Financial Crisis

[12DrinkMore]

Are they serious?

Goldman to make record bonus payout

Surviving banks accused of undermining stability

http://www.guardian.co.uk/business/2009/ju...-bonus-payments

Staff at Goldman Sachs staff can look forward to the biggest bonus payouts in the firm's 140-year history after a spectacular first half of the year, sparking concern that the big investment banks which survived the credit crunch will derail financial regulation reforms.

Looks like the privileged few are on the road to recovery. And at the same time forcing the rest of us further down the road to ruin.

Barclays Capital, Credit Suisse and Deutsche Bank are among the European firms expected to register bumper profits, along with US banks JP Morgan and Morgan Stanley

Wasn't it just a few months ago that they were all forecast to be out of business, ruined, bailed-out? WOW! What an amazing turn around. Banks, they make me sick. They caused the dam_n crisis, got bailed out with hundreds of billions of our future income, and just a few short months later are into bumper fuc_king profits. Well, how about the rest of us? You know, like industry, that actually produces stuff you can see and hold.

Blankfein is obviously a very capable man. He has to be, because for every hour he spends in the office he earns the average ANNUAL wage of one of us normal peeps. In fact, he must be an amazing person. I wonder if anybody ever comments, "hey Lloyd, you've just spent fifteen minutes in the john taking a dump, here's a cheque for USD 7,000. Would you like a coffee?"

But didn't he mutter just a short time ago something like

http://www.nytimes.com/2009/04/08/business...ldman.html?_r=1

Mr. Blankfein, who received compensation valued at nearly $43 million in 2008, said Tuesday that lessons from the crisis included the need to “apply basic standards to how we compensate people in our industry.

USD 43,000,000 earned in 2008? I'd like a piece of that "basic standard". "Goldman to make record bonus payout" sounds like there are standards for them and other standards, namely "substandards" for us poor peeps.

Still, isn't it nice to see our Warren back in the black?

Warren Buffett, who bought $5bn of the company's shares in January, has already made a $1bn gain on his investment.

Leads me to wonder if there was some mutual stimulation in the lav. "hey Warrren, looks like we're on track for a bumper six months, how about you having a dabble in GS stock?" "OK Lloyd, I think I can find five billion, is that OK?" "Fine, oh and thanks for pushing up the option prices at the same time, another coffee?"

But surely we are out of the woods now? The banks are paying back the bailouts, the TARPS and making immense profits again. Our Leaders promised us that once the banking system was rescued and on solid ground, then the economy would follow.

So this must mean that the world bank and the IMF will be revising their estimates upwards. Such dismal forecasts as this will surely become a thing of the past?

http://www.bloomberg.com/apps/news?pid=206...id=a1.yaHjcvVko

But hello, what is this on Bloomberg? But is it time to get out, or get in?

http://www.bloomberg.com/apps/news?pid=206...id=aOt23chpd_Yw

"Insiders Exit Shares at Fastest Pace in 2 Years as Market Rises"

“If you see broad- based selling among the management team or large holders, that’s generally not a good sign because presumably who knows that business better than they do?”

Oh dear, maybe not out of the woods yet, then?

Edited June 22, 2009 by 12DrinkMore

[12DrinkMore]

And whilst I am spouting off, here's more from that well run bank, Fred the Shred's Royal Bank of Scotland.

http://www.independent.co.uk/news/business...ge-1712427.html

It is understood that RBS persuaded UK Financial Investments (UKFI), which controls the Government's more than 70 per cent stake, as well as other large shareholders at a meeting last week.

The RBS chief is understood to be in line for £1.2 million in salary, around £2 million in annual non-cash bonus payments and close to £6.4 million of long term share and stock option awards.

Well HELLO HELLO, you out there, yes YOU, the UKFI bunch controlling not "the government's" share but the TAX PAYERS's share. How about asking US if WE want to pay this guy 3.2 million Quid/year? That's some twenty times more than our Leader, Cyclops "The Tantrum Boy" Brown earns is given for services rendered.

[Abrak]

I didn't hear anything about China's surplus disappearing. You have to wonder why half of the UST long bonds were bought by foreign CBs just last week if they thought the USD would crash, much less weren't actually complicit in supporting the USD. All I'm saying is betting against that seems very risky...

