A cure or our recession

[Castillo]

Cures for Our Economic Disease

I have recently had several opportunities on various news programs to discuss the economy and what is wrong with the so-called economic stimulus package. I have said over and over what we shouldn’t be doing, and now I’d like to explain what we should be doing.



But to improve the situation, you must first have a solid grasp of how we got here. Government policies and central planning created the housing bubble, now going bust. About a decade ago the government made expanded homeownership and affordable housing a public goal. Through Fannie Mae, Freddie Mac and the secondary mortgage market the government incentivized creative, low down-payment, more widely available mortgage products, and discouraged the market-proven lending standards of the past. The Federal Reserve kept interest rates artificially low, which added more fuel to this fire. Many related sectors temporarily flourished because of this, and many people got into homes they otherwise could not have afforded. The increased demand for housing sent prices soaring until in many markets housing became even more unaffordable, necessitating even more creative mortgages, and impossibly leveraging homeowners. Many risky investment vehicles such as mortgage-backed securities, derivatives, credit default swaps grew out of this unsustainable situation. As the foreclosures began, the house of cards started to tumble. Too many people have confused the symptoms and the pain of the bust with the problematic policies that caused the bubble, which is really what needs to be treated.



First of all, just as the best cure for a hangover is not to drink so much, the best cure for a recession is a recession. It is time to sober up and return to free market sanity, risk and reward, supply and demand, without political intervention. Politicians are good at catering to the needs of special interests, but very bad at determining what needs to take place in the market. Government should stick to punishing fraud and enforcing contracts. When they use the tax code, bureaucratic departments and their manipulative rules and regulations to dictate social and economic behavior, we end up with distortions and malinvestments. Bailing out banks, continuing failed Fed policies and strapping the taxpayer with toxic debt will worsen the pain, and punish the innocent.



If Congress really wanted to do something helpful, it would cut taxes. Ideally, we would repeal the income tax altogether and get the IRS off the economy’s back, which would be a huge boon. We should also cut spending. Cut every unconstitutional department and program, every wasteful governmental encroachment on the people’s liberty and money, starting with our massive overseas empire. The cost of our empire is bringing us to our knees, just as the Soviets’ empire did to them. Congress should also abolish the Federal Reserve and take back its responsibilities to ensure sound money, safe from the manipulations of powerful banking interests.



These things would constitute real change, real economic stimulus. The plans being bandied about Washington are just more of the same. As long as no one seriously considers the cure, we are unfortunately destined to prolong the disease.


Posted by Ron Paul (02-02-2009, 02:27 PM) filed under Monetary Policy

http://www.house.gov/htbin/blog_inc?BLOG,tx14_paul,blog,999,All,Item%20not%20 found,ID=090202_2647,TEMPLATE=postingdetail.shtml

Is he right?

[Permanent Solution]

Um the best cure for a hangover is definitely getting drunk again I don't know what he's thinking.

[StreetlightRock]

He's more or less right.

[Angmar]

Can't say I was ever a Ron Paul fan.

[Aaron]

It is time to sober up and return to free market sanity, risk and reward, supply and demand, without political intervention."

Yes.
If Congress really wanted to do something helpful, it would cut taxes.
No.

Way to contradict yourself Ron Paul.

[ridethelib]

It sound good to me - money to the people cutting back the government.

[Angmar]

Worked well so far.

...

[StreetlightRock]

Way to contradict yourself Ron Paul.

Cutting back taxes = intervention??

[Aaron]

If it's for such an overt purpose as he's implying, yeah I'd deem it so. Taxes should be set in a manner that they're appropriate no matter the financial outlook. Sure it's great if there's a surplus to pass on some of that happy outcome, but tax-reduction as a inflation effecting tool should be discouraged. The reserve bank and the government should not do each other's jobs,

[Swill_Merchant]

Down With Death And Taxes

[StreetlightRock]

Sure it's great if there's a surplus to pass on some of that happy outcome, but tax-reduction as a inflation effecting tool should be discouraged

*shurg*, I think reducing/lowering taxes as an inflationary control tool is more or less useless anyway, so I guess I agree. I just want more money in my paycheck.

[BridgeToSolace]

This is so non-specific and unhelpful.

"What do we do to fix this problem?"

"Do what I told you to do before it was a problem, and would tell you to do regardless"

"Thanks, Paul."

[siva_chair]

If it's for such an overt purpose as he's implying, yeah I'd deem it so. Taxes should be set in a manner that they're appropriate no matter the financial outlook. Sure it's great if there's a surplus to pass on some of that happy outcome, but tax-reduction as a inflation effecting tool should be discouraged. The reserve bank and the government should not do each other's jobs,

The purpose of cutting taxes isn't as an inflation hedge though, it is to keep money in the hands of productive individuals for capital investment (which I suppose could be looked at as a sort of hedge against price inflation, but nonetheless). I don't see where he said cutting taxes would be an inflation hedge.

The inflation hedge is abolishing the institution that is the fiat machine responsible for it: The Federal Reserve.

[mph4ever]

i suppose you have to consider where would you like to start over again. at what stage were things sustainable and healthy.

[hismajestythepope]

Can't say I was ever a Ron Paul fan.

Explain what's wrong with his logic here though?

[hismajestythepope]

This is so non-specific and unhelpful.
how so?

[BridgeToSolace]

how so?

It's just his normal talking points marginally put within the context of the current recession.

If you just took out the word "recession", this might as well be last decade's news letter.

[siva_chair]

Well considering he pretty accurately predicted what is happening currently, I'd say that is a rather silly criticism, tbh.

[BridgeToSolace]

It's nonspecific and unhelpful because it's nothing we have heard before.

We aren't already doing it, so what new information has he provided to sway us to his plan? We are aware of the idea of minimal government before he started harping about it, and we will be aware of it after him. If he's not providing us with a new idea, the least he could do is justify it in a new way.

But he's not. He's copy and pasting old news letters. Snooze. It's unconvincing to anyone who wasn't already convinced ten years ago. (or whatever time ago)

[siva_chair]

And the fact that people are ignoring him is why this thing is going to get much worse.

[BridgeToSolace]

But there's a reason why people are ignoring him.

[siva_chair]

But there's a reason why people are ignoring him.

Because they are idiots?

[Aaron]

It's the same reason why people ignore their 5th grade teacher in favour of a university lecturer. It's basic stuff he's pointing out, and there's more interesting and more sophisticated points of views to consider.

[BridgeToSolace]

Because they are idiots?

Yes, the only reason you would not listen to/agree with Ron Paul is if you are a complete ****ing retard.

[siva_chair]

It's the same reason why people ignore their 5th grade teacher in favour of a university lecturer. It's basic stuff he's pointing out, and there's more interesting and more sophisticated points of views to consider.

You mean like Ben "there is no housing bubble to bust" Bernanke's? Or how about the slew of Keynesians and Neo-Keynesians that did such an awesome job at predicting this whole thing (you know, the ones that said we were doing peachy and financials were in great shape)?

I'm really interested in these "more interesting and more sophisticated points of view" you are speaking of that we should consider.

[siva_chair]

Yes, the only reason you would not listen to/agree with Ron Paul is if you are a complete ****ing retard.

Or suffer from "ecognorance."

[BridgeToSolace]

Unless it's you two who are suffering from ecognorance.

[StreetlightRock]

It's the same reason why people ignore their 5th grade teacher in favour of a university lecturer. It's basic stuff he's pointing out, and there's more interesting and more sophisticated points of views to consider.

Like what?

[siva_chair]

Unless it's you two who are suffering from ecognorance.

Then display it. So far all the arguments against what he has said have fallen massively short of containing any actual reasoning as to why he is wrong.

[BridgeToSolace]

Then display it. So far all the arguments against what he has said have fallen massively short of containing any actual reasoning as to why he is wrong.

His arguments seems to fall massively short on containing any actual reasoning as to why he's right.

Today, Iceland has some of the world's highest levels of economic and civil freedoms.

Iceland has been hit especially hard by the world financial crisis. The nation's ongoing economic crisis has caused significant unrest in recent months and made Iceland the first western country to borrow from the International Monetary Fund since 1976.[9] Iceland's newly established minority cabinet is headed by the world's first openly gay leader. [10][11]

See what economic and civil freedoms get you? You wanna be lead by a queer?

[siva_chair]

His arguments seems to fall massively short on containing any actual reasoning as to why he's right.

Except for the parts where he points out why this financial crisis happened and what caused it.

See what economic and civil freedoms get you? You wanna be lead by a queer?

Iceland's economy was also heavily dependant on foreign investors. Iceland was a causualty of our policies, not it's own. It's only fault was in putting too many of it's eggs in one basket and relying so heavily on foreign capital that was highly susceptible to market interventionism.

[BridgeToSolace]

Except for the parts where he points out why this financial crisis happened and what caused it.

There are book-length explanations of the current economic situation. Something tells me that 4 paragraphs is an account that's over simplified to the point of irrelevance.

Iceland's economy was also heavily dependant on foreign investors. Iceland was a causualty of our policies, not it's own. It's only fault was in putting too many of it's eggs in one basket and relying so heavily on foreign capital that was highly susceptible to market interventionism.

Oh, so the only fault of the free market is that people are free to do whatever they want?

ie. put all your eggs in one basket

in either case, it wasn't a serious comment. it was for lulz

[hismajestythepope]

It's just his normal talking points marginally put within the context of the current recession.

If you just took out the word "recession", this might as well be last decade's news letter.

okay cool so what he says has no weight whatsoever and his point is invalid because theres been a recession for the past decade?

hmmm.

looks like youre just being critical for the sake of being critical.

[siva_chair]

There are book-length explanations of the current economic situation. Something tells me that 4 paragraphs is an account that's over simplified to the point of irrelevance.

Something tells me that this isn't a very good refutation of anything.

Oh, so the only fault of the free market is that people are free to do whatever they want?

ie. put all your eggs in one basket

in either case, it wasn't a serious comment. it was for lulz

Of course people are free to do what they want. At least under a free market you don't have the government distorting the market to as lead to this kind of massive malinvestment.

[DBoons Ghost]

Ron Paul's biggest flaw is his hatred for government and his need to blame this on the government.

[siva_chair]

Ron Paul's biggest flaw is his hatred for government and his need to blame this on the government.

When the shoe fits....

[DBoons Ghost]

When the shoe fits....

Nah.

Americans are consumeriffic idiots who have no clue how to manage their money in their fight to keep up with the Joneses as the saying goes.

The government tried to make people's dreams come true. The consumer's greed coupled with Wall Street's increasingly creative greed caused the housing situation and turned the economy into a nightmare. I would be more then happy to prove it but I've done that in many threads past. Did the government lost control of the market? Maybe. They are only responsible for the federal government. The martket is all us.

Just because Ron Paul says it doesn't make it true. This is NOT the government's fault and it's ignorant to blame them.

[siva_chair]

Nah.

Americans are consumeriffic idiots who have no clue how to manage their money in their fight to keep up with the Joneses as the saying goes.

The government tried to make people's dreams come true. The consumer's greed coupled with Wall Street's increasingly creative greed caused the housing situation and turned the economy into a nightmare. I would be more then happy to prove it but I've done that in many threads past. Did the government lost control of the market? Maybe. They are only responsible for the federal government. The martket is all us.

Just because Ron Paul says it doesn't make it true. This is NOT the government's fault and it's ignorant to blame them.

Yeah because it isn't the government that inflates the money supply, sets artificially low interest rates, Fannie increasing the loan-to-value ratio on low-income loans to 103%, or anything else that could distort the market and cause a general populace to believed that buying unproductive assets,(like housing) could make them wealthy, forever, without any coherent explanation why....

To blame this on people's greed while ignoring the government removal of the necessary counterbalance of fear in the market is dishonest and will only lead to more disastrous policy.

[Against Miik!]

I'm not sure what kind of cure you are referring to, but surely a cure for anything is better than a recession.

[siva_chair]

A recession is the cure. Recessions are simply the markets correcting malinvestments.

By trying to intervene the government is going to turn this recession into a depression.

[Already_Taken]

i've read better from Paul.

and malinvestments... seems like a problem with the free market to me.

[DBoons Ghost]

Yeah because it isn't the government that inflates the money supply, sets artificially low interest rates, Fannie increasing the loan-to-value ratio on low-income loans to 103%, or anything else that could distort the market and cause a general populace to believed that buying unproductive assets,(like housing) could make them wealthy, forever, without any coherent explanation why....

To blame this on people's greed while ignoring the government removal of the necessary counterbalance of fear in the market is dishonest and will only lead to more disastrous policy.


All of the above was done after the fact to try and fix what broke.

Fannie Mae has been helping people for decades. Before Wall Street turned people's debt into a tradeable commodity the formula worked fine. Wall Street sold the general populace a pocket full of lies, not the Fed. Not the government. The Market belongs to us. The government tries to ensure balance but the think tank of geniuses that comprise any of the exotics sold on the open stock market consistently finds a loophole.

Maybe the Fed made some mistakes along the way, but to outright blame the government is just as dishonest.

I could be a little off in the blame I place on consumers but there are no predators without the prey.

[siva_chair]

i've read better from Paul.

and malinvestments... seems like a problem with the free market to me.

Well then you are being ignorant because the malinvestments in question are caused by distortions in the market (primarily when market rates of interest are driven below the “natural rate” as a result of credit expansion by the central bank).

[StreetlightRock]

Siva dude, it's just not possible to explain away all malinvestments as the results of artificial economic stimulus by central banks. Sure, they may add fuel to the fire, but it's a fire that's bound to start due to the nature of the system. It's just impossible to discount the momentum provided by speculation and investor fenzy. With every bubble - The Railways in England, The Asian Tiger markets, the Internet bubble - all these were more than just the mechanizations of the central bank. People f'uck up, and no where more so than the market, which is exactly why cycles exist naturally.

[siva_chair]

All of the above was done after the fact to try and fix what broke.

Incorrect.

Interest rates have remained artificially low since after the dotcom bubble crash and 9/11.

Fannie increased the rates years ago, which is what exacerbated the speculation in real estate and pumped more air into the inflated the bubble.

The Fed has been inflating the money supply at an increasing rate for decades.

Fannie Mae has been helping people for decades. Before Wall Street turned people's debt into a tradeable commodity the formula worked fine. Wall Street sold the general populace a pocket full of lies, not the Fed. Not the government. The Market belongs to us. The government tries to ensure balance but the think tank of geniuses that comprise any of the exotics sold on the open stock market consistently finds a loophole.

The and CRA was modified in the late 90's that forced banks to loan to people that had no business borrowing that much money. Also, since the government guaranteed mortgage-backed securities, this gave speculators a free pass to do their speculating. Couple that with the artificially low interest rates, you have given them cheap easy money to do the speculating with, further inflating the bubble of already overvalued real estate. Wall Street was only acting on the signals they got from the Fed, and since the government took the fear of failure out of the market, they had a huge incentive for risky lending and speculation.

One of the problems was all these bad loans in the Sand States (California, Arizona, Nevada, Florida) got bundled in with all the other mortgages as that was the only way to create an after-market for them. Since the various tranches of bundled loans became unbelievably complex, nobody really knows how much "bad" is mixed in with the "good." Another problem was that when Maria the hotel maid in LA got a $200K loan, then Bill the insurance agent in Atlanta wanted a $400K loan, a dozen mortgage brokers sprang up all around them to satisfy the need. After all, there's big, fat Fannie and Freddie waiting around to soak up all this crap, forcing everybody else to loosen their standards as well to avoid losing market share.

Maybe the Fed made some mistakes along the way, but to outright blame the government is just as dishonest.

Not when the source of all this malinvestment comes from the government distorting the market.

I could be a little off in the blame I place on consumers but there are no predators without the prey.

And investors and entrepreneurs only go off the signals and the playground the Fed creates for them. If they create a playground full of moral hazards, some kids are going to end up hurt.

[siva_chair]

Siva dude, it's just not possible to explain away all malinvestments as the results of artificial economic stimulus by central banks. Sure, they may add fuel to the fire, but it's a fire that's bound to start due to the nature of the system. It's just impossible to discount the momentum provided by speculation and investor fenzy. With every bubble - The Railways in England, The Asian Tiger markets, the Internet bubble - all these were more than just the mechanizations of the central bank. People f'uck up, and no where more so than the market, which is exactly why cycles exist naturally.

Massive malinvestment (the kind that causes these kinds of things) is only plausible if the market is distorted.

Also, I reject the idea that cycles are an inherent feature of the market.

[StreetlightRock]

How can you reject cycles while subscribing to the idea of recessions as cures? 'Pure' markets do not exist. You should know as well as I do that prices only reflect what people perceive values to be and nothing more. And perceptions are never, ever pure.

[DBoons Ghost]

Wow siva that was awesome spin. I see no point in this discussion though. You're tough to argue with I'll give you that. I'm not an economist so I can't walk that road with any sense of purpose. I'm biased to hate consumers and traders and you're biased to hate the Fed banks and the government. Together there is no end to this.

[siva_chair]

How can you reject cycles while subscribing to the idea of recessions as cures? 'Pure' markets do not exist. You should know as well as I do that Prices only reflect what people perceive values to be and nothing more. And perceptions are never, ever pure.

The amplifying, "wave-like" effects of the credit cycle is the primary cause of most business cycles. Prices reflect what people perceive to value, but value is inherently subjective. "Natural" interest rates are simply a reflection of the actual time preference of lenders and borrowers. The problem arises when "artificial" interest rates are set too low for too long, which results in excessive credit creation, speculative bubbles, and "artificially" low savings.

Recessions are simply periods of time when malinvestment is corrected by a period of savings and the capital base is replenished.

[siva_chair]

Wow siva that was awesome spin. I see no point in this discussion though. You're tough to argue with I'll give you that. I'm not an economist so I can't walk that road with any sense of purpose. I'm biased to hate consumers and traders and you're biased to hate the Fed banks and the government. Together there is no end to this.

Hey fair enough.

[StreetlightRock]

I completely agree, but that the 'problem' arises ONLY from artificial interest rates is to overlook the dynamism of the market. Of course it contributes to downturns, but I don't understand why you insist that credit is predicated simply on interest rates. The history of economic boom and bust is rife with stories of speculative mania and panic, influenced by factors far more reaching than interest rates. Stories of rags to riches, the sheer wealth that lies just within grasp, the instances of striking golden investments, the innovations and benefits of new technology which beat at the very heart of capitalism and the money that people are willing to commit to them cannot be reduced to the mere fluctuations of artificial interest rates. It's just a gross oversimplification on your part.

[JohnXDoe]

abolishing taxes, cutting all "unconstitutional" spending. the cure to ALL of societies woes. it all comes down to the almighty dollar and how much we get to keep and spend individually

big meh

[siva_chair]

I completely agree, but that the 'problem' arises ONLY from artificial interest rates is to overlook the dynamism of the market. Of course it contributes to downturns, but I don't understand why you insist that credit is predicated simply on interest rates. The history of economic boom is bust is rife with stories of speculative mania and panic, influenced by factors far more reaching than interest rates. Stories of rags to riches, the sheer wealth that lies just within grasp, the instances of striking golden investments, the innovations and benefits of new technology which beat at the very heart of capitalism and the money that people are willing to commit to them cannot be reduced to the mere fluctuations of artificial interest rates. It's just a gross oversimplification on your part.

Because the credit cycle/credit market is determined by interest, as the role of interest rates is to balance the supply of real savings (from depositors) and demand for those savings on the part of borrowers (investors). If interest rates are set too low for too long, it results in excessive credit creation. Under fractional reserve banking, this causes an expansion of the supply of money.

Of course the market is dynamic, which is exactly why the business cycle is not an inherent function of the market. The only time that enough malinvestment takes place to create the significant and perpetual macroeconomic boom/bust cycles is when the market is overly distorted and false signals are in place. If interest rates are naturally set (i.e. as a reflection of borrower/lender actual time preferences) then it stands to reason that the price mechanism will allow for a more rational allocation of resources, which hedges against the massive malinvestments that create the amplified boom/bust cycles.

[StreetlightRock]

Because the credit cycle/credit market is determined by interest

...and reflexively, interest rates are determined by the credit cycle/credit market - especially so in a world where they are not determined by central banks. But more than that, the cycles of the credit market are premised on inputs (PEOPLE) that go beyond the interest rate, and it is these factors (like the ones I've mentioned in my previous post) that I'm arguing will naturally cause the market to move in drastic ways. Interest rates are not the be all and end all of market cycles. The price mechanism can't hedge against malinvestments becuase malinvestments are part and parcel of that very mechanism, not a separate entity.

I really need to sleep now, but I'll be back in the morning.

[siva_chair]

...and reflexively, interest rates are determined by the credit cycle/credit market - especially so in a world where they are not determined by central banks. But more than that, the cycles of the credit market are premised on inputs (PEOPLE) that go beyond the interest rate, and it is these factors (like the ones I've mentioned in my previous post) that I'm arguing will naturally cause the market to move in drastic ways. The price mechanism can't hedge against malinvestments becuase malinvestments are part and parcel of that very mechanism, not a separate entity.

I really need to sleep now, but I'll be back in the morning.

Of course malinvestments will take place at an individual level, but not at the level that cause the large boom/bust cycles. It is not the interest rates fluctuating themselves that are the source of malinvestment, it is that they are set artificially and therefor lack a valuable source of feedback (like a price mechanism). If the credit market/interest rates are set naturally, there will be no excessive credit expansion.

The source of the widespread “cluster of entrepreneurial errors” that typifies the boom-bust sequence is that market rates of interest are driven below the “natural rate” as a result of credit expansion by a central bank. Market rates are the result of the supply of and demand for credit, while the natural rate is an expression of individuals’ preferred rate of substitution between present goods and future goods. Such declines in market rates make it appear as if consumers have chosen to save (delay consumption) at a higher rate than before, when in reality they have not. This essentially amounts to a false "price mechanism" in the credit market.

G'night.

[nungman]

we should abolish the government

abolish the economy

abolish trees

abolish education

abolish water

abolish air

abolish abolishism

[mph4ever]

we should abolish the government

abolish the economy

abolish trees

abolish education

abolish water

abolish air

abolish abolishism

how about the state? why don't we just abolish the state? it makes perfect sense. oh, and theft via taxation, lets abolish that and the whole world can live in harmony and get a better education and healthcare and food and legal representation since they will all have to pay for them even if they are broke

siva_chair 2012 - the campaign starts here

[Against Miik!]

Guys I'm sorry but anyone who doesn't think government intervention played a huge part in the recession soon to be depression is pretty much on acid.

O and I just found out that this little goody was included in that awesome stimulus package: http://www.bizjournals.com/sanjose/stories/2009/02/02/daily20.html

Sounds strangely similar to this other thing called the Smoot-Hawkley Tariff Act that was instituted in 1930 just before that depression thing. I dunno look it up.

[DBoons Ghost]

I've taken plenty of acid in my life. I suppose I could be wrong about the government's role in all of this and siva made compelling enough arguements.

Without Wall Street trading mortgages chances are the subprime debacle doesn't happen. Maybe that makes more sense.

[mph4ever]

Guys I'm sorry but anyone who doesn't think government intervention played a huge part in the recession soon to be depression is pretty much on acid.

acids cool

O and I just found out that this little goody was included in that awesome stimulus package: http://www.bizjournals.com/sanjose/stories/2009/02/02/daily20.html

Sounds strangely similar to this other thing called the Smoot-Hawkley Tariff Act that was instituted in 1930 just before that depression thing. I dunno look it up.
this is getting a lot of press in europe and the eu ambassador to america, a failed irish politician call john bruton, is the bloke charged with addressing it with america.

same time, i can understand why they would want to restrict protectionism to infrastructure projects and the raw materials therein. fear has to be that other countries do the same thing

http://www.rte.ie/news/2009/0203/useconomy.html

[Against Miik!]

Thats interesting. I haven't heard the US press cover it yet, outside of that article I found, but I was looking for it.

I wonder how many congressmen knew that provision was in the bill. I wonder how many congressmen have read a history book before.

Clearly none. Partisan politics are more important than facts and history!

edit: upon further research, there are some articles a few other places, including this one: http://news.yahoo.com/s/afp/20090202/pl_afp/uspoliticseconomytrademcconnell

this line from that article made me lol

The Republican leader also urged Obama to lean on his Democratic allies in the US Congress to accept or at least accommodate Republican ideas for how best to pull the US economy out of a paralyzing recession.

Like, are you kidding me? The republicans are opposing this bill, but for all the wrong reasons. They don't have any actual ideas. They just have "not democrat" ideas.

[DBoons Ghost]

I found that story on the BBC website and it made me sad that the EU called it out when they clearly misread the language.

Anyway, **** anyone who doesn't get it. The bill states we use no imported goods for infrastructure projects listed in the bill itself. Not every project.

[Against Miik!]

It's a bad precedent though, and as that Irishman pointed out, this is a global issue and one that needs to be solved globally.

[DBoons Ghost]

It's a bad precedent though, and as that Irishman pointed out, this is a global issue and one that needs to be solved globally.

Explain why. The BBC article did a piss poor job so maybe you can shed some light.

If only the projects covered in the stimulus package (rebuilding roads, schools, bridges etc) are using local goods and local jobs are created and our economy is benefitting (which it won't) , how is this hurting anyone else's economy? Why even make an issue of it?

The real discussion is how much of a joke the stimulous package is and how useless it will be, even with this clause.

[DBoons Ghost]

Here is the BBC article in case anyone can't find it.

http://news.bbc.co.uk/2/hi/business/7866900.stm

[DBoons Ghost]

Also make sure you catch the awesomeness at the end. So much for Europeans.

Let me highlight that just in case.


The continuing wrangles over the Buy American clause come as hundreds of workers at UK power stations continue wildcat strike action in protest at the employment of Italian and Portuguese workers at a Total oil refinery.

Union leaders have denied accusations that the strikers are guilty of xenophobia.

Instead they say the UK workers are unfairly being denied the right to carry out work, because contracts are being awarded to foreign firms who bring in their own staff.


So, allow me to be the first to say, **** the EU, **** you, and **** anyone who lives in a glass house yet throws boulders.

Based on the comments to this story from UK and the like, all seem to agree that this EU spokesman is a moron.

[Against Miik!]

Well we can see the state the the UK is in right now, worse than the US. So I wouldn't exactly be taking economic advice from them.

However, that doesn't mean they aren't right.

The provision, as is right now, isn't the end of the world. It's just a speck of dust on an already completely flawed piece of legislation. However, if expanded, we would essentially be following a blueprint towards depression. The same conditions are present stock market crash, unemployment nearing double digits (although its actually much higher now, get to that later), etc...

Obama apparently said he had no intention to expand "Buy American", but you know, he's said a lot of things

[Aaron]

Massive malinvestment (the kind that causes these kinds of things) is only plausible if the market is distorted.
Wow I actually agree with you on something. :amaze:

Also, I reject the idea that cycles are an inherent feature of the market.
Cycles exist naturally, but they're distorted to extremes by bad decision making.

[DBoons Ghost]

Well we can see the state the the UK is in right now, worse than the US. So I wouldn't exactly be taking economic advice from them.

However, that doesn't mean they aren't right.

The provision, as is right now, isn't the end of the world. It's just a speck of dust on an already completely flawed piece of legislation. However, if expanded, we would essentially be following a blueprint towards depression. The same conditions are present stock market crash, unemployment nearing double digits (although its actually much higher now, get to that later), etc...

Obama apparently said he had no intention to expand "Buy American", but you know, he's said a lot of things


If it becomes a trend then yes, I would agree that keeping things domestic or, internal are a bad idea, but the US cannot survive without all we import from the world and that cannot change nor will it based on a 5% stimulus package with a couple of projects to rebuild infrastructure and we'd be kidding ourselves to think that other countries won't follow suit. They almost have to!

Obama is doing his best to keep to his word, but I think he's beginning to realize the situation is much more dire then he anticipated. Plus we all know they all lie. They have to lie. Or bend the truth.

Truly in the end this is politics. They publically make a display and whine and make press but in the end they will drink 500 dollar bottles of wine and eat 300 dollar meals and discuss the fate of the world together like the diplomatic liars they all are.

[mph4ever]

Also make sure you catch the awesomeness at the end. So much for Europeans.

Let me highlight that just in case.




So, allow me to be the first to say, **** the EU, **** you, and **** anyone who lives in a glass house yet throws boulders.

Based on the comments to this story from UK and the like, all seem to agree that this EU spokesman is a moron.

he is a moron. protectionism is a slippery slope to isolationism and i guess that is what they are more concerned about. without america to police things and having america worry only about their own geographically isolated patch really does open the old world, the eu, to serious threat

at the end of the day the americans caused most of this **** and it would be a little unfair for them to head home and bring the ball and the ref with them.

but anyways, i don't do countries, so yeah, loud and clear, **** world trade, **** the states, **** america, **** america, **** america

[1338 h4x0r]

lol looks like the EU representative forgot to read David Ricardo in university

education fail

[Already_Taken]

it's so annoying when you say stuff like that, seriously

[1338 h4x0r]

You should be grateful that I made it through one post without saying "Heil"

And, seriously, that EU spokesperson needs to learn about comparative advantage

[mph4ever]

theres about 100 things he needs to learn before that

[Aaron]

And, seriously, that EU spokesperson needs to learn about comparative advantage
Heil to that. It's becoming quite obvious that leaders are forgetting the basics of their schoolin'.

[1338 h4x0r]

We need to school they asses

[Aaron]

Paddle them with a hardcover Wealth of Nations.

[1338 h4x0r]

That's hot

[StreetlightRock]

Good Morning!

Of course malinvestments will take place at an individual level, but not at the level that cause the large boom/bust cycles.

I disagree. It's not simply a case of a set of disparate individuals that 'so happen' to make the occasional malinvestment - it's quite literally a social phenomenon where entire societies are influenced by investment trends (and speculators follow and drive up prices) and 'jump on the bandwagon'. There's a reason every major recession comes before a major f'uck up in the financial world that is always, always aimed at a single sector of the market (be it the internet, mortgages, Asian manufacturers in the 80s...) - it's because people, as individuals, based on market rumors, widespread speculation, bandwagon jumping, whatever, make these bad decisions that become a society wide phenomenon. It's essentially the market version of hype.

This essentially amounts to a false "price mechanism" in the credit market.

Ah, I misread you, but yea sure, I agree with EVERYTHING you're saying about the role of interest rates, please stop rewording how they work every post, lol. However, aside from my major point above, I do think that you're tying credit expansion too closely to the interest rate set by the fed. After all, firstly, if people are determined enough to think venture X is going to do well, they WILL acquire credit for it. Secondly, credit don't come simply from banks - bonds and margin loans issued by corporations and foreign treasuries account for huge swaths of credit are that not beholden to the fed's rates.

[siva_chair]

I disagree. It's not simply a case of a set of disparate individuals that 'so happen' to make the occasional malinvestment - it's quite literally a social phenomenon where entire societies are influenced by investment trends (and speculators follow and drive up prices) and 'jump on the bandwagon'. There's a reason every major recession comes before a major f'uck up in the financial world that is always, always aimed at a single sector of the market (be it the internet, mortgages, Asian manufacturers in the 80s...) - it's because people, as individuals, based on market rumors, widespread speculation, bandwagon jumping, whatever, make these bad decisions that become a society wide phenomenon. It's essentially the market version of hype.

Ok so where do the speculators and bandwagon jumpers get their money to speculate? Bad speculators will lose their money, weeding out the inefficient and putting money for speculative purposes into the hands of the most efficient predictors. This "animal spirits" doctrine simply is inadequate at explaining a boom/bust cycle. All speculation does is speed up the path to equilibrium. It takes credit expansion to make it dangerous. It is theoretically impossible for a pure market economy to have a large portion of market actors who make unprofitable investments (unless, of course, there are market distortions sending false signals to investors).

Ah, I misread you, but yea sure, I agree with EVERYTHING you're saying about the role of interest rates, please stop rewording how they work every post, lol. However, aside from my major point above, I do think that you're tying credit expansion too closely to the interest rate set by the fed. After all, firstly, if people are determined enough to think venture X is going to do well, they WILL acquire credit for it. Secondly, credit don't come simply from banks - bonds and margin loans issued by corporations and foreign treasuries account for huge swaths of credit are that not beholden to the fed's rates.

Cheap easy credit is what inflates the bubbles though. This always comes from fractional reserve banking (expansion of the money supply). While it is true that if enough people think venture X is going to do well, many will acquire credit for it. But it is when the credit market is set artificially low that a bubble is inflated, as it gives a stronger incentive to speculate and allows more actors entry into the speculative field (ones that simply would not have entered had interest rates been set naturally). It is this massive malinvestment that creates the actual boom/bust cycles we have come to know. I know you pretty much agree with me for the most part, so I'll leave it at that.

[StreetlightRock]

Please don't reduce my argument to some Keynesian "Animal Spirits" argument. I completely believe that those who jump on investment/speculation bandwagons and such do so for more or less purely rational, profit motivated reasons, and not some mystical market force. The problem is twofold:

(1) Investment diversification has always been limited. I've already noted how most of the time these crashes have all revolved around a single market (The credit cycle and interest rates are irrelevant when it comes to explaining this)

(2) The is simply not enough time for people to realize the gravity of their (usually undiverse) malinvestments and to allow the feedback mechanism of the market to be effective: Most financial crashes happened in the space of a few days, hours even, up to which point, everyone believed their money was sound no matter how long or how fast credit was poured into the venture in the first place.

Artificially low interest rates no doubt encouraged more bad investments that would have occurred in a pure market economy. BUT - Interest rates are limited to controlling the volume of investments, not their direction. (and volume is a second order problem)

[siva_chair]

Please don't reduce my argument to some Keynesian "Animal Spirits" argument. I completely believe that those who jump on investment/speculation bandwagons and such do so for more or less purely rational, profit motivated reasons, and not some mystical market force. The problem is twofold:

Sorry about the Animal Spirits thing.

(1) Investment diversification has always been limited. I've already noted how most of the time these crashes have all revolved around a single market (The credit cycle and interest rates are irrelevant when it comes to explaining this)

These various "investment trends" merely determine which particular sector the bubble will manifest itself. They are not, in themselves, the cause of the bubble.

(2) The is simply not enough time for people to realize the gravity of their (usually undiverse) malinvestments and to allow the feedback mechanism of the market to be effective: Most financial crashes happened in the space of a few days, hours even, up to which point, everyone believed their money was sound no matter how long or how fast credit was poured into the venture in the first place.

They don't really happen in the space of a few days, its that the malinvestment becomes apparent far too late (due to the fact that the savings rate is obfuscated by the rate set by the central bank and FRL). You seem to be ignoring the fact that if interest reflected actual savings (as it should), the feedback mechanism is much more responsive and in flux (thus acting as an effective price mechanism). The reason it is not effective is because it is set and not a true reflection of real savings.

Artificially low interest rates no doubt encouraged more bad investments that would have occurred in a pure market economy. BUT - Interest rates are limited to controlling the volume of investments, not their direction. (and volume is a second order problem)

I think the key thing to realise with an expansionary monetary policy is that it allows a flawed "investment trend" to go on unrealised for longer (thus contributing to both volume and direction). In the absense of an EMP, the bubble would pop far sooner leading to far fewer malinvestments in that direction. Since the low interest rates creates the illusion of an increased supply of real savings, this allows for many investment projects to appear viable that would not appear viable with a more realistic picture of the supply of savings. Inflation begins to kick in and the money supply needs to continue expanding in order to maintain the new found momentum. Eventually, the rate of monetary expansion becomes anticipated and needs to be increased in order to avoid widespread realisation of the true level of savings, which leads to increased inflation. Utlimately, either inflation will escalate out of control or the central bank will need to put the brakes on. Then the shortfall in savings becomes realised and the bust kicks in. So you see, an EMP can sustain investment bubbles for longer than would otherwise have been the case if interest rates were a reflection of real savings (i.e. a "natural" interest rate).

EDIT: Also, it is important to point out that with this new found "abundance of credit" comes increased consumer demand for consumption and as a result contributes to malinvestment. New consumer demand for consumption creates increased investment in consumer products and high orders of production. It makes less credit available for investment in low orders of production or in capital goods to support the higher orders of production (at some time later in the future).

[Aaron]

One thing that needs to be added about investment trends is that, it's often a result of tax-law changing. Most investors realistically aren't young people, as A) young people don't have capital and B) we all want to get pissed and root each other [lets be honest] and that's where we spend our money. Most investors are old and are trying to make money for either an income or for when they retire, and changes in tax-law create changes as people respond to make the most of their money and the changes that have occurred. We need to recognise that external factors effect the market and induce trends.

[siva_chair]

One thing that needs to be added about investment trends is that, it's often a result of tax-law changing. Most investors realistically aren't young people, as A) young people don't have capital and B) we all want to get pissed and root each other [lets be honest] and that's where we spend our money. Most investors are old and are trying to make money for either an income or for when they retire, and changes in tax-law create changes as people respond to make the most of their money and the changes that have occurred. We need to recognise that external factors effect the market and induce trends.

You are correct in that tax law does significantly induce external factors (it has a noticible effect on time-preferences, as you pointed out with the fact that younger people tend to have higher time-preferences or more "present mindedness"). My point is, however, that these external factors simply are not enough to create the boom/bust cycle, as recessions/depressions are the result of long term malinvestment buildups (bubbles). These bubbles and buildups are only possible when the "feedback mechanism" is distorted as such to give the illusion of a rising productive investment or increasing demand.

[Aaron]

No, but in follow-up most people don't understand what they're doing and act on the fear-and-love spectrum. Emotions are always at play with humans and whales in decision making.

[siva_chair]

No, but in follow-up most people don't understand what they're doing and act on the fear-and-love spectrum. Emotions are always at play with humans and whales in decision making.

Sure, but those making investment choices on emotions will find themselves soon losing money and be naturally "purged" from the market. Thus there is a strong incentive to invest rationally (which cannot really be done in such a distorted market).

[Aaron]

Noone is that removed from emotions to do that though, to me.

[siva_chair]

Noone is that removed from emotions to do that though, to me.

When it comes to investing, it is very much possible. Sure emotions effect everyone, but are you denying that people can use reason and rationality to make decisions?

I do not see how emotion can be a significant factor in causing bubbles, tbh.

[StreetlightRock]

Dude, that was an awesome post, most of which I'm not going to respond to simply because I agree with almost everything on it. The one thing I am curious about though is the fact that

They don't really happen in the space of a few days, its that the malinvestment becomes apparent far too late (due to the fact that the savings rate is obfuscated by the rate set by the central bank and FRL).

Doesn't seem to align with

You seem to be ignoring the fact that if interest reflected actual savings (as it should), the feedback mechanism is much more responsive and in flux (thus acting as an effective price mechanism). The reason it is not effective is because it is set and not a true reflection of real savings.

I agree again with both parts of that post in isolation, but how will a floating interest rate expose malinvestments quicker?

[siva_chair]

Doesn't seem to align with



I agree again with both parts of that post in isolation, but how will a floating interest rate expose malinvestments quicker?

For the same reason that the price mechanism is quicker at exposing an increase in demand (assuming it isn't a faux increase via inflation) than set prices.

[Aaron]

Price floors and price-ceilings are stupid, unless it's for discouraging stupid behaviour.

[siva_chair]

Who advocated those?

[StreetlightRock]

That makes no sense?? Or I'm not getting something?? floating interest rates won't make accountants work faster, they won't encourage whistle blowers, they won't make investigative journalists work most diligently, they won't make auditors less useless???

[siva_chair]

That makes no sense?? Or I'm not getting something?? floating interest rates won't make accountants work faster, they won't encourage whistle blowers, they won't make investigative journalists work most diligently, they won't make auditors less useless???

I never said it would.

It will keep the faux increase in demand from appearing, which manifests itself by higher prices. These prices send a signal to people to "make more stuff." This is how it works: People see a higher price being paid for certain goods, and this appears to indicate that there is perhaps profit to be made in that market. Responding to the apparent signal, they begin now to overwork their assets, or perhaps to invest in assets that will enable them to be more productive tomorrow.

A set interest rate simply acts as the "catalyst" between the money expansion and malinvestment. Time preferences haven't really changed; fiat injections cause a disconnect between prices and time preference. With a "natural" interest rate, the signals are dependent on increase/decrease of actual time preferences, instead of the expansion of the money supply.

[StreetlightRock]

Ah cool, the missing link, if I'm a little slow you'll have to forgive me, I'm playing CS and it's 2AM here =P Anyway, got this whole thing to pen out but not rite now, got work tomorrow morning.

[siva_chair]

There is nothing to forgive, sir.

I hope I have been clear enough.

[StreetlightRock]

btw, i give up on this, I'm bored now =P Great discussion though.

[siva_chair]

:thumb:

Good show, sir.

[mph4ever]

Heil to that. It's becoming quite obvious that leaders are forgetting the basics of their schoolin'.

they should have to spend 3 months compulsory on mx. they wouldn't be forgetting too long

[Iskandar]

They should just put us in charge.

[1338 h4x0r]

Let's be mods for the economy

Except for siva_urinal

[mph4ever]

They should just put us in charge.

mappy for foreign affairs. that'd shut them up

[Iskandar]

I don't think a transsexual would go over well with the Saudis.

Meaning nothing against transsexuals.

[mph4ever]

I don't think a transsexual would go over well with the Saudis.

Meaning nothing against transsexuals.

**** them, the saud clan is disgusting

i don't think that clubfoots go well with transexuals.