilogue together

[Dreadnaught]

When the recent financial crisis hit, the straw that broke the camels back was that the banks needed bailing out following the sub-prime collapse. But bailing out the banks should not have destroyed entire economies and put us in so much debt. It should have been affordable.

I agree with you that people need to grow up a bit and remember that economic crises and declines are somewhat cyclical and inevitable. However, I disagree that bank bailouts have destroyed economies and led to crippling debt. The crippling debt was already there. It's not like Greece had much of a banking system to speak of; if anything it was being propped-up by a banking system that suddenly shrunk and couldn't continue the Greek gravy train.

[RandBlade]

You know, in some countries it's not "far" better to be wealthy than to be middle class. Re. the OP didn't Joseph instruct the Pharaoh to tax the hell out of the populace in order to build up a reserve for the seven bad years??

No, not tax the hell, a 20% tax. I pay far more than 20% tax already.

The issue is that I pay far more than that, but its still not enough for what they spend.

Dread: That's my whole point, the banks were the straw that broke the camel's back, not the cause of the crisis.