Well on average half of all USTs are bought by CBs although that wont be the case this year - there are just too many and the US C/A deficit has shrunk. A lot of people argue there's a lot of money to be made betting against CBs. I just wont bet against Ben, he's pulling the strings and he got 1590 out of 1600 in his SATs.

When I say China's surplus disappearing, I mean it in a general sense. The current a/c may be flat but that is because imports have imploded due to lower investment and exports will be down. The capital a/c has already moved into deficit for the first time. And there will be a fiscal deficit of US$250bn compared to US$20bn last year.

[Abrak]

The way the US has handled the banking crisis in terms of moral hazard, no reregulation, TARP etc. seems to have been a bit of a shambles. Look at the banks now, they are cleaning up. Of course they need to, to pay off their losses. But you have a record steep yield curve, so the depositor who deposits short gets nothing and the borrower (say a mortgage) who borrows long is paying a high yield while the banks are taking a record spread. It helps of course, when the entire secondary banking system which encouraged competition has gone bust. Ultimately though, the good depositor (the guy who didnt buy assets at ridiculous prices) and the good borrower (who is paying back his loan at too high a rate) is subsidizing silly bankers who lent badly to stupid borrowers.

By the way, any bail out structured in such a way that tax payers funds are put at risk but the bank is still in a position to pay out record bonuses at the end of the year must be deeply flawed in some way. In any case, wasnt Goldman's becoming a bank which would mean reducing its gearing from 30x to 8x and hence profitability (in terms of ROE) could never reach historic levels?

Edited June 22, 2009 by Abrak

[midas]

June 22 (Bloomberg) -- The World Bank said the global recession this year will be deeper than it predicted in March and warned that a flight of capital from developing nations will swell the ranks of the poor and the unemployed.

Efforts to revive domestic economies through stimulus spending should be coordinated internationally, the bank said.

“Any country that acts alone -- even the United States -- may reasonably fear that increases in government debt will cause investors to lose confidence in its fiscal sustainability and so withdraw financing,” the report said.

http://www.bloomberg.com/apps/news?pid=206...id=afWrPB8FcAZw

[12DrinkMore]

So, you really want to know how the USD, EUR, THB, GBP are going to perform over the next six months? Looking to make a little bit of medium term financial planning to avoid any nasty adverse movements in rates? Or maybe even thinking about putting some chips down on the huge forex roulette wheel.

The definitive answer is here...

All you need to know...

http://www.bloomberg.com/apps/news?pid=206...id=aLaIb.6J8xFc

:D

[teletiger]

More Roubini.

http://www.cnbc.com/id/31482873

http://www.cnbc.com/id/31482098

"That's why I believe there's going to be a significant market correction for equities, for commodities and even for credit," Roubini added.

Regards.

[flying]

Ultimately though, the good depositor (the guy who didnt buy assets at ridiculous prices) and the good borrower (who is paying back his loan at too high a rate) is subsidizing silly bankers who lent badly to stupid borrowers.

Remember I asked is it ok for them to steal from your savings

In the end the prize is the same.

Today is interesting...dollar up a little....

Dow down almost 200 Nas down almost 60

PM's down a little.

We will see what tomorrow brings with the start of the meetings at the FED.

[flying]

More Roubini.

http://www.cnbc.com/id/31482873

http://www.cnbc.com/id/31482098

"That's why I believe there's going to be a significant market correction for equities, for commodities and even for credit," Roubini added.

Regards.

Good Articles thanks

Banks that are too big to fail are simply too big

You know the fact that they ( FED ) went & pumped the too big too fail up to bigger sizes.... What kind of final unfair advantage have they given them (again ) against the too small to succeed?

Edited June 22, 2009 by flying

[Abrak]

Now for a few yellow weeds....

http://www.federalreserve.gov/releases/g19/current/g19.htm

Consumer credit fell at an annualised rate of 7.5% in April so the consumer is deleveragering. Luckily consumer credit is only some US$2.5trn compared to mortgages of US$14.5trn which are down but only just. Obviously you pay off those credit cards first... I guess just inevitable....

These numbers I dont like though and would have expected to see some bounce by now. Production and capacity utilization are still heading down as of May

http://www.federalreserve.gov/releases/G17...ent/default.htm

Just to put the May figure of 68.3 for capacity utilization in perspective - it is the lowest ever recorded since the Fed started records in 1948 - the next lowest being 68.6 in 1968. Production was down 1.1% in May and is down 13.4% yoy. I suppose its lucky that the US has productive service industries such as banking to fall back on.

Finally some reasonably interesting/useless monetary aggregates - I say useless since they stopped publishing M3 when it didnt give them the right numbers.

http://www.federalreserve.gov/releases/h6/current/h6.htm

I am not much of a monetarist as it was already totally discredited while I was looking at economics (we were too busy trying to revive Marx.) M1 is too narrow to be meaningful but M2 consisting about half of deposits is a fairly broad based money supply. The growth figures they show dont really show the true story. (I watch M btw because I think it is correlated to asset prices rather than CPI.)

First of all, there was a truely staggering 16% annualized growth in M2 between Sept '08 and Mar '09. I call it truely staggering because the basic relationship MV=PQ means M is supposed to grow in line with nominal GDP. M2 has never grown 16% annualized and last exceeded 12% back in 1975 or so when inflation was say 10%. With say 2% inflation and 0% growth M2 should be growing at 2% (well so says Friedman).

So there was the most inflationary rise in monetary growth in living history and rather remarkably the stockmarket went down until right at the end. Now we can account for the rise by Bernanke's QE policies but clearly something else was going on. Presumably it was this. Outside of the Fed Res's M2 was a wonderful world of CDOs, ARMs, BURPs and FARTs - a money supply that literally imploded. Some of the money jumped back into M2 but much evaporated into thin air. On that basis, can anyone be sure that Bernanke's QE is not actually easing, tightening caused by the financial crisis as opposed to actually inflating the money supply.

Anyways back to the yellow weeds in those numbers - the last couple of months have seen a fall in M2 which is both negative in terms of GDP expectations and the stockmarket.

[flying]

I suppose its lucky that the US has productive service industries such as banking to fall back on.

Want to bet the outcome of the next two days?

[midas]

I suppose its lucky that the US has productive service industries such as banking to fall back on.

Want to bet the outcome of the next two days?

That and consumption

[midas]

Chaimai ok but tell me where exactly you see the job opportunities are going to be in one year ? Which

sectors ?

I will guarantee that the finance sector will one area. Overall, my crystal ball is no better than yours but when/if CONFIDENCE is restored employers will employ. When/if DEMAND returns increased employment will follow.

The claims the NAEA are making are interesting......... but it doesn't quite tie in with what is being said here ............

Of course house hunting doesn't equate to transactions ?

Of course house hunting equates to transactions. Not many are people are just looking to fill in the voids in their life. Any sales process starts with ACTIVITY - house hunting equates to activity. Activity will result in sales, increased sales equals increased demand. Increased demand equals..... need I go on ?

The dampening factor in the current climate will be the supply of credit. At the current stage of the cycle that is perhaps, not a bad thing. First time for over 30 years that I have seen quotas in place.

I do agree that we need to see more first time buyers coming into the market, particularly as their psuedo replacement (the Buy to Let purchaser) is the sector hardest hit by the squeeze on credit.

Chaimai

I can't see how you can expect even the recent pick up in activity to be sustained with these statistics :-

" Two thirds of employers have made, or are considering, significant changes to the organisation of workforces to cope with recession, the CBI survey found.

It reported that two thirds of businesses had imposed partial or complete recruitment freezes, with more than half predicting that it could take up to two years or more for hiring to return to the levels of 2007. More than half of employers said that they planned to freeze pay, with 39 per cent intending only modest wage increases. "

and without any " scaremongering " notice this is being mentioned again.............

" John Cridland, the CBI’s deputy director-general, said that Britain’s jobless count was bound to rise above three million by next spring and that it was vital to remain alert to the danger that this could foster industrial and social unrest.

“None of us should be complacent . . . we need to remember some of the things that happened in the Eighties in Brixton and Toxteth,” he said, in a reference to the riots in those areas of London and Liverpool as unemployment spiralled. "

http://business.timesonline.co.uk/tol/busi...icle6558068.ece

[flying]

That and consumption

Yes but those days are gone............

As this guy puts it

A Snake Eating Its Own Tail

Therefore there is no chance between heaven and hel_l that the pre-2008 suburban homesteading and shopping fiesta can ever come back. The American polity is tapped out in all sectors, personal, corporate, and public.

http://kunstler.com/blog/2009/06/a-snake-e...s-own-tail.html

But I think this is the point.............

Notice the two words largely absent from whatever public discussion exists around these matters -- "swindle" and "fraud."

Why is Bernie the only guy in jail? Where are all his counter parts? Where are all the folks that these bail out $$$ are covering? Please dont tell me they are the same guys getting the biggest bonuses this year are they?

Edited June 23, 2009 by flying

[teletiger]

Ed Balls: Labour ‘would aim to increase spending on public services’

http://www.timesonline.co.uk/tol/news/poli...icle6558064.ece

Now there's a novel idea.

Regards.

[hhgz]

"Want to bet the outcome of the next two days?"

That's how you do your long-term investing, day-by-day? Incredible.

[midas]

"Want to bet the outcome of the next two days?"

That's how you do your long-term investing, day-by-day? Incredible.

There hasnt been any investing ..............you mean speculation ?

[BlackJack]

"Companies with net sellers outnumbered those with buyers by almost 9-to-1 last week, versus a ratio of about 1-to-1 in the first week of the rally."

It's not very confidence building for ordinary investors to see insiders bolting to the sidelines and cashing in some of their holdings.

Perhaps they know something about how there companies are going and how the forthcoming second quarter earnings season will go.

[flying]

"Want to bet the outcome of the next two days?"

That's how you do your long-term investing, day-by-day? Incredible.

Thanks but sorry I only invest in myself.

I was referring to meetings at the FED .

Edited June 23, 2009 by flying

[flying]

Gang of wealthy pensioners kidnaps and tortures financial adviser who lost their savings

http://www.dailymail.co.uk/news/worldnews/...al-crisis.html#

[Abrak]

Someone said I should post more pics (or maybe it was just that I should post less). Anyway here are some interesting pics showing the similarity between now and the Great Depression. The causes high debt to GDP and the results appear similar. This isnt immediately obvious when looking at the US (with its huge fiscal and monetary response) bottom right but the Depression was a truely global phenomenon and so is this (just look at Japan). All charts based at 0 assume the recession started Apr '08.

Europe looks much the same story. If anything the US looks to be holding up well. Look at Italy things have already fallen as far as in the whole of the Depression.

So if we look at global production things are just as bad. Note that even in the Depression their were several false dawns especially after very severe down cycles (as we have just experienced) - for instance the uptick in months 21 to 24 after -10% inflation in the year before.

The stock market fall has been more severe (I dont think this is telling us much other than markets are more efficient in that they forecast declines and rises quicker and earlier than in the past - that seems to be the case anyways.)

And so has world trade....

So one thing for sure is that this recession looks more like the Depression than any other. However, that doesnt mean history is going to repeat itself for long. The usual argument goes is that we can never have a repeat of the Depression because a big structural recession was exacerbated by the Hoover's decision to to balance the budget in 1935 (I think) which then plunged the economy back into recession. But to me fiscal policy is at the limits of its effectiveness unlike in the 1930s as you can vaguely see below.

Krugman argues that the US should increase fiscal spending but given the current size of the deficit, he should accept this will at least be regarded as unconventional. To the extent that people are reducing consumption of things they want to pay off debt, they are not intending to give the Government a license to take on debt on their behalf to pay for things they dont want. Obviously higher deficits (especially when they are already 14% of GDP) crowd out more consumption through higher interest rates and higher perceived future taxes. It is even possible to see Obama tightening fiscal policy to a 5% deficit having much the same effect as Hoover's balanced budget in say 3 years time.

The reason that I do not believe we are heading for a depression like the 1930s is because 'monetary' as opposed to 'fiscal' policy will not be the same. Consider the policies of Bernanke, BOE etc and the expansion of money supply to what happened last time around. Money supply growth.....

...Looks very different this time around and isnt going to contract. Look at interest rates....

...You see the essential problem last time around and this was high debt to GDP. When the asset bubble burst the private sector deleveraged repaying debt. But this reduced both investment and consumption and so GDP at the same time. The key point though was that interest rates remained highly positive while inflation below was highly negative so very high real interest rates (real interest rates were 12% in 1932) were exacerbating the underlying problem in that debt was struggling to fall versus GDP.

http://inflationdata.com/inflation/Inflati...n_currentPage=6

I dont believe that, that mistake will be made this time. Real interest rates will be low or possibly negative which should allow real adjustments to take place without a self-induced deflationary spiral and hopefully quicker than the Japanese model (I really really hope).

If this isnt immediately obvious, take the simplest of monetarist arguments that M (given V is assumed constant) should grow in line with GDP. Then look at the monetary numbers - between 1929 and 1934 nominal GDP should have fallen about 15% (sounds about right given those inflation numbers). So even if consumers were deleveraging (at relatively high rates it is unlikely that total debt to GDP was actually falling (especially when you to take into account the fiscal deficit.) Now you assume Ben has a helicopter and M rises 10% a year while the consumer deleverages and even if real growth falls over the next 5 years at least the debt to GDP ratio has fallen at least 30% assuming some fiscal responsibility.

By the way, I do see all the problems with this solution. It implies robbing people of their savings to pay debtors. It implies inherent default of debt in real terms to creditors. It is rewarding the bad at the expense of the good. I am not a monetarist, dont really believe in screwing around with the money supply but have quite a lot of faith in Bernanke and cant come up with a better idea. I also think the effects of tight monetary policy (i.e. high real rates) is generally underestimated or ignored as a contributor to the Depression.

[Abrak]

Gang of wealthy pensioners kidnaps and tortures financial adviser who lost their savings

http://www.dailymail.co.uk/news/worldnews/...al-crisis.html#

Obviously these torturers deserve to be behind bars as this was not part of their contract.

However, as hedge fund managers believe they have a right to take a large percentage of above average returns (whether caused by an above average year in the stock market or not), presumably investors should be able to inflict some punishment for below average returns. As the fund manager may not have the resources to meet a financial penalty, some sort of physical punishment (such as the loss of a finger for each 5% loss relative to 10 year treasuries) would seem appropriate.

At some point of course this would prove counter productive to his continuing work as a fund manager but it some ways that would be the point. While successful fund managers become wealthy, unsuccessful become unemployed.

[flying]

Someone said I should post more pics (or maybe it was just that I should post less). Anyway here are some interesting pics showing the similarity between now and the Great Depression.

By the way, I do see all the problems with this solution. It implies robbing people of their savings to pay debtors. It implies inherent default of debt in real terms to creditors. It is rewarding the bad at the expense of the good. I am not a monetarist, dont really believe in screwing around with the money supply but have quite a lot of faith in Bernanke and cant come up with a better idea. I also think the effects of tight monetary policy (i.e. high real rates) is generally underestimated or ignored as a contributor to the Depression.

Thanks

It will be interesting to see if Bernanke is reappointed

I figured he was a shoe in since I doubt none but himself know what the he!! he is actually doing.

But Mr O's comment today left that a bit open.

I wont post these pics but here is a link.

It was interesting read

http://jessescrossroadscafe.blogspot.com/2...-inflation.html

Edited June 23, 2009 by flying

[badge]

[...]

The reason that I do not believe we are heading for a depression like the 1930s is because 'monetary' as opposed to 'fiscal' policy will not be the same. Consider the policies of Bernanke, BOE etc and the expansion of money supply to what happened last time around. Money supply growth.....

...Looks very different this time around and isnt going to contract. Look at interest rates....

...You see the essential problem last time around and this was high debt to GDP. When the asset bubble burst the private sector deleveraged repaying debt. But this reduced both investment and consumption and so GDP at the same time. The key point though was that interest rates remained highly positive while inflation below was highly negative so very high real interest rates (real interest rates were 12% in 1932) were exacerbating the underlying problem in that debt was struggling to fall versus GDP. [...]

What is the source of your money supply figures? Theres no real sign of inflation on the ground in US yet, and Im of the opinion there wont be.

Banks arent flooding the markets with printed money, theyre flooding them with credit. Consumers arent going to take this credit because theyre still reeling from the financial destruction in so many markets. Banks will take the credit to stave off going bust, so they can pay themselves and not be banished into obscurity, as they're all technically bankrupt still after leveraging up 20:1 in markets that have collapsed in some case 80%. At 10:1 leverage you only need a 10% decline to be wiped out. They're in big trouble still, so are soaking up any kind of capital and not dishing any out.

'Seeing inflation' has got to be the easiest call Ive ever heard. 'Helicopter Ben' is an inflationist, CBs are giving blank cheques out, Govts are embarking on record stimulus.... its so obvious right? I read a great quote from Joe Granville: 'anything obvious is obviously wrong'

Financial markets dont move logically.

The reason theres no point in comparing - economically - the current issues with that of the 30's is that ours are so much worse.

Its amazing really isnt it, that financial markets have got this bad. I mean we had it all figured out; unregulated trade in OTC derivatives would stave off any busts.... oh dear

[MJP]

Ed Balls: Labour 'would aim to increase spending on public services'

http://www.timesonline.co.uk/tol/news/poli...icle6558064.ece

Now there's a novel idea.

Regards.

Ed Balls was at the heart of the problem. The man is a Grade 'A' . . . He came up with the term "NICE", Non-Inflationary Continuous Expansion. Then proceeded to switch to CPI which ignored housing costs.

http://en.wikipedia.org/wiki/Ed_balls

As Labour swept to power in the General Election of 1997 he continued as an economic adviser to Brown, who was then Chancellor. He then served as chief economic adviser to HM Treasury from 1999 to 2004, in which post he was once named the 'most powerful unelected person in Britain'.^[3]

[Abrak]

What is the source of your money supply figures? Theres no real sign of inflation on the ground in US yet, and Im of the opinion there wont be.

'Seeing inflation' has got to be the easiest call Ive ever heard. 'Helicopter Ben' is an inflationist, CBs are giving blank cheques out, Govts are embarking on record stimulus.... its so obvious right? I read a great quote from Joe Granville: 'anything obvious is obviously wrong'

Financial markets dont move logically.

The reason theres no point in comparing - economically - the current issues with that of the 30's is that ours are so much worse.

Source: 19 countries. Bordo et al. (2001), IMF International Financial Statistics, OECD Monthly Economic Indicators.

Helicopter Ben is an inflationist and he also believes is using smoke and mirrors in that he regards manipulating inflationary expectations as important as inflation itself. To some extent I think that is how you view him and say current inflation expectations. I think there is more substance to him than that. I do believe he can create inflation. I am less confident that can control real rates unless there is some fiscal discipline.

He is definitely smart enough to know that monetary policy is usually leveraged through your banking system, so if you dont have one you dont have the other. So he is already recapitalizing the banks through a record yield curve. He may well try to achieve several of his goals by lending to the banks long term at 0% interest etc..

The point of the comparison is this. The causes of the 2 recessions high debt/gdp caused by an asset bubble that burst with a consequential financial crisis. You may well be right in saying that the fundamentals look worse this time around. However, there is absolutely no need for the consequences to be as bad because the depression was exacerbated by so many policy errors. (1) allowing prices to fall exacerbates debt/GDP (2) raising real interest rates from 3% in 1928 to 12% in 1932 was bound to crater the economy (3) to the extent it was 'artificially' depressed there was a 'natural' public sector deficit without stimulus so balancing the budget simply 'artificially' depressed things further.

The other point I wished to make is that the depression and its end has as much to do with monetary policy failure as fiscal. This I see as important. In my view the US has already used its fiscal gun. If anything they are going to over use it - fiscal stimulus is supposed to compensate 'artificially' low private sector demand, but the fall in demand is not artificial, previous demand was artificial in that there were no savings and the consumer simply overconsumed through debt. Ultimately the US needs to adjust from the consumer being 70% of GDP to about 60% as its savings ratio increases and they deleverage. There is little point in this adjustment being compensated by G because while the consumer is paying his debt on one hand he is taking future liabilities in the form of tax on the other.

So to me an imaginative and inflationary stance by the Fed re monetary policy seems the best option (and one that was ignored in the depression until the war.) In this thread, Bernanke has been referred to as mad, stupid, idiotic, irresponsible, unconventional etc. QE is both irresponsible and unconventional in terms of Fed policy. But to the extent M2 was increased so dramatically at the end of last year and the beginning of this, you have to ask yourself where we would be now without it.

[Naam]

So to me an imaginative and inflationary stance by the Fed re monetary policy seems the best option (and one that was ignored in the depression until the war.) In this thread, Bernanke has been referred to as mad, stupid, idiotic, irresponsible, unconventional etc. QE is both irresponsible and unconventional in terms of Fed policy. But to the extent M2 was increased so dramatically at the end of last year and the beginning of this, you have to ask yourself where we would be now without it.

i said the same repeatedly, but used slightly less wording. but you and i are dead wrong Abrak! you don't believe me? just ask the resident economic/financial experts and they will prove with a dozen or more youtube clips that we are wrong.

[lannarebirth]

So to me an imaginative and inflationary stance by the Fed re monetary policy seems the best option (and one that was ignored in the depression until the war.) In this thread, Bernanke has been referred to as mad, stupid, idiotic, irresponsible, unconventional etc. QE is both irresponsible and unconventional in terms of Fed policy. But to the extent M2 was increased so dramatically at the end of last year and the beginning of this, you have to ask yourself where we would be now without it.

i said the same repeatedly, but used slightly less wording. but you and i are dead wrong Abrak! you don't believe me? just ask the resident economic/financial experts and they will prove with a dozen or more youtube clips that we are wrong.

It's not the expansion of M2 that's the problem, it's the belief that it will not be withdrawn correctly that creates concern. Bernake has shown no indications that he cares one whit about the savings of a person's lifetime (of course Greenspan never did either). Could be a new paradiagm in the making. People concerned only about capital gains, all the time.

Edited June 24, 2009 by lannarebirth

[Abrak]

It will be interesting to see if Bernanke is reappointed

I figured he was a shoe in since I doubt none but himself know what the he!! he is actually doing.

But Mr O's comment today left that a bit open.

Well if he doesnt get reappointed it will be a grave error based on the wrong assumption.

As I see it there are 3 views of the current recession.

(1) This is a cyclical downturn caused by a shortfall in aggregate demand created by the financial crisis. These guys take a look at growth over the last ten years and say that the natural rate of unemployment is 5.0% or so (or inflationary pressures start appearing) and the natural rate of growth is 2.8%. They believe in a consumer/debt driven economy and simply assume when the banks are up and running then the consumer will start borrowing again and growth will not only resume but can rise above the natural rate because it plays catch up.

These guys are delusional in my view but it is the basis of Government forecasts (which is rather worrying). US consumers had negative savings because they believed they were saving through their homes. This was based on the assumption that house prices would rise in real terms relative to income over time (which is ridiculous or in the long run you couldnt eat.) If that wasnt obvious enough they could look at the marginal productivity of debt which by 2006 was with each increase of US$100 of debt around US$8 was being added to GDP. So what they think is a growth model is a Ponzi scheme.

(2) There is a second school of thought (rather popular on this thread) that basically can see a consumption based growth model is really no growth at all and is really simply borrowing tomrrows growth. Krugman epitomises this view - he warned as long ago as 2002 that the only way the US could keep growing was by engendering a housing price bubble that when it burst would lead to a Japanese style recession. They argue the deflationary forces are so powerful that little can be done about them. They point to Japan that tried everything from QE, fiscal deficit financing, ZIRP but still couldnt dig itself out even though starting with a 30% savings ratio.

(3) Finally there are a few economists, of whom Bernanke is by far the most respected, that argue that rather like the depression was exacerbated by policy errors, so was the Japanese lost decade. Essentially he argues that every policy was too little, too late (such as tackling bank bad debts) and that the CB failed to engender inflationary expectations.

The reason to go with Bernanke is there is no downside. The downside being that opinion (2) is right and deflation cant be avoided or his policies lead to 1970s style hyperinflation which would be marginally preferable to deflation.

If he doesnt get reappointed it will be because his 'unconventional' policies have restored faith in the 'delusionists' who now want a more 'responsible' monetary policy as they see prospects of the economy returning to 'growth and prosperity'.

[Abrak]

It's not the expansion of M2 that's the problem, it's the belief that it will not be withdrawn correctly that creates concern. Bernake has shown no indications that he cares one whit about the savings of a person's lifetime. Could be a new paradiagm in the making, people concerned about only capital gains, all the time.

It is not that Bernanke doesnt care about people's savings - it is just that he starts from the basis that deflation is the most destructive economic force, so that to the extent he destroys the value of savings he believes he is creating much more value elsewhere.

You are right to point out though, that if Bernanke proves his theories correct, it is based on increased moral hazard - namely subsidizing the bad by robbing from the good.

But that is an inherent problem with capitalism. People complain that say Krugman has a left wing agenda but why not? Afterall if he can warn in 2002 that the only way the US can grow is through a housing price bubble which when it burst will lead to a Japanese style recession, I also suspect that he knew that (1) Greenspan would quite deliberately create that bubble and (2) that when it burst the Government would bail out those who got sucked in by robbing from those that didnt. And as the banker who gave the loans gets grossly overpaid whatever the circumstances, the banker knows he is pretty smart.

If Marx were alive today he would right a theory of the end of capitalism based on the ever increasing amounts of moral hazard rather than ever increasing exploitation of labour necessary to maintain returns on capital